-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nOmULCs2H5aBpUF0HeZi2MsOBsVngvNL1jkN1tFVDy16NPt2J8xkF7pYwZspuQRs NUKdSae6mEHeUCWa8QBwXQ== 0000201533-95-000029.txt : 19950615 0000201533-95-000029.hdr.sgml : 19950615 ACCESSION NUMBER: 0000201533-95-000029 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950315 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS POWER CO CENTRAL INDEX KEY: 0000201533 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 380442310 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05611 FILM NUMBER: 95520810 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 382726431 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 95520815 BUSINESS ADDRESS: STREET 1: FAIRLANE PLZ SOUTH STE 1100 STREET 2: 330 TOWN CENTER DR CITY: DEARBORN STATE: MI ZIP: 48126 BUSINESS PHONE: 3134369261 MAIL ADDRESS: STREET 1: FAIRLANE PLAZA SOUTH, SUITE 1100 STREET 2: 330 TOWN CENTER DRIVE CITY: DEARBORN STATE: MI ZIP: 48126 10-K 1 BODY OF FORM 10-K FOR CMS ENERGY AND CONSUMERS FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. ----------- ----------------------------------- ------------------ 1-9513 CMS ENERGY CORPORATION 38-2726431 (A Michigan Corporation) Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 (313)436-9261 1-5611 CONSUMERS POWER COMPANY 38-0442310 (A Michigan Corporation) 212 West Michigan Avenue Jackson, Michigan 49201 (517)788-1030 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Registrant Title of Class on Which Registered ------------ ---------------------------- ----------------------- CMS Energy Common Stock, $.01 par value New York Stock Exchange Corporation Consumers Listed on inside cover Power Company Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Consumers Power Company securities registered pursuant to Section 12(b) of the Act: FIRST MORTGAGE BONDS: 5-7/8% Series due 1996 6-7/8% Series due 1998 6-5/8% Series due 1998 7-1/2% Series due 2001 7-1/2% Series due 2002 PREFERRED STOCK - Cumulative No par: $2.08 Series $100 par value: $4.16 Series $7.68 Series $4.50 Series $7.72 Series $7.45 Series $7.76 Series All securities listed above are registered on the New York Stock Exchange. The aggregate market value of the voting stock of CMS Energy Corporation held by non-affiliates, was $2,101,736,952 based on the closing sale price of $24 per share for the 87,572,373 common shares, $.01 par value, outstanding on February 28, 1995. CMS Energy held all 84,108,789 outstanding common shares, $10 par value, of Consumers Power Company, and the market value of the voting preferred stock of Consumers, held by non- affiliates, was $320,480,726 based on the closing sale price shown below. Aggregate market value of Consumers' voting stock held by non-affiliates. Transaction Number Shares ------------------------ Type of Stock Outstanding Price/Share Date Market Value - ------------- -------------- ----------- ------- ------------ (2/28/95) Preferred: $2.08 8,000,000 $24-1/4 2/28/95 $194,000,000 4.16 68,451 50 2/21/95 3,422,550 4.50 373,148 51-1/4 2/28/95 19,123,835 7.45 379,549 89-1/2 2/27/95 33,969,636 7.68 207,565 86-1/2 2/28/95 17,954,372 7.72 289,642 86-1/2 2/23/95 25,054,033 7.76 308,072 87-1/2 2/28/95 26,956,300 --------- ------------ Total 9,626,427 $320,480,726 ========= ============ Documents incorporated by reference: The Registrants' proxy statements relating to the 1995 annual meetings of shareholders to be held May 26, 1995, are incorporated by reference in Part III, except for the organization and compensation committee report contained therein. CMS ENERGY CORPORATION and CONSUMERS POWER COMPANY ANNUAL REPORTS ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1994 This combined Form 10-K is separately filed by CMS Energy Corporation and Consumers Power Company. Information contained herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Consumers Power Company makes no representation as to information relating to any other companies affiliated with CMS Energy Corporation. TABLE OF CONTENTS Page PART I Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 28 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 36 Item 4. Submission of Matters to a Vote of Security Holders . . . . . 41 PART II Item 5. Market for CMS Energy's and Consumers' Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 42 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 42 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 42 Item 8. Financial Statements and Supplementary Data . . . . . . . . . 43 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . .135 PART III Item 10. Directors and Executive Officers of CMS Energy and Consumers . . . . . . . . . . . . . . . . . . . . . .135 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . .135 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . .135 Item 13. Certain Relationships and Related Transactions. . . . . . . .135 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .135 4 GLOSSARY Certain terms used in the text and financial statements are defined below. ABATE . . . . . . . . . . . . . . Association of Businesses Advocating Tariff Equity ALJ . . . . . . . . . . . . . . . Administrative Law Judge AMT . . . . . . . . . . . . . . . Alternative minimum tax Articles. . . . . . . . . . . . . Articles of Incorporation Attorney General. . . . . . . . . The Michigan Attorney General bcf . . . . . . . . . . . . . . . Billion cubic feet Big Rock. . . . . . . . . . . . . Big Rock Point nuclear plant, owned by Consumers Btu . . . . . . . . . . . . . . . British thermal unit CERCLA. . . . . . . . . . . . . . Comprehensive Environmental Response Compensation and Liability Act Clean Air Act . . . . . . . . . . Federal Clean Air Act as amended on November 15, 1990 CMS Energy. . . . . . . . . . . . CMS Energy Corporation 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 NOMECO. . . . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of Enterprises Consumers . . . . . . . . . . . . Consumers Power Company, a subsidiary of CMS Energy Court of Appeals. . . . . . . . . Michigan Court of Appeals Detroit Edison. . . . . . . . . . The Detroit Edison Company DNR . . . . . . . . . . . . . . . Michigan Department of Natural Resources DOE . . . . . . . . . . . . . . . U. S. Department of Energy Dow . . . . . . . . . . . . . . . The Dow Chemical Company DSM . . . . . . . . . . . . . . . Demand-side management EMF . . . . . . . . . . . . . . . Electric and magnetic fields Energy Act. . . . . . . . . . . . Energy Policy Act of 1992 Enterprises . . . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy Environmental Response Act. . . . Michigan Envirionmental Response Act EPA . . . . . . . . . . . . . . . Environmental Protection Agency FASB. . . . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . . . Gas cost recovery GPSLP . . . . . . . . . . . . . . Genesee Power Station Limited Partnership GTN's . . . . . . . . . . . . . . $250 million CMS Energy General Term Notes, Series A Huron . . . . . . . . . . . . . . Huron Hydrocarbons, Inc., a subsidiary of Consumers HYDRA-CO. . . . . . . . . . . . . Independent power production subsidiary of Niagara Mohawk Power Corporation Indentures. . . . . . . . . . . . Indenture pursuant to which the Notes are issued, including the First Supplemental Indenture and Second Supplemental Indenture ITC . . . . . . . . . . . . . . . Investment tax credit kWh . . . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison mcf . . . . . . . . . . . . . . . Thousand cubic feet MCV . . . . . . . . . . . . . . . Midland Cogeneration Venture MCV Bonds . . . . . . . . . . . . Collectively, senior secured lease obligation bonds and subordinated secured lease obligation bonds issued in connection with the leveraged- lease financing of the MCV Facility, and tax-exempt PCRBs MCV Facility. . . . . . . . . . . A natural gas-fueled, combined cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . . . Midland Cogeneration Venture Limited Partnership MGL . . . . . . . . . . . . . . . Midland Group, Ltd., a former subsidiary of Consumers MichCon . . . . . . . . . . . . . Michigan Consolidated Gas Company Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a subsidiary of Consumers MMbbls. . . . . . . . . . . . . . Million barrels MMBtu . . . . . . . . . . . . . . Million British thermal unit MMcf/d. . . . . . . . . . . . . . Million cubic feet per day MMCG. . . . . . . . . . . . . . . Michigan Municipal Cooperative Group MOAPA . . . . . . . . . . . . . . MOAPA Energy Limited Partnership, a wholly owned affiliate of CMS Generation MPSC. . . . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . . . Megawatts MWRC. . . . . . . . . . . . . . . Michigan Waste Resources Commission Natural Gas Act . . . . . . . . . Federal Natural Gas Act NEIL. . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd. NEPA. . . . . . . . . . . . . . . National Environmental Response Act NML . . . . . . . . . . . . . . . Nuclear Mutual Ltd. Notes . . . . . . . . . . . . . . Collectively, Series A Notes. . . . . . . . . Series A Senior Deferred Coupon Notes of CMS Energy due October 1, 1997 Series B Notes. . . . . . . . . Series B Senior Deferred Coupon Notes of CMS Energy due October 1, 1999 NOx . . . . . . . . . . . . . . . Nitrogen oxide NPDES . . . . . . . . . . . . . . National Pollutant Discharge Elimination System NRC . . . . . . . . . . . . . . . Nuclear Regulatory Commission O&M . . . . . . . . . . . . . . . Other operation and maintenance expense Order 636 . . . . . . . . . . . . Orders affecting interstate gas pipelines, including Order 636A and 636B issued by the FERC in 1992, known also as the Restructuring Rule Owner Participants. . . . . . . . Lessors of the MCV Facility Palisades . . . . . . . . . . . . Palisades nuclear plant, owned by Consumers Panhandle . . . . . . . . . . . . Panhandle Eastern Pipeline Company PCB . . . . . . . . . . . . . . . Polychlorinated biphenyls PCRB. . . . . . . . . . . . . . . Pollution control revenue bond Pension Plan. . . . . . . . . . . The trusteed, non-contributory, defined benefit pension plan of Consumers and CMS Energy PFD . . . . . . . . . . . . . . . Proposal for Decision 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 PURPA . . . . . . . . . . . . . . Public Utility Regulatory Policies Act of 1978 Qualifying Facility . . . . . . . A facility that produces electricity or steam and electricity and meets the ownership and technical requirements of PURPA. Electric utilities are required to purchase the electric capacity and energy made available by a Qualifying Facility at the purchasing utility's avoided cost. Revised Settlement Proposal . . . The request for approval of a settlement proposal to resolve MCV cost recovery issues, PURPA issues and court remand as filed with the MPSC on July 7, 1992 and amended on September 8, 1992 SEC . . . . . . . . . . . . . . . Securities and Exchange Commission SERP. . . . . . . . . . . . . . . Supplemental Executive Retirement Plan Settlement Order. . . . . . . . . MPSC Order issued March 31, 1993 in MPSC Case Nos. U-10127, U-8871 and others, and the rehearing order issued May 26, 1993 SFAS. . . . . . . . . . . . . . . Statement of Financial Accounting Standards Superfund . . . . . . . . . . . . Comprehensive Environmental Response, Compensation and Liability Act Trunkline . . . . . . . . . . . . Trunkline Gas Company Union . . . . . . . . . . . . . . Utility Workers of America, AFL-CIO Unsecured Credit Facility . . . . $400 million unsecured revolving credit and letter of credit facility dated as of July 29, 1994 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 Walter. . . . . . . . . . . . . . Walter International, Inc., a Texas corporation 7 PART I ITEM 1. BUSINESS. GENERAL CMS Energy CMS Energy, incorporated in Michigan in 1987, is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the largest subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: oil and gas exploration and production; development and operation of independent power production facilities; gas marketing services to end-users; and transmission, storage and processing of natural gas. CMS Energy is exempt from registration under PUHCA, see Item 3. LEGAL PROCEEDINGS. CMS Energy had consolidated operating revenue in 1994 of $3.62 billion which was derived approximately 61 percent from its electric utility operations, approximately 36 percent from its gas utility operations, approximately 2 percent from oil and gas exploration and production activities and approximately 1 percent from independent power production, gas marketing and other non-utility activities. Consumers' consolidated operations in the electric and gas businesses account for the major share of CMS Energy's total assets, revenue and income. CMS Energy's share of unconsolidated non-utility electric generation and gas transmission revenue for 1994 was $392 million. Consumers Consumers was incorporated in Michigan in 1968 and is the successor to a corporation of the same name which was organized in Maine in 1910 and which did business in Michigan from 1915 to 1968. Consumers is a public utility serving gas or electricity to almost 6 million of Michigan's 9 million residents in all 68 counties in Michigan's Lower Peninsula. Industries in Consumers' service area include automotive, metal, chemical, food and wood products and a diversified group of other industries. Consumers had consolidated operating revenue in 1994 of $3.4 billion which was derived approximately 65 percent from its electric business and approximately 35 percent from its gas business. Consumers' retail rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC. BUSINESS SEGMENTS CMS Energy and Consumers Financial Information For information with respect to operating revenue, net operating income, assets and liabilities attributable to all of CMS Energy's business segments, refer to its Consolidated Financial Statements and Notes to Consolidated Financial Statements for the year ended December 31, 1994, in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, which is incorporated herein by reference. For information with respect to the operating revenue, net operating income, assets and liabilities attributable only to Consumers' business segments, refer to its Consolidated Financial Statements and Notes to Consolidated Financial Statements for the year ended December 31, 1994, in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, which is incorporated herein by reference. CMS Energy and Consumers Principal Operations CMS Energy conducts its principal operations through the following five business segments: electric utility operations; gas utility operations; oil and gas exploration and production operations; independent power production; and gas marketing, transmission, storage and processing. Consumers conducts CMS Energy's electric and gas utility operations. Consumers' electric and gas businesses are regulated utility operations. On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, result in more competitive businesses. Consumers Electric Utility Operations Consumers generates, purchases, transmits and distributes electricity and renders electric service in 62 of the 68 counties in the Lower Peninsula of Michigan. Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Muskegon, Saginaw and Wyoming. Consumers had approximately 1.5 million electric customers at December 31, 1994. Total electric sales in 1994 were a record 34.5 billion kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent increase in system sales to Consumers' ultimate customers. Electric operating revenue in 1994 was $2.189 billion, an increase of 5.4 percent from 1993. A peak demand of 6,502 MW was achieved in June 1994, representing an increase of 4.4 percent from the peak achieved in 1993, predominantly as a result of improved industrial sales. Consumers' reserve margin was approximately 15 percent in 1994 and 21 percent in 1993, based on weather adjusted peaks. Including the Ludington pumped storage facility, in which Consumers has a 51 percent ownership and capacity entitlement, Consumers owns and operates 28 electric generating plants with an aggregate net demonstrated capability available to Consumers, as of 1994 for summer conditions, of 6,299 MW. In 1994, Consumers purchased approximately 1375 MW of net capacity from independent power producers and cogenerators, the most significant being the MCV Facility, which amounted to approximately 22 percent of Consumers' total system requirements (including a reserve margin of approximately 19 percent). See Item 2. PROPERTIES. CONSUMERS ELECTRIC UTILITY PROPERTIES. Consumers' electric generating plants are interconnected by a transmission system which is itself interconnected at a number of locations with transmission facilities of unaffiliated systems, including those of other utilities in Michigan and Indiana. These interconnections permit a sharing of the reserve capacity of the systems. This allows mutual assistance during emergencies and substantially reduces investment in utility plant facilities. Consumers' customer base includes a mix of residential, commercial, and diversified industrial customers, the most significant of which is the automotive industry. However, Consumers' electric operations are not dependent upon a single customer, or a few customers, and the loss of any one or more of such customers would not have a material adverse effect on its financial condition. Consumers' electric operations are seasonal to the extent the weather pattern may have an effect on revenues. Peak demands for 1994 were 5,526 MW in the winter and 6,502 MW in the summer. For sales by customer class, see Item 1. BUSINESS. CONSUMERS CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT. MCV Cost Recovery Issues: The MCV Partnership was formed in January 1987 by subsidiaries of Consumers and Dow to convert a portion of Consumers' abandoned Midland Nuclear Plant into a natural gas-fueled, combined cycle cogeneration facility. The MCV Facility has been certified as a Qualifying Facility under PURPA. Consumers' current interests in the MCV Partnership and the MCV Facility are discussed more fully in Note 3 of the Notes to Consumers Consolidated Financial Statements. In 1987, Consumers signed a PPA with the MCV Partnership for the purchase of up to 1,240 megawatts of capacity for a 35-year period beginning with the MCV Facility's commercial operation in March 1990. Consumers' cost recovery from its electric customers for the amount of capacity purchased by Consumers from the MCV Partnership, the price paid by Consumers for that capacity and associated energy, and the method of rate recovery for those purchases had been at issue before the MPSC and the Michigan appellate courts since Consumers' first attempt to recover those costs in its annual power supply cost recovery proceedings. Because the MPSC consistently denied Consumers full recovery of the costs it incurred for its purchases from the MCV Partnership, Consumers incurred significant ongoing annual losses. On March 31, 1993, the MPSC issued an Opinion and Order on a Revised Settlement Proposal, which had been submitted by Consumers, CMS Energy, the MPSC Staff, and ten qualifying facility developers, approving it with certain modifications. The Settlement Order allows Consumers to schedule deliveries of energy from the MCV Partnership's facility whenever it is available up to specified hourly availability caps. Consumers can recover an average 3.62 cents per kWh capacity charge and the prescribed energy charges associated with the scheduled deliveries within the availability caps, whether or not those deliveries had been scheduled on an economic basis. The applicable availability caps are divided into on-peak and off-peak hours. For the period beginning January 1, 1993 through December 31, 1997, there is no cap applicable on Consumers' recovery for its purchase of capacity made available during on-peak hours while recovery for the purchase of capacity made available during off-peak hours is capped in 1993 at 80 percent of the 915 MW, 82 percent in 1994 and 1995, and 84 percent in 1996 and 1997. Beginning in 1998 and continuing thereafter both the on and off peak recovery will be capped at 88.7 percent of the 915 MW of capacity authorized for recovery under the Settlement Order. With Consumers' acceptance of the Settlement Order, the uncertainties surrounding Consumers' cost recoveries related to its purchases from the MCV Partnership were resolved to a sufficient degree that Consumers effected a quasi-reorganization as of December 31, 1992, in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. Following this quasi-reorganization, Consumers resumed paying dividends in 1993. This action was approved by Consumers' Board of Directors and did not require shareholder approval. In conjunction with its ongoing underrecovery of MCV costs and the recovery ultimately authorized in the Settlement Order, Consumers sought under the PPA to cease payment to the MCV Partnership of certain of costs Consumers was not recovering from its customers. The MCV Partnership disagreed with Consumers' interpretation of the PPA and Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and in February 1995 entered his final order. For further discussion of this arbitration proceeding and other legal proceedings involving Consumers, the MCV Partnership and the lessors of the MCV facility see Item 3. LEGAL PROCEEDINGS. Fuel: Consumers has five generating plants which utilize coal as a fuel source and which constitute 77 percent of its baseload capacity. These plants combined to produce a total of 17,401 million kWhs in 1994 requiring approximately 7.2 million tons of coal. Consumers has long-term contracts covering 60 to 70 percent of its coal requirements for 1995. Consumers' coal requirements not under long-term contract must be supplied through short-term agreements or spot purchases. Consumers' coal inventory as of December 31, 1994 amounted to approximately 44 days' supply. Consumers currently owns and operates two nuclear power plants, Palisades, near South Haven, Michigan and Big Rock Point, near Charlevoix, Michigan. In 1994, the combined net generation of these plants was 4,904 million kWhs, which constitutes approximately 22 percent of Consumers' baseload capacity. Consumers has contracted for all of its nuclear fuel for 1995 and 30 percent for 1996. Consumers currently has two contracts for uranium concentrates which have quantity flexibility sufficient to cover up to approximately 60 percent of its requirements. The larger of these two contracts runs through 1996, with options to extend the term through 1997. Consumers intends to purchase the balance of its 1996 and 1997 concentrate requirements in the spot market. Consumers has contracts for nuclear fuel services, including conversion to and enrichment of uranium hexafluoride and fabrication of nuclear fuel assemblies. The conversion contract remains in effect until June 1996. Consumers intends to solicit competitive bid packages in 1995 to procure additional conversion services for the period 1996 through 1999. The enrichment contract covers 100 percent of the requirements until 1996, then 70 percent until 2000. The fabrication contracts remain in effect for the next three Palisades reloads and through the end of the operating license for Big Rock Point in 2000. These contracts are with major private industrial suppliers of nuclear fuel and related services and with the U.S. government. Karn Unit 4, a 638 MW oil fired electric generating unit located in Essexville, Michigan, was modified to burn natural gas in 1993. This unit has the capability to generate electricity using oil or natural gas or a combination of both. The unit's maximum capability using natural gas is 375 MW. When using natural gas, full load can be achieved by over-firing with oil. As shown below, Consumers generates electricity principally from coal and nuclear fuel. Power Generated (Millions of kWhs) 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Coal 17,401 16,520 17,024 16,500 16,427 Nuclear 4,904 3,938 5,093 5,340 3,406 Oil (a) 322 238 206 194 287 Gas (a) 91 110 12 16 8 Hydro 481 489 490 518 478 Net Pumped Storage (b) (414) (394) (393) (406) (354) ------- ------- ------- ------- ------- Total Net Generation 22,785 20,901 22,432 22,162 20,252 ======= ======= ======= ======= ======= (a) 1994 and 1993 reflect the conversion of Karn Unit 4 to a dual fuel capability enabling the unit to burn natural gas or oil or a combination of both, having previously only burned oil. (b) Represents Consumers' share of net generation from the Ludington pumped storage plant. This facility pumps water into a storage pond using electricity generated during off-peak hours, in order to later generate electricity during peak demand hours. The cost of all fuels consumed, shown below, fluctuates with the mix of fuel burned. Fuel Consumed (Cost Per Million Btu) 1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- Coal $1.57 $1.60 $1.62 $1.61 $1.65 Oil 2.96 2.90 2.73 2.96 3.25 Gas (a) 2.81 3.13 4.73 4.58 6.11 Nuclear .46 .40 .38(b) .62 .67 All Fuels (c) 1.34 1.39 1.33 1.36 1.50 (a) Beginning in 1993, includes combustion turbines and Karn 4. (b) An increase in operating cycles from twelve to eighteen months beginning in 1992 resulted in a significant reduction in nuclear fuel costs. (c) Weighted average fuel costs. Under the Nuclear Waste Policy Act of 1982, the federal government is responsible for the permanent disposal of spent nuclear fuel and high- level radioactive waste beginning not later than 1998. To date, the DOE has been unable to arrange for storage facilities to meet this obligation. In May 1994, the DOE solicited comments on its "preliminary view" that the DOE does not have a statutory obligation to accept spent nuclear fuel in 1998 absent an operational repository. The DOE has begun exploring possible options to offset a portion of the costs associated with continued on-site storage after 1998. Consumers' on-site storage pool at Palisades is at capacity and it is likely that the DOE will fail to accept delivery of spent nuclear fuel by the contractually established dates, which for Big Rock and Palisades are 1999 and 2000, respectively. In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the NEPA. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied NEPA requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. As of February 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades 1995 refueling. For a discussion relating to the NRC approval of the casks and Consumers' use of the casks, see Note 13 of the Notes to Consolidated Financial Statements and Item 3. LEGAL PROCEEDINGS. which are incorporated by reference herein. The Big Rock Point plant has the capacity to accommodate normal spent fuel discharge through the end of its operating license in 2000, with a full- core discharge reserve through 1996. Consumers Gas Utility Operations Consumers purchases, transports, stores and distributes gas and renders gas service to approximately 1.4 million customers in 45 of the 68 counties in Michigan's Lower Peninsula. Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban Detroit area. It owns gas transmission and distribution mains and other gas lines, compressor stations and facilities, storage rights, wells and gathering facilities in several fields in Michigan. Consumers and its wholly owned subsidiary, Michigan Gas Storage, store gas during the warmer months of the year for use in the colder months when demand is higher. Consumers' gas operations are not dependent upon a single customer, or a few customers, and the loss of any one of such customers would not have a material adverse effect on its financial condition. See Item 2. PROPERTIES. Consumers' gas operations are seasonal to the extent that peak demand occurs in winter due to colder temperatures. Consumers' consolidated gas operating revenue was $1.151 billion in 1994, a decrease of .8 percent from 1993. The all-time record 24 hour send-out of natural gas for Consumers was 3,100,000 mcf on January 19, 1994, which Consumers considers to be the peak-day transportation and distribution capacity of the system. Deliveries of gas by Consumers, and from other sellers, to ultimate customers including the MCV Partnership totaled 409 bcf in 1994. See Item 1. BUSINESS. CONSUMERS CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT. Consumers Gas Supply: In 1994, Consumers purchased approximately 83 percent of its required gas supply under long term contracts. Trunkline, Consumers' primary gas supplier, supplied 35 percent of the overall requirement. Of Consumers' remaining gas supply requirements purchased under long term contract, 14 percent came from Michigan producers and 35 percent from various other producers and non-affiliated marketing companies in the United States and Canada. The remaining 17 percent of Consumers' 1994 gas supply requirements were met by purchases on the spot market. Consumers' supply contract with Trunkline, which obligated Trunkline to supply 325 thousand mcf per day to Consumers, expired on November 1, 1994. This obligation has been replaced with three two-year contracts and four one-year contracts with independent producers at fixed prices for an aggregate of 255 thousand mcf per day. Consumers expects to obtain the balance of its gas supply requirements in the spot market. Consumers' firm transportation agreements are with Trunkline, Panhandle, ANR Pipeline Company and Great Lakes Gas Transmission Company. These agreements are utilized by Consumers to transport its required gas supplies to market and to replenish its storage fields. In total, Consumers' firm transportation arrangements will carry almost 90 percent of Consumers' total gas supply requirements. Consumers' portfolio of firm transportation from pipelines is as follows: Volume (dekatherms/day) Expiration ------ ---------------- Trunkline 41,400 February 1997 336,375 October 2002 Panhandle 40,000 March 2000 25,000 March 2000 ANR Pipeline Company 40,000 October 1999 10,000 December 2001 6,000 December 2002 24,900 October 2003 58,765 October 2003 Great Lakes Gas Transmission Company 84,000 March 2004 The balance of Consumers' required gas supply is transported on interruptible contracts. The amount of interruptible capacity and the utilization thereof is primarily a function of the price for such service and the availability and price of the spot supplies to be purchased and transported. Consumers' utilization of interruptible transportation is generally in off-peak summer months. CMS Energy Oil and Gas Exploration and Production CMS NOMECO, a wholly owned subsidiary of Enterprises, is an oil and natural gas producer with activities in Michigan and 12 other states, the Gulf of Mexico, Australia, Colombia, Ecuador, Equatorial Guinea, New Zealand, Papua New Guinea, Venezuela and Yemen. In 1994, it produced approximately 2.2 MMbbls of oil, condensate and plant products and approximately 20.5 bcf of gas compared to 1.9 MMbbls and 18.5 bcf in 1993. During 1994 CMS NOMECO participated with a working interest in drilling wells as follows: Type of Number of Number of Success Well Wells Successful Wells Ratio ---------- ---------- ----------------- ------------ Gross Net Gross Net Gross Net Exploratory 15 5.04 7 2.42 47% 48% Development 21 2.99 19 2.83 90% 95% -- ---- -- ---- Total 36 8.03 26 5.25 72% 65% == ==== == ==== The numbers do not include CMS NOMECO's participation in Devonian Antrim Shale gas wells in Michigan, where CMS NOMECO drilled 12 wells during 1994 with a 92 percent success rate. CMS NOMECO has a 14 percent working interest in a consortium which is conducting oil development and production operations in Block 16 and the adjoining Tivacuno Block of the Oriente Basin of Ecuador. Production commenced from the Tivacuno field in May 1994, the Bogi-Caprion field in June, followed by the Amo field in December. By year end all three fields were producing at a pipeline-curtailed rate of 33,000 barrels per day compared to total production capacity of 43,000 barrels per day. Further, the Ministry of Energy and Mines in Ecuador has recently informed the consortium members that the Ministry will seek to renegotiate the Risk Service Contract and other contracts governing the project. CMS NOMECO cannot predict the outcome of these negotiations. Ecuador currently represents approximately one-fifth of the total of CMS NOMECO's proven oil and gas reserves on an equivalent barrel basis. In June 1994, CMS NOMECO acquired from Sun Company, Inc. a working interest in the Espinal block in Colombia, South America, which is operated by LASMO Oil (Colombia) Limited. The block, which includes 250,000 acres, is currently producing 8,500 barrels of oil per day. CMS NOMECO estimates the block to contain at least 75 million barrels of proven oil reserves of which CMS NOMECO's share of production is 14.7 percent. In December 1994, a consortium in which CMS NOMECO is a 29 percent participant entered into an agreement with Maraven, S.A., a unit of the Venezuelan state oil company, to develop the Colon block in the Maracaibo basin of southwest Venezuela. The development program involves reworking, re-equipping and re-entering wells, and drilling new wells to optimize production from existing proved reserves. Total production from this block is expected to approximate 30,000 barrels per day by 1997. In February 1995, CMS NOMECO acquired Walter for approximately $46 million, consisting of approximately $28 million of CMS Energy common stock and $18 million in both cash and assumed debt. CMS NOMECO's acquisition of Walter will add net production of 5,500 barrels per day in 1995 and proven reserves of 20 million barrels of oil. See Item 2. PROPERTIES. CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES. CMS Energy Independent Power Production CMS Generation, a wholly owned subsidiary of Enterprises, invests in, develops, converts, constructs, operates and acquires non-utility power generation projects both domestically and internationally. As of January 1995, CMS Generation had ownership interests in 3467 MW (gross) operating capacity in twenty-nine operating power projects in Michigan, California, Connecticut, New York, Maine, New Jersey, Oklahoma, North Carolina, Argentina and the Philippines. These power projects are fueled by natural gas, biomass, coal, diesel, hydro, tires and wind. In March 1994, GPSLP, an unconsolidated affiliate of CMS Generation, obtained financing for the Genesee Power Station. CMS Generation has a 50 percent ownership interest in GPSLP. In April 1994, construction began on the 35 MW waste wood-fueled power plant near Flint, Michigan. Completion of the project is scheduled for Spring 1996. In June 1994, CMS Generation acquired a 41 percent ownership interest in the Centrales Termicas Mendoza electric generating plant in western Argentina's Mendoza Province. CMS Generation is the lead developer and will become the plant operator. With major retrofitting and maintenance, this facility has the potential to produce 422 MW of generating capacity fueled by oil and natural gas. CMS Generation's operation of the plant commenced in November 1994. In July 1994, CMS Generation acquired a 32.5 percent ownership interest in Toledo Power Company, which owns two operating power plants totaling 135 MW of generating capacity on Cebu Island in the Philippines. CMS Generation is the operator of the 93 MW coal- and oil- fueled Sangi plant and the 42 MW oil-fueled Carmen plant. In January 1995, CMS Generation acquired Niagara Mohawk Power Corporation's independent power subsidiary, HYDRA-CO Enterprises, Inc. CMS Generation assumed ownership in seven major electric generating facilities and a number of smaller plants totaling 795 MW of gross capacity and 250 MW of net ownership. CMS Generation will manage and operate eight plants previously managed by HYDRA-CO. The plants are fueled by coal, natural gas, waste wood and water (hydro). CMS Generation also assumed management responsibility for a 60-megawatt diesel-fueled plant currently under construction in Jamaica. The plant is scheduled to go into service in the third quarter of 1996. CMS Energy Gas Transmission and Storage and CMS Gas Marketing CMS Gas Marketing, a wholly owned subsidiary of Enterprises, was formed in 1987 to independently acquire and provide natural gas to markets throughout the Great Lakes, Midwest and Middle South regions of the United States. CMS Gas Marketing currently serves over 500 customers in 18 states with sales of 60 bcf in 1994. Customers include industrial facilities, schools, hospitals, electric utilities and local gas distribution companies. CMS Gas Transmission, a wholly owned subsidiary of Enterprises which commenced operations in 1989, owns, develops and manages natural gas transmission, processing and storage projects. In the first quarter of 1994, CMS Gas Transmission acquired a 50 percent ownership interest in Moss Bluff Gas Storage Systems, a high deliver- ability salt cavern storage facility on the Gulf Coast of Texas for $18 million. In April 1994, CMS Gas Transmission entered into an agreement in principle with certain partners to develop a North American natural gas market center, the Grands Lacs Market Center. The Grands Lacs Market Center, located in southeastern Michigan, will provide natural gas storage services, peaking storage, wheeling, parking and other related natural gas services. In a related project, in February 1995, CMS Gas Transmission filed an application with the MPSC for permission to construct a pipeline which will link Grands Lacs with pipeline systems in Ontario, Canada. This new interconnection between the U.S. and Canada will allow up to 100 MMcf/d of gas to be transported between the countries. 16 CMS ENERGY CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT Revenue For Years Ended December 31 In Millions 1994 1993 1992 ------- ------- ------- Electric Utility Operations Residential $ 756 $ 718 $ 644 Commercial 646 620 561 Industrial 672 635 551 Other 80 75 80 ------- ------- ------- Total System Sales 2,154 2,048 1,836 Intersystem Sales 35 29 27 ------- ------- ------- Total 2,189 2,077 1,863 ------- ------- ------- Gas Utility Operations Residential 791 803 781 Commercial 230 232 226 Industrial 57 55 55 Other 19 14 16 Transportation 54 56 48 ------- ------- ------- Total 1,151 1,160 1,126 ------- ------- ------- Oil and Gas Exploration and Production Operations 85 77 70 ------- ------- ------- Independent Power Production (a) 45 21 (8) ------- ------- ------- Gas Transmission and Marketing Operations Marketing 129 130 82 Transmission 16 12 7 ------- ------- ------- 145 142 89 ------- ------- ------- Other Operations 4 5 6 ------- ------- ------- Total $3,619 $3,482 $3,146 ======= ======= ======= (a) Does not include CMS Energy's share of unconsolidated independent power production revenues of $385 in 1994, $334 in 1993 and $284 in 1992. Sales For Years Ended December 31 1994 1993 1992 ------- ------- ------- Electric Utility Sales (Millions of kWhs) Residential 10,222 10,066 9,733 Commercial 9,174 8,909 8,652 Industrial 12,321 11,541 10,831 Other 1,285 1,142 1,292 ------- ------- ------- Total System Sales 33,002 31,658 30,508 Intersystem Sales 1,460 1,106 1,093 ------- ------- ------- Total 34,462 32,764 31,601 ======= ======= ======= Gas Utility Sales and Deliveries (bcf) Residential 171 175 167 Commercial 55 56 54 Industrial 14 14 13 Transportation 169 166 150 ------- ------- ------- Total 409 411 384 ======= ======= ======= Oil & Gas Exploration and Production Sales (net equiv. MMbbls) 5.5 4.3 3.7 17 CONSUMERS CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT Revenue For Years Ended December 31 In Millions 1994 1993 1992 ------- ------- ------- Electric Operations Residential $ 756 $ 718 $ 644 Commercial 646 620 561 Industrial 672 635 551 Other 80 75 80 ------- ------- ------- Total System Sales 2,154 2,048 1,836 Intersystem Sales 35 29 27 ------- ------- ------- Total 2,189 2,077 1,863 ======= ======= ======= Gas Operations Residential 791 803 781 Commercial 230 232 226 Industrial 57 55 55 Other 19 14 16 Transportation 54 56 48 ------- ------- ------- Total 1,151 1,160 1,126 ------- ------- ------- Other Operations 16 6 (11) ------- ------- ------- Total $3,356 $3,243 $2,978 ======= ======= ======= Sales For Years Ended December 31 1994 1993 1992 ------- ------- ------- Electric Sales (Millions of kWhs) Residential 10,222 10,066 9,733 Commercial 9,174 8,909 8,652 Industrial 12,321 11,541 10,831 Other 1,285 1,142 1,292 ------- ------- ------- Total System Sales 33,002 31,658 30,508 Intersystem Sales 1,460 1,106 1,093 ------- ------- ------- Total 34,462 32,764 31,601 ======= ======= ======= Gas Sales and Deliveries (bcf) Residential 171 175 167 Commercial 55 56 54 Industrial 14 14 13 Transportation 169 166 150 ------- ------- ------- Total 409 411 384 ======= ======= ======= CMS ENERGY AND CONSUMERS REGULATION CMS Energy, Consumers and their subsidiaries are subject to regulation by various federal, state, local and foreign governmental agencies, including those specifically described below. Michigan Public Service Commission Consumers is subject to the jurisdiction of the MPSC, which regulates public utilities in Michigan with respect to retail utility rates, accounting, services, certain facilities, the issuance of securities and various other matters. For information about Consumers' significant pending MPSC matters, see Item 3. LEGAL PROCEEDINGS. The MPSC also has or will have rate jurisdiction over several limited partnerships in which CMS Gas Transmission has ownership interests. These partnerships own or will own and operate intrastate gas transmission pipelines. Nuclear Regulatory Commission Under the Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC with respect to the design, construction and operation of its nuclear power plants. Consumers is also subject to NRC jurisdiction with respect to certain other uses of nuclear material. In June 1994, the NRC completed a diagnostic evaluation of Palisades. While this inspection found certain performance deficiencies at Palisades, the NRC did not place Palisades on either the troubled plant or declining performance list. The diagnostic evaluation inspection and other matters relating to Palisades are more fully described in Note 13 to Consumers' Consolidated Financial Statements. Federal Energy Regulatory Commission FERC has rate jurisdiction over nine independent power projects in which CMS Generation has an ownership interest which are Qualifying Facilities under PURPA. FERC also has jurisdiction over Consumers' subsidiary, Michigan Gas Storage, as a natural gas company within the meaning of the Natural Gas Act. The FERC jurisdiction relates, among other things, to the acquisition, operation and disposal of assets and facilities and to service provided and rates charged by Michigan Gas Storage. Under certain circumstances, the FERC also has the power to modify gas tariffs of interstate pipeline companies. Certain aspects of Consumers' gas business are also subject to regulation by the FERC including a blanket transportation tariff pursuant to which Consumers can transport gas in interstate commerce. In 1992, the FERC issued Order 636 which required interstate pipelines to unbundle sales services from transportation services and adopted various mechanisms by which pipelines may recover transition costs arising from the restructuring of their services. Consumers had historically been a significant purchaser of gas from an interstate pipeline (Trunkline) and is a major transportation customer of a number of pipelines, including Trunkline. Through a settlement approved by the FERC and MPSC, Consumers will be allowed recovery of transition costs incurred in connection with the Trunkline restructuring. Consumers does not believe that Order 636 will have a significant impact on its financial position or results of operations. Certain aspects of Consumers' electric operations are also subject to regulation by the FERC, including compliance with the FERC's accounting rules and other regulations applicable to "public utilities" and "licensees", the transmission of electric energy in interstate commerce and the rates and charges for the sale of electric energy at wholesale, certain mergers, the sale of certain facilities, the construction, operation and maintenance of hydroelectric projects and the issuance of certain securities, as provided by the Federal Power Act. In July 1994, the FERC approved new 40-year licenses for 11 of Consumers' hydroelectric plants, confirming planned environmental expenditures. In issuing the licenses, the FERC approved, with modifications, a settlement agreement signed by Consumers, the Attorney General, the DNR and other state and federal officials. The agreement requires Consumers to make payments and investments which could total $30 million over the license periods for such things as environmental safeguards and fishery habitat improvements. For information about various lawsuits involving the Ludington plant, see Item 3. LEGAL PROCEEDINGS. Consumers has an effective open-access interconnection service schedule on file with the FERC for wholesale wheeling transactions and another wheeling tariff pending before the FERC. For further information about the open-access transmission tariffs, see Item 3. LEGAL PROCEEDINGS. CONSUMERS AND CMS ENERGY INSURANCE Consumers is insured by NML, which provides insurance coverage against property damage to members' nuclear generating facilities. Consumers maintains $500 million of primary property damage insurance from NML at each of its operating nuclear plants, Big Rock Point and Palisades, covering all risks of physical loss, subject to certain exclusions and deductibles. Consumers is also insured by NEIL and obtains excess property damage insurance in the amount of $1.952 billion for Palisades. These nuclear property insurance policies cover decontamination, debris removal and direct property loss. The NEIL excess property damage policies for Palisades would also cover much of the cost arising from a premature decommissioning due to accidents which were not already funded and part of the remaining book value of the plant. For any loss over $100 million, stabilization and decontamination expenses must be satisfied before other claims proceeds are received from the insurers. Under all these policies, Consumers retains the risk of loss to the extent the loss is within the policy deductibles ($1 million for Palisades and $250,000 for Big Rock Point) or policy exclusions or if the loss exceeds the combined property damage policy limits ($2.452 billion for Palisades and $500 million for Big Rock Point) at either location. Because NML and NEIL are mutual insurance companies, Consumers would be subject to assessments under the NML and NEIL excess property damage policies which could total approximately $30 million in any one policy year in the event of covered losses at its own or any other member's nuclear facility. Consumers has also procured NEIL I coverage which would partially cover the cost of replacement power during certain prolonged accidental outages of the Big Rock Point or Palisades units. Such cost would not be covered by the insurance during the first 21 weeks of any outage, but the major portion of such cost would be covered during the next 12 months of the outage, followed by a reduced level of coverage for a period up to two additional years. Consumers would be subject to a maximum assessment under the replacement power insurance of approximately $3 million in any one policy year in the event of covered losses at its own or any other member's nuclear facility or facilities. Consumers maintains nuclear liability insurance and other forms of financial protection (including an agreement of government indemnity under the Price-Anderson Act, applicable to the Big Rock Point plant) for injuries and off-site property damage due to the nuclear hazard at such facilities. Such insurance and financial protection covers Consumers up to the aggregate limits of liability established by the Price-Anderson Act, which are presently $544.4 million for Big Rock Point and approximately $8.9 billion for Palisades. Part of such financial protection consists of a mandatory industry-wide program under which owners of nuclear generating facilities could be assessed in the event of a nuclear incident at any of such facilities. Consumers would be subject to a maximum assessment of $75.5 million per occurrence (adjusted for inflation plus a 5 percent surcharge if claims and legal costs exceed the financial protection limit) in the event of a nuclear incident at certain nuclear facilities, limited to a maximum installment payment of $10 million per occurrence in any year. Consumers also maintains insurance under a master worker program that covers tort claims for bodily injury caused by a nuclear hazard to workers who began their nuclear related employment after January 1, 1988. The policies contain a $200 million nuclear industry aggregate limit and could subject Consumers to a maximum assessment of up to $6.4 million in the event of claims thereunder. Property insurance is also maintained on CMS Energy's and Consumers' non- nuclear facilities and operations. Conventional (non-nuclear) property insurance is maintained on buildings, equipment, boilers, machinery and gas stored underground. The applicable policies insure the full replacement value of all major operating locations. However, the insurance policies are subject to standard terms, conditions, exclusions and coverage limits similar to those of other companies with similar facilities and operations. Consumers maintains deductibles ranging from $500,000 to $1,000,000 on plant and facility losses. Certain CMS Energy projects are specifically insured with lower deductibles. Consumers insures its overhead electric transmission and distribution system for a $25 million maximum loss limit subject to a $7.5 million deductible. CMS Energy's and Consumers' non-nuclear public liability insurance policies provide a $125 million policy limit, with a $500,000 deductible. Other policies include $125 million of excess workers' compensation insurance, subject to the $500,000 deductible; $125 million of fiduciary and employee benefit liability insurance, subject to the $500,000 deductible; $10 million of crime insurance coverage subject to a $100,000 deductible; $50 million (offshore) and $20 million (onshore) of oil and gas well blow-out insurance subject to a $500,000 deductible; and $225 million of aircraft insurance for corporate aircraft. Certain CMS Energy non-utility projects maintain special insurance with lower deductibles. CMS Energy and Consumers are not insured with regard to certain risks, most notably for flood or earthquake damage to its underground gas and electrical equipment, because it believes that these properties are not subject to large earthquake and flood risks. Consumers has also not obtained insurance for flood and earthquake property damage at its nuclear plants because it believes that the protective systems built into these plants and the low probability of an event of this type at the locations of these plants makes such insurance unnecessary. In addition, Consumers' insurance coverages do not extend to certain environmental clean-up costs, such as claims for air pollution, some past PCB contamination and for some long-term storage or disposal of pollutants. See CONSUMERS AND CMS ENERGY ENVIRONMENTAL COMPLIANCE section below. Insurance policy terms, limits and conditions are subject to change during the year as policies are renewed; however, CMS Energy and Consumers believe that they and their subsidiaries are adequately insured for the various risk exposures incident to their respective businesses. CONSUMERS AND CMS ENERGY ENVIRONMENTAL COMPLIANCE Consumers and CMS Energy and their subsidiaries are subject to regulation with regard to environmental quality, including air and water quality, zoning and other matters, by various federal, state and local authorities. Management believes that the responsible administration of its energy resources includes reasonable programs for the protection and enhancement of the environment. Consumers has installed modern stack emission controls and monitoring systems at its electric generating plants, converted electric generating units to burn cleaner fuels, worked with others to use bottom ash as final cover for ash disposal areas in place of topsoil and as a base for asphalt in road shoulders, worked with local, state and national organizations to enhance certain of Consumers' lands for the benefit of wildlife, provided recreational access to its lands, worked with universities and other institutions on projects to propagate threatened or endangered species, and made financial contributions to a variety of environmental enhancement projects. Capital expenditures by Consumers for environmental protection additions were approximately $47 million in 1994 and are estimated to be approximately $40 million in 1995. Air use permits are required under federal and state law for certain of Consumers' and CMS Generation's affiliates' sources of air emissions. These laws require that certain affected facilities control their sources' air emissions. Permits for Consumers' affected steam electric generating facilities and other affected sources of air emissions have been issued by the Michigan Air Pollution Control Commission pursuant to a delegation of authority from the EPA under the federal Clean Air Act and Michigan Air Pollution Act, as amended. Consumers believes that it is in substantial compliance with all air use permits. Included in the 1990 amendments to the federal Clean Air Act are provisions that limit emissions of sulfur dioxide and NOx and require enhanced emissions monitoring. All of Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in 2000. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. The Clean Air Act's provisions have also required Consumers to make capital expenditures totaling $15 million for installation of continuous emission monitoring systems at affected units, and $10 million to install a low NOx burner system at one coal-fired unit. Consumers estimates capital expenditures for in- process and possible NOx control modifications at other coal-fired units to be an additional $50 million by year 2000. Under the current regulatory framework, NOx controls to be installed at the other coal-fired units are not expected earlier than 1996. Management believes that Consumers' annual operating costs will not be materially affected. The relative costs of compliance with the Clean Air Act by Consumers should be less than that experienced by other utilities that have not been previously subject to stringent air quality restrictions. CMS Energy believes that CMS Generation's projects are in substantial compliance with the 1990 amendments. Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability will average less than 4 percent of the estimated total site remediation costs, and such liability will probably not exceed $6 million. At December 31, 1994, Consumers has accrued a liability for its estimated losses. Consumers believes that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. In 1990, the State of Michigan passed amendments to its Environmental Response Act. Effective July 1991, this law established a state program similar to the federal CERCLA, though broader in scope. Under this law, Consumers expects it will ultimately incur costs at a number of sites, including several of the 23 sites that formerly housed manufactured gas plant facilities at one time operated by Consumers, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests will also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time. However, Consumers is continuing to monitor this issue. For further information about manufactured gas plants, see Item 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS., which is incorporated herein by reference. Consumers has engaged in an aggressive testing and removal program for USTs. Since 1985, Consumers and its subsidiaries have reduced the number of regulated UST systems from approximately 256 to 52. At 106 of the sites from which UST systems were removed, there had been hydrocarbon releases, either from tank system leaks or from spillage on the surface during transfer of contents to or from the tanks. Consumers' response activities have resulted in DNR concurrence in closure of 65 of those releases. The remaining releases are at various stages of cleanup completion. It is estimated that about $5 million remains to be spent to complete these response activities. The Michigan Underground Storage Tank Financial Assurance Act provides a fund to help pay for the cost of response activities associated with leaking USTs. To qualify for these funds, an owner or operator must be in compliance with UST regulations. A substantial portion of future costs for UST response activities at the release sites and a portion of the costs already incurred may be eligible for reimbursement from this fund. Through February 1995, Consumers was reimbursed approximately $2.4 million by this state fund. Like most electric utilities, Consumers has PCB in some of its electrical equipment. Although it has been unlawful to manufacture or sell PCB or PCB contaminated equipment since the 1970's, its continued use in preexisting electrical equipment is lawful. Consumers has engaged in a number of programs to reduce the risk of exposure to the environment from possible PCB spills. These included such actions as removing PCB capacitors outside of substations, draining large transformers and refilling them with non-PCB mineral oil, removing PCB equipment which was found to pose a risk to food supplies or animal feed, and other such programs. Consumers still has a substantial number of PCB capacitors in substations. It has approximately 459,000 untested distribution transformers. By regulation, unless the PCB level is known, transformers are presumed to be PCB-contaminated. There may also be PCB in certain other types of equipment. Based upon results of sampling in 1981, it is thought that about 1 percent of the pole-top transformers had over 500 ppm of PCB, and about 12 percent had from 50 to 500 ppm. Those percentages should decline over time with the retirement of older equipment and its replacement with non-PCB equipment. From time to time there are accidental releases from such equipment. Consumers typically spends less than $1 million per year for all cleanup and disposal of debris and equipment from PCB releases. NPDES and ground water discharge permits authorize the discharge of certain waste waters from Consumers' facilities and pipeline construction projects pursuant to state water quality standards and federal effluent limitation guidelines. Authorizations for discharges from all of Consumers' major operating steam electric generating facilities and for certain discharges from Consumers' other facilities, including the Ludington pumped storage plant and pipeline construction projects, have been issued by the State of Michigan pursuant to a delegation of authority from the EPA under the Federal Water Pollution Control Act of 1972, as amended. Consumers believes that it is in substantial compliance with the NPDES permits. The possibility that exposure to EMFs emanating from power lines and other electric sources may result in adverse health effects has been a subject of increased public, governmental and media attention. The scientific studies and reviews have shown that information is currently insufficient to determine whether a cause-and-effect relationship exists between EMF and certain health risks. Currently, there is no Michigan or federal regulation of transmission lines with regard to EMF. CONSUMERS AND CMS ENERGY COMPETITION Electric Competition The electric utility operations of Consumers are regulated at the wholesale and retail level. The wholesale utility operations of Consumers are regulated by the FERC while the retail utility operations are regulated by the MPSC. Competitors in the electric utility operations of Consumers must also be similarly regulated or specifically exempted from such regulation. CMS Energy's non-utility electric generation businesses are exempt from most state and many federal regulations regarding electric generation and compete in the non-utility power market with other non- utility energy companies that have similar exemptions. The electric utility industry has experienced retail load competition in recent years from cogeneration and self-generation as discussed below. The electric utility industry is now also experiencing increased competition in the wholesale power markets. The factors driving this trend include the enactment of PURPA, the enactment of the Energy Act and increased transmission access. These initiatives provide both opportunities for Consumers in competing for new customers and potential risks because of alternative energy supplies available to existing customers. CMS Energy is similarly faced with expanded opportunities and competition for customers in the non-utility electric generation market. PURPA created a special type of independent power producer that, providing the requirements of qualifying facility status are met and the utility's requirements and the power offered by the qualifying facility are equivalent, are entitled by statute to have their production purchased by a utility. Under PURPA, qualifying facilities are generally exempt from the federal and state regulation imposed on electric utilities. Similarly, the Energy Act was designed, among other things, to foster competition in the wholesale market by facilitating the ownership and operation of generating facilities by "exempt wholesale generators" (which may include independent power producers as well as affiliates of electric utilities) and authorizing the FERC under certain conditions to order utilities which own transmission facilities to provide wholesale transmission services to or for other utilities and other entities generating electric energy for sale or resale. In addition, the Energy Act exempts independent power producers from much of the regulation imposed on electric utilities. One effect of the exemption from regulation has been to encourage investment in wholesale power production facilities which will compete with utilities to provide generation to meet future system demand and provide competition for CMS Energy in the non- utility electric generation market both domestically and internationally. Some of Consumers' larger industrial customers are exploring the possibility of constructing and operating their own on-site generating facilities. Consumers is actively working with these customers to develop rate and service alternatives that are competitive with self-generation options. Under the retail rates authorized by the MPSC, Consumers' industrial and commercial customer rates are currently structured such that rates paid by residential customers are kept at levels lower than they would otherwise be through subsidization by the industrial and commercial customers. However, in a May 1994 order granting Consumers a $58 million annual increase in its retail electric rates, the MPSC reduced the level of subsidization of residential customers by commercial and industrial customers. Residential customers were allocated $40 million (70 percent) of the rate increase. In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million. Consumers has requested that the MPSC eliminate the remainder of cross-subsidization of residential rates in a two-step adjustment to take place over a two year period. In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which, if approved, would allow Consumers a certain level of rate-pricing flexibility and allow the use of the MCV contract capacity above the level currently authorized for recovery by the MPSC, to respond to customers' alternative energy options. In addition, a number of municipalities distribute electricity within their corporate limits and some of these generate all or a portion of their requirements. These municipalities and various rural electric cooperative corporations serve a growing number of retail customers in the same or adjacent areas served by Consumers. In one case, a community currently served by Consumers is considering the formation of a new municipal utility which could displace retail service by Consumers. In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In February 1994, the ALJ issued a PFD which, among other things, found that retail wheeling is likely to create additional stranded investment costs which could be considered costs of transition from a regulated environment to an unregulated environment and that retail wheeling participants should bear their proportionate share of these costs. A ruling on the rate design is expected from the MPSC by mid-1995. In the short term, Consumers does not expect this experimental program to have a material impact on its financial position or results of operations. Consumers has on file with the FERC an open-access transmission tariff which enables any electric utility (defined in such tariff to include independent power producers) to use Consumers' integrated transmission system for the transmission of capacity and energy produced and sold by such electric utility or by third parties. Other similar open-access transmission tariffs have been made effective by the FERC for several large utility companies or systems and more open-access transmission tariffs are anticipated. These developments produce increased marketing opportunities for utility systems such as Consumers' and expose Consumers' system to loss of wholesale load or reduced revenues due to possible displacement of Consumers' wholesale transactions by alternative suppliers with access to Consumers' primary areas of service. Because wholesale transactions by Consumers generated less than 2 percent of Consumers' 1994 revenue from electric operations, Consumers does not believe that this potential loss is significant. Gas Competition Competition with respect to Consumers' gas operations has a longstanding history, as gas has traditionally competed with other fuels such as coal and oil. The passage of the Natural Gas Policy Act of 1978 resulted in gas supplies no longer being curtailed, with competition subsequently arising among alternative suppliers of gas. Consumers responded to these developments by offering gas transportation and storage services to customers that chose to acquire their gas supplies from some other supplier. Because Consumers' earnings from its gas operations are not primarily dependent on gas purchased and resold to its customers, but rather on owning and operating its gas distribution, storage and transportation facilities, Consumers has not suffered any significant losses as a result of such competition, nor does it believe that such losses are likely. CMS Energy's non-utility interstate and intrastate gas operations face competition from other gas transportation companies for new opportunities. The marketing segment faces strong competition for business in all its markets. EMPLOYEES CMS Energy As of February 28, 1995, CMS Energy and its subsidiaries had 10,043 full- time employees and 275 part-time employees for a total of 10,318 employees. Consumers As of February 28, 1995, Consumers and its subsidiaries had 9,326 full- time employees and 251 part-time employees for a total of 9,577 employees. This total includes 4,175 full-time operating, maintenance and construction employees of Consumers who are represented by the Union. A collective bargaining agreement was negotiated between Consumers and the Union which became effective on June 1, 1992 and, by its terms, will continue in full force and effect until June 1, 1995. 25 EXECUTIVE OFFICERS As of February 28, 1995 CMS Energy Name Age Position Period ---- --- -------- ------ William T. McCormick, Jr. 50 Chairman of the Board and Chief Executive Officer of CMS Energy 1987-Present Chairman of the Board of Consumers 1992-Present Chairman of the Board and Chief Executive Officer of Enterprises 1988-Present Chairman of the Board and Chief Executive Officer of Consumers 1985-1992 S. Kinnie Smith, Jr. 64 Vice Chairman of the Board and General Counsel of CMS Energy 1992-Present Vice Chairman of the Board of Consumers 1988-Present Vice Chairman of the Board of Enterprises 1989-Present President and General Counsel of CMS Energy 1988-1992 Victor J. Fryling 47 President of CMS Energy 1992-Present Vice Chairman of the Board of Consumers 1992-Present President of Enterprises 1993-Present President and Chief Financial Officer of Enterprises 1992-1993 Executive Vice President and Chief Financial Officer of CMS Energy and Consumers 1988-1992 John W. Clark 50 Senior Vice President of CMS Energy 1987-Present Senior Vice President of Consumers 1985-Present Alan M. Wright 49 Senior Vice President, Chief Financial Officer and Treasurer of CMS Energy 1994-Present Senior Vice President and Chief Financial Officer of Consumers 1993-Present Senior Vice President and Chief Financial Officer and Treasurer of Enterprises 1994-Present Senior Vice President and Chief Financial Officer of CMS Energy 1992-1994 Senior Vice President and Chief Financial Officer of Enterprises 1993-1994 Senior Vice President, Chief Financial Officer and Treasurer of Consumers 1992-1993 Vice President and Treasurer of Consumers 1991-1992 Vice President - Finance of Entergy Corporation 1989-1991 Vice President - Finance of Entergy Services 1987-1991 Preston D. Hopper* 44 Vice President, Controller and Chief Accounting Officer of CMS Energy 1992-Present Vice President and Controller of Enterprises 1992-Present Vice President and Controller of CMS Energy 1991-1992 Vice President and Controller of ANR Pipeline Co. 1983-1991 Michael G. Morris* 48 President and Chief Executive Officer of Consumers 1994-Present Executive Vice President and Chief Operating Officer of Consumers 1992-1994 Executive Vice President of Consumers 1988-1992 David A. Mikelonis* 46 Senior Vice President and General Counsel of Consumers 1988-Present * In May 1993 the Board of Directors designated the Senior Officers of CMS Energy, its Controller, the President of Enterprises, the President of Consumers and the General Counsel of Consumers as Executive Officers of CMS Energy for purposes of the Securities Exchange Act of 1934. The present term of office of each of the officers extends to the first meeting of CMS Energy's Board of Directors after the next annual election of Directors (scheduled to be held May 26, 1995). There are no family relationships among executive officers and directors of CMS Energy. Consumers Name Age Position Period ---- --- -------- ------ William T. McCormick, Jr. 50 See the information under CMS Energy's Officers Section above, incorporated herein by reference. S. Kinnie Smith, Jr. 64 See the information under CMS Energy's Officers Section above, incorporated herein by reference. Victor J. Fryling 47 See the information under CMS Energy's Officers Section above, incorporated herein by reference. Michael G. Morris 48 See the information under CMS Energy's Officers Section above, incorporated herein by reference. John W. Clark 50 See the information under CMS Energy's Officers Section above, incorporated herein by reference. Paul A. Elbert 45 Executive Vice President and Chief Operating Officer - Gas of Consumers 1994-Present Senior Vice President of Consumers 1991-1994 Vice President of Consumers 1988-1991 David A. Mikelonis 46 See the information under CMS Energy's Officers Section above, incorporated herein by reference. Alan M. Wright 49 See the information under CMS Energy's Officers Section above, incorporated herein by reference. David W. Joos 41 Executive Vice President and Chief Operating Officer - Electric of Consumers 1994-Present Senior Vice President of Consumers 1994-1994 Vice President of Consumers 1990-1994 Dennis DaPra** 52 Vice President and Controller of Consumers 1991-Present Director of Financial and Regulatory Reporting of Consumers 1984-1991 ** In May 1993, Consumers' Board of Directors designated the Senior Officers of Consumers and its Controller as Executive Officers of Consumers for purposes of the Securities Exchange Act of 1934. The present term of office of each of the officers extends to the first meeting of Consumers' Board of Directors after the next annual election of Directors (scheduled to be held May 26, 1995). There are no family relationships among executive officers and directors of Consumers. 28 ITEM 2. PROPERTIES. CHARACTER OF OWNERSHIP The principal properties of CMS Energy and its subsidiaries are owned in fee, except that most electric lines and gas mains are located, pursuant to easements and other rights, in public roads or on land owned by others. The statements under this item as to ownership of properties are made without regard to tax and assessment liens, judgments, easements, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumbrances, and other outstanding rights. None of these outstanding rights impairs the usefulness of such properties. Substantially all of Consumers' properties are subject to the lien of its First Mortgage Bond Indenture. CONSUMERS ELECTRIC UTILITY PROPERTIES Consumers' electric generating system consists of five fossil-fueled plants, two nuclear plants, one pumped storage hydroelectric facility, seven gas combustion turbine plants and 13 hydroelectric plants. 29
1994 Summer Net 1994 Net Demonstrated Generation Name and Location Size and Year Capability (Thousands (Michigan) Entering Service (Kilowatts) of kWhs) Coal Generation J H Campbell - West Olive 3 Units, 1962-1980 1,346,100 (a) 8,270,828 D E Karn - Essexville 2 Units, 1959-1961 515,000 3,153,851 B C Cobb - Muskegon 2 Units, 1956-1957 296,000 1,974,550 J R Whiting - Erie 3 Units, 1952-1953 310,000 2,099,716 J C Weadock - Essexville 2 Units, 1955-1958 310,000 1,901,989 --------- ----------- Total 2,777,100 17,400,934 --------- ----------- Oil/Gas Generation D E Karn - Essexville 2 Units, 1975-1977 1,276,000 398,423 --------- ----------- Ludington Pumped Storage 6 Units, 1973 954,700 (b) (413,644) (c) --------- ----------- Nuclear Generation Palisades - South Haven 1 Unit, 1971 755,000 4,495,232 Big Rock Point - Charlevoix 1 Unit, 1962 67,000 408,488 --------- ----------- Total 822,000 4,903,720 --------- ----------- Gas/Oil Combustion Turbine Generation 7 Plants, 1966-1971 395,300 14,490 --------- ----------- Hydro Generation 13 Plants,1907-1949 73,800 480,846 --------- ----------- Total Owned Generation 6,298,900 22,784,769 =========== Plus Purchased and Inter- change Power Capacity 1,107,000 (d) --------- Total 7,405,900 ========= (a) Represents Consumers' share of the capacity of the Campbell Plant Unit 3, net of 6.69 percent (ownership interests of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.). (b) Represents Consumers' share of the capacity of the Ludington pumped storage plant. Consumers and Detroit Edison have 51 percent and 49 percent undivided ownership, respectively, in the plant, and the capacity of the plant is shared accordingly. (c) Represents Consumers' share of net pumped storage generation. This facility electrically pumps water during off-peak hours for storage to later generate electricity during peak-demand hours. (d) Includes 915 MW jurisdictional and does not include 217 MW non-jurisdictional purchased power capacity from the MCV Facility.Consumers' electric transmission and distribution lines owned and in service are as follows: /TABLE 30 Structure Sub-Surface (Miles) (Miles) Transmission 345,000 volt 1,137 - 138,000 volt 3,251 4 120,000 volt 19 - 46,000 volt 4,080 9 23,000 volt 30 7 ------ ----- Total transmission 8,517 20 Distribution (2,400-24,900 volt) 50,853 4,991 ------ ----- Total transmission and distribution 59,370 5,011 ====== ===== Consumers owns substations having an aggregate transformer capacity of 37,766,530 kilovoltamperes. CONSUMERS GAS UTILITY PROPERTIES Consumers' gas distribution and transmission system consists of 21,197 miles of distribution mains and 1,076 miles of transmission lines throughout the Lower Peninsula of Michigan. Consumers owns and operates five compressor stations with a total of 116,070 installed horsepower. Consumers' gas storage fields, listed below, have an aggregate certified storage capacity of 242.2 bcf: Total Certified Field Name Location Storage Capacity (bcf) Overisel Allegan and Ottawa Counties 64.0 Salem Allegan and Ottawa Counties 35.0 Ira St Clair County 7.5 Lenox Macomb County 3.5 Ray Macomb County 66.0 Northville Oakland, Washtenaw and Wayne Counties 25.8 Puttygut St Clair County 16.6 Four Corners St Clair County 3.8 Swan Creek St Clair County .6 Hessen St Clair County 18.0 Lyon - 34 Oakland County 1.4 Michigan Gas Storage owns and operates two compressor stations with a total of 46,600 installed horsepower. Its transmission system consists of 548 miles of pipelines within the Lower Peninsula of Michigan. Michigan Gas Storage's gas storage fields, listed below, have an aggregate certified storage capacity of 117 bcf: Total Certified Field Name Location Storage Capacity (bcf) Winterfield Osceola and Clare Counties 75.0 Cranberry Lake Clare and Missaukee Counties 30.0 Riverside Missaukee County 12.0 Consumers' gas properties also include the Marysville gas reforming plant, located in Marysville, Michigan. Huron and PanCanadian Petroleum Company are partners in a partnership to use the expanded capacity of the underground caverns at the Marysville plant for commercial storage of liquid hydrocarbons. In addition, Consumers and Novacor Hydrocarbons, Inc. were partners in a partnership to use certain hydrocarbon fractionation facilities at the plant. In December 1994, PanCanadian Petroleum Company purchased Novacor Hydrocarbons' interest in the fractionation partnership. CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES CMS NOMECO has carried on a domestic oil and gas exploration program since 1967. In 1976, CMS NOMECO entered its first venture outside the United States. Net oil and gas production by CMS NOMECO for the years 1992 through 1994 is shown in the following table. Thousands of barrels of oil and millions of cubic feet of gas, except for reserves 1994 1993 1992 Natural gas (a) 20,546 18,487 17,578 Oil and condensate (a) 2,025 1,716 1,417 Plant products (a) 193 186 291 Average daily production (b) Oil 7.1 5.6 4.9 Gas 69.3 62.3 59.2 Reserves to annual production ratio Oil (MMbbls) 26.1 19.1 22.6 Gas (bcf) 11.3 10.9 11.8 (a) Revenue interest to CMS NOMECO (b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties) 32 The following table shows CMS NOMECO's estimated proven reserves of oil and gas for the years 1992 through 1994.
Total Worldwide United States International Oil Gas Oil Gas Oil Gas (MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf) Proven Developed and Undeveloped Reserves(a) December 31, 1991 28.5 191.2 5.3 187.1 23.2 4.1 Revisions and other changes 0.8 (20.4) 0.2 (20.1) 0.6 (0.3) Extensions and discoveries 7.4 45.4 0.1 44.7 7.3 0.7 Purchases of reserves 1.0 9.9 0.2 6.8 0.8 3.1 Production (1.6) (17.6) (1.1) (17.4) (0.5) (0.2) ----- ------ ----- ------ ----- ----- December 31, 1992 36.1 208.5 4.7 201.1 31.4 7.4 Revisions and other changes 0.4 7.2 (0.4) 7.1 0.8 0.1 Extensions and discoveries 0.1 2.9 0.1 2.9 - - Purchases of reserves - 1.7 - 1.7 - - Production (1.9) (18.5) (1.0) (18.2) (0.9) (0.3) ----- ------ ----- ------ ----- ----- December 31, 1993 34.7 201.8 3.4 194.6 31.3 7.2 Revisions and other changes (1.3) (9.7) (0.3) (9.4) (1.0) (0.3) Extensions and discoveries 0.4 50.2 0.4 50.2 - - Acquisitions of reserves 20.2 9.4 - 9.4 20.2 - Production (2.1) (20.5) (0.8) (20.3) (1.3) (0.2) ----- ------ ----- ------ ----- ----- December 31, 1994 51.9 231.2 2.7 224.5 49.2 6.7 ===== ====== ===== ====== ===== ===== Proven Developed Reserves December 31, 1991 25.9 188.0 5.1 183.9 20.8 4.1 December 31, 1992 31.7 205.0 4.5 198.8 27.2 6.2 December 31, 1993 31.2 200.0 3.3 193.4 27.9 6.6 December 31, 1994 37.4 211.7 2.5 205.9 34.9 5.8 Equity Interest in Proven Reserves of Pecten Yemen December 31, 1993 1.5 - - - 1.5 - December 31, 1994 2.9 - - - 2.9 - (a) In mid-1994, CMS NOMECO negotiated an agreement to acquire Walter, a Texas Corporation. Because of the need to obtain governmental approvals, the transaction did not close until early 1995. Had the Walter acquisition been recorded in 1994, proven oil reserves would have been 20 million barrels higher.
The following table shows CMS NOMECO's undeveloped net acres of oil and gas leasehold interests at December 31. Net Acres 1994 1993 Michigan 85,372 77,672 Louisiana (a) 30,418 37,295 Texas (a) 7,823 8,083 North Dakota 5,099 5,635 Indiana 2,518 5,034 Ohio 2,201 1,055 Other states 1,908 1,129 --------- ------- Total domestic 135,339 135,903 --------- ------- Yemen 401,897 120,563 Venezuela 234,002 - Colombia 85,217 - Ecuador 69,160 69,160 Papua New Guinea 63,220 96,825 Equatorial Guinea 47,330 83,334 New Zealand 602 602 Thailand - 188,000 --------- ------- Total international 901,428 558,484 --------- ------- Total 1,036,767 694,387 ========= ======= (a) Includes offshore acreage. CONSUMERS OTHER PROPERTIES CMS Midland owns a 49 percent interest in the MCV Partnership which was formed to construct and operate the MCV Facility. The MCV Facility has been sold to five owner trusts and leased back to the MCV Partnership. CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS Holdings' indirect beneficial interest in the MCV Facility is 35 percent. Consumers owns fee title to 1,140 acres of land in the City and Township of Midland, Midland County, Michigan, occupied by the MCV Facility. The land is leased to the owners of the MCV Facility by five separate leases, each leasing an undivided interest and in the aggregate totaling 100 percent, for an initial term ending December 31, 2035 with possible renewal terms to June 15, 2090. Consumers owns or leases three principal General Office buildings in Jackson, Michigan and 55 Regional and other field offices at various locations in Michigan's Lower Peninsula. Of these, two of the General Office buildings and eleven of the Regional and other field offices are leased. Also owned are miscellaneous parcels of real estate not now used in utility operations. CMS ENERGY OTHER PROPERTIES Various subsidiaries of CMS Generation own interests in independent power plants, including a 50 percent partnership interest in a 36 MW woodwaste- fueled power plant near Susanville, California; a 50 percent partnership interest in a 60 MW coal and woodwaste-fueled power plant in Filer City, Michigan; a 50 percent partnership interest in a 39 MW woodwaste-fueled power plant in Grayling Township, Michigan; a 50 percent interest in a 31 MW tire burning power plant near Sterling, Connecticut; a 50 percent interest in a 19 MW woodwaste-fueled power plant in Lyons Falls, New York; a 50 percent ownership interest in a 20 MW woodwaste-fueled power plant near Chateaugay, New York; an 18.6 percent interest in a consortium which owns an 88 percent interest in a 650 MW fossil-fueled plant in San Nicolas, Argentina; an 80 percent interest in a consortium which owns a 51 percent interest in 422 MW of oil and natural gas fuel plants in the Mendoza province, Argentina; a 25 percent interest in a consortium which owns a 59 percent interest in two hydroelectric power plants, with a total of 1,320 MW of capacity, on the Limay River in western Argentina; and a 32.5 percent interest in 135 MW of oil and coal fueled plants on Cebu Island, in the Philippines. In October 1994, CMS Generation signed a stock purchase agreement with Niagara Mohawk Power Corporation to acquire its independent subsidiary, HYDRA-CO. In January 1995, CMS Generation assumed ownership in seven major electric generating plants, a number of smaller plants and a plant under construction totaling 795 MW of gross capacity and 250 MW of net ownership. The plants are fueled by coal, natural gas, wastewood, wind and water (hydro). The operating plants are located in California, Maine, New Jersey, New York, Oklahoma and North Carolina. CMS Gas Transmission owns a 75 percent interest in a general partnership which owns and operates a 25-mile, 16-inch natural gas transmission pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent limited partnership interest in the Saginaw Bay Area Limited Partnership which owns 125 miles of 10-inch and 16-inch natural gas transmission pipeline in north-central Michigan; owns a 44 percent limited partnership interest in a partnership that owns certain pipelines of 20 and 12 miles interconnected to the Saginaw Bay Area Limited Partnership facilities; owns 100 percent interest in a natural gas treating plant in Otsego County, Michigan; owns 100 percent interest in 41 miles of gas transmission pipeline in Otsego and Montmorency Counties, Michigan; and owns a 50 percent general partnership interest in the Moss Bluff Gas Storage Systems, a high deliverability salt cavern storage facility on the Gulf Coast of Texas. CMS Gas Transmission is currently developing, with other partners, the Grands Lacs Market Center. Located in southeastern Michigan, this site was selected as a North American natural gas market center which will provide natural gas storage services, peaking storage, wheeling, parking and other related natural gas services to both buyers and sellers. CMS Energy, through certain subsidiaries, owns a 50 percent interest in Bay Harbor Limited Liability Company, a resort development in Emmet County, Michigan, owns approximately 6,000 acres of undeveloped land in Benzie and Manistee Counties, Michigan, and owns approximately 53 acres of undeveloped land in Muskegon County, Michigan. CONSUMERS CAPITAL EXPENDITURES Capital expenditures during 1994 for Consumers and its subsidiaries totaled $483 million for capital additions and $9 million for demand-side management programs. These capital additions include approximately $47 million for environmental protection additions and $36 million for capital leases of nuclear fuel and other assets. Of the $483 million, $349 million was incurred for electric utility additions and $134 million for gas utility additions. The electric and gas utility additions include an attributed portion of capital expenditures common to both businesses. In 1995, capital expenditures are estimated to be $437 million for capital additions and $15 million for demand-side management programs. These capital addition estimates include approximately $40 million related to environmental protection additions and $44 million related to capital leases of nuclear fuel and other assets. Of the $437 million, $310 million will be incurred for electric utility additions and $127 million for gas utility additions. The estimated electric and gas utility additions include an attributed portion of anticipated capital expenditures common to both businesses. CMS ENERGY CAPITAL EXPENDITURES Capital expenditures during 1994 for CMS Energy and its subsidiaries totaled $664 million for capital additions and $9 million for demand-side management programs. These capital additions include approximately $47 million for environmental protection additions and $36 million for capital leases of nuclear fuel and other assets. Of the $664 million, $483 million was incurred by Consumers as discussed above. The remaining $181 million in capital additions include $115 million for oil and gas exploration and development, $30 million for independent power production, $31 million for natural gas transmission, storage and marketing and $5 million for other capital expenditures, primarily the Bay Harbor resort development in northern Michigan. In 1995, capital expenditures are estimated to be $924 million for capital additions and $15 million for demand-side management programs. This capital addition estimate includes approximately $40 million related to environmental protection additions and $44 million related to capital leases of nuclear fuel and other assets. Of the $924 million, $437 million will be incurred by Consumers as discussed above. The remaining $487 million in capital additions will be incurred as follows: $132 million for oil and gas exploration and development (including the Walter acquisition), $255 million for independent power production (including the HYDRA-CO acquisition), and $100 million for natural gas transmission, storage and marketing. 36 ITEM 3. LEGAL PROCEEDINGS. Consumers and some of its subsidiaries and affiliates are parties to certain routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, income taxes, and rates and licensing. Reference is made to the Notes to the Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating and environmental matters. The Attorney General, ABATE, and the MPSC Staff typically intervene in MPSC proceedings concerning Consumers. Unless otherwise noted below, these parties have intervened in such proceedings. For many years, almost every significant MPSC order affecting Consumers has been appealed. Appeals from such MPSC orders are pending in the Michigan Court of Appeals and the Michigan Supreme Court. Consumers is vigorously pursuing these matters. Under Michigan civil procedure, parties may file a claim of appeal with the Michigan Court of Appeals which serves as a notice of appeal. The grounds on which the appeal is being made are not set forth until a later date when the parties file their briefs. RATE CASE PROCEEDINGS Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant Investment In November 1983, Consumers filed an electric rate case with the MPSC which sought recovery of its investment in the abandoned portion of the Midland nuclear plant. This case was separated into two phases in September 1984: a financial stabilization phase, MPSC Case No. U-7830, Step 3A, and a prudence phase, MPSC Case No. U-7830, Step 3B. Numerous orders were issued in these cases, including one issued in 1985 in the financial stabilization phase which contained certain conditions to Consumers' receiving financial stabilization rate relief. On May 7, 1991, the MPSC issued final orders in both Step 3A and Step 3B proceedings. The MPSC ruled, among other things, that Consumers could recover approximately $760 million of its $2.1 billion of abandoned Midland investment. In Step 3A, the MPSC reviewed Consumers' compliance with the financial stabilization order conditions. Consumers, as well as the Attorney General and ABATE, among others, filed applications for rehearing with the MPSC of the May 7 Orders in Step 3A and Step 3B which were all denied by the MPSC. Several parties, including Consumers, have appealed the MPSC determinations in these orders to the Court of Appeals. Regarding the Step 3B order, the Attorney General and ABATE primarily disagreed with the standard used by the MPSC to determine the amount of investment that is recoverable by Consumers from its electric customers, contending that recovery should not be allowed for utility assets that have not been placed in service. Consumers disagreed with the date the MPSC determined it would have been prudent for Consumers to abandon construction of the Midland nuclear facility and the reduction in recoverable investment that resulted from this determination. In the Step 3A appeal, the Attorney General and ABATE contended that Consumers did not fully comply with the financial stabilization orders. Oral arguments were held on the appeals from the May 7 Step 3A order in December 1993 and on the Step 3B appeal on October 19, 1994. A decision on the Step 3A appeals has been held in abeyance pending resolution of Step 3B appeals. The Court of Appeals affirmed the MPSC determinations in Step 3B in an order issued in December 1994. Consumers and ABATE have filed applications for leave to appeal the Court of Appeals decision to the Michigan Supreme Court. The Attorney General filed a delayed appeal in February. Appeal of 1991 General Electric Rate Case Order Certain aspects of the electric rate case orders issued by the MPSC in May 7, 1991 and July 1, 1991 were appealed by the Attorney General, ABATE and the Michigan Association of Home Builders. The appeals of the Attorney General and the Michigan Association of Home Builders were dismissed and in May 1994, the Court of Appeals denied ABATE's appeal. In January 1995, the Michigan Supreme Court denied ABATE's application for leave to appeal this decision. 1993 Electric Rate Case On May 10, 1994, the MPSC issued a final order in this case which increased annual electric revenues by $58 million, or about 2.8 percent, and approved an allowed rate of return on common equity of 11.75%. The rate increase is effective for service rendered on and after May 11, 1994. In August 1994, the MPSC denied petitions for rehearing filed by Consumers and the Attorney General. The Attorney General has appealed the MPSC order to the Michigan Court of Appeals arguing that the MPSC cannot require Consumers to spend money on DSM programs and that a modified interruptible rate authorized by the MPSC is unlawful because it permits Consumers to negotiate rates, for certain customers, within a specified range. 1994 Electric Rate Case Filing In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. The filing addresses the ratemaking effect of jurisdictional sales losses by assuming adoption of a proposed special nonjurisdictional rate to large, qualifying industrial customers as requested by Consumers in an earlier June 1994 filing with the MPSC. An alternative approach presented would use the MCV contract capacity above 915 MW for jurisdictional electric customers and offer discounted jurisdictional tariffs. Consumers has also requested that the MPSC eliminate the rate subsidization of residential rates in a two-step adjustment. In addition, Consumers proposes to eliminate all DSM expenditures after April 1995 and further requests MPSC approval to recover costs associated with the proposed settlement of the proceedings concerning the operation of Ludington. Under MPSC rate case scheduling policies, a final order in this case is expected in October 1995. Request for Approval of a Competitive Tariff for Certain Industrial Customers In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility and allow the use of the MCV contract capacity above the level currently authorized by the MPSC to respond to customers' alternative energy options. 1994 Gas Rate Case Filing In December 1994, Consumers filed a gas rate case requesting an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. Under MPSC rate case scheduling policies, a final order in this case is expected in late 1995. MCV - RELATED PROCEEDINGS Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $21 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers received these funds on February 16, 1995. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order (which established Consumers recovery of MCV costs for those and future years) is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award at this time until the remaining amount of MCV capacity is sold or the market for the capacity is confirmed. In March 1994, a lawsuit was filed in federal court for the southern district of New York against CMS Energy, Consumers and CMS Holdings. The lawsuit was filed by the Owner Participants who, along with a partnership in which CMS Midland is a partner, are the lessors of the MCV Facility. The action alleged compensatory and punitive damages in excess of $1 billion and sought injunctive relief relating to Consumers' payments of fixed energy charges to the MCV. On February 8, 1995, the Owner Participants filed a notice of dismissal of this lawsuit. Since the lawsuit had not progressed beyond a preliminary stage, no court action was required for dismissal of this suit. CMS Energy, Consumers and CMS Holdings have also dismissed the lawsuit that had been initiated by them on March 28, 1994, in Midland County, Michigan, in response to the Owner Participant lawsuit in New York. The dismissals are without prejudice and the parties have agreed that the dismissals will be without costs or attorney fees, each side bearing its own. A separate suit filed by CMS Holdings against its partners in First Midland Limited Partnership (the partnership that is one of the lessors of the MCV Facility) to obtain a refund of tax indemnity payments owed to CMS Holdings by the other partners was decided in favor of CMS Holdings. The remaining portion of the $8 million originally in dispute, plus interest, have been paid. An order of dismissal was entered February 2, 1995 after the payments were received. On May 5, 1994, the MCV Partnership notified Consumers of its desire to commence a second arbitration proceeding, this one regarding the methodology for calculation of the energy charge payable under the PPA. The MCV Partnership maintains that Consumers has breached the PPA in misapplying or misinterpreting the methodology for calculation since commercial operation in March 1990. In January 1995, MCV Partnership estimated that it is owed additional energy charge revenues for the years 1990-1994 of amounts ranging from $2.3 million to $6.7 million per year and estimated additional amounts of $6.3 million annually for 1995 through the end of the PPA. Consumers believes that the PPA is clear on the manner in which energy charges are to be calculated and that Consumers has followed the specified procedure correctly throughout the term of the PPA. In accordance with the dispute resolution procedures set out in the PPA, an arbitrator acceptable to both parties has been selected. The schedule established by the arbitrator requires briefs to be filed in June 1995 and anticipates a decision being issued in August 1995. PALISADES PLANT -- SPENT NUCLEAR FUEL STORAGE In April 1993, the NRC amended its regulations, effective May 7, 1993, to license the design of the dry spent fuel storage casks to be used by Consumers at Palisades. In May 1993, the Attorney General and certain other parties commenced litigation to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the NEPA. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected the claims of the Attorney General and certain other parties and upheld the NRC's rulemaking action. The Court found that the NRC's environmental assessment satisfied NEPA requirements, and that a site-specific environmental analysis concerning the use and operation of the dry storage casks at Palisades was not required. As of February 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades' 1995 refueling outage. In the latter part of 1995, Consumers plans to unload and replace one of the dry storage casks previously loaded because of minor flaws detected in the welds in the liner of the cask. Although testing following cask loading did not disclose any leakage from the cask, Consumers has nevertheless decided to remove the spent fuel from the cask and insert it in another cask. Consumers has examined the radiographs for all of the casks fabricated for it to date, and has found all other welds acceptable. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed and concluded that the pad location is acceptable to support the casks. CMS ENERGY'S EXEMPTION UNDER PUHCA CMS Energy is exempt from registration under PUHCA. In December 1991, the Attorney General and the MMCG filed a request with the SEC for the revocation of CMS Energy's exemption. In January 1992, CMS Energy responded to the revocation request affirming its position that it is entitled to the exemption. In April 1992, the MPSC filed a statement with the SEC that recommended that the SEC impose certain conditions on CMS Energy's exemption. CMS Energy is vigorously contesting the revocation request and believes it will maintain the exemption. There has been no action taken by the SEC on this matter. LUDINGTON PUMPED STORAGE PLANT In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. A definitive settlement agreement was subsequently filed with the FERC on February 28, 1995. The proposed settlement, which allows for the continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve recreational areas and convey undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to MPSC approval of Consumers' recovery of all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan in the Circuit Court of Ingham County, seeking damages from Consumers and Detroit Edison for injuries to fishery resources because of the operation of the Ludington plant and the revocation of the plant's bottom-lands lease. The state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, with the latter amount to be adjusted upon installation of "adequate" fish barriers and other changed conditions. Since 1986 the parties have continued to dispute, in various courts, the amount of actual damages as well as the best alternative to mitigate future damages. STRAY VOLTAGE LAWSUITS Consumers has experienced an increase in the number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. Claimants contend that stray voltage affects farm animal behavior, reducing the productivity of their livestock operations. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of on-farm equipment can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers' system. On October 27, 1993, a complaint seeking certification as a class action suit was filed against Consumers in a local circuit court. The complaint alleged that in excess of a billion dollars of damages, primarily related to lost production by certain livestock owned by the purported class, were being incurred as a result of stray voltage from electricity being supplied by Consumers. Consumers believed the allegations to be without merit and vigorously opposed the certification of the class and this suit. On March 11, 1994, the court decided to deny class certification for this complaint and to dismiss, subject to refiling as separate suits, the October lawsuit with respect to all but one of the named plaintiffs. On April 4, 1994, the plaintiffs appealed the court's denial of class certification in this matter to the Court of Appeals. Subsequent to the filing of this appeal and the submission of the plaintiffs' brief on this issue, the Court of Appeals on its own motion issued an order which decided that since the lead case in the class action suit had not been dismissed, the trial court's decision to deny class certification was an interlocutory order and therefore not ripe for appeal. The Court of Appeals order also found that the trial court's decision that the other named plaintiffs had been misjoined was final and ripe for appeal. This issue had not been raised in the plaintiffs' appeal or brief. Consumers has addressed both issues in its brief filed with the Court of Appeals on July 14, 1994, in support of the trial court's decision. This matter is pending before the Court of Appeals. A number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At February 28, 1995, Consumers had 81 separate stray voltage cases pending. RETAIL WHEELING PROCEEDINGS On April 11, 1994, the MPSC issued an Opinion and Interim Order which approved the framework for a five year experimental retail wheeling program for Consumers and Detroit Edison, and remanded the case to the ALJ to determine appropriate rates and charges. The MPSC stated that the purpose of the experiment is to gather and evaluate information regarding whether retail wheeling is in the public interest and should occur on a permanent basis. The experimental program will commence with each utility's next solicitation of additional supply side resources. In February 1995, the ALJ issued a PFD which, among other things, found that retail wheeling is likely to create additional stranded investment costs which could be considered costs of transition from a regulated environment to an unregulated environment and that retail wheeling participants should bear their proportionate share of these costs. The PFD also stated that there should be no restrictions on the entities that can be third party power suppliers in the experiment and that retail wheeling charges should include costs associated with DSM programs, nuclear decommissioning, SFAS 106 costs, and amortization of the Midland plant. A ruling on the ALJ's recommended rate design is expected from the MPSC by mid-1995. In the short term, Consumers does not expect this experimental program to have a material impact on its financial position or results of operations. WHOLESALE WHEELING PROCEEDINGS Consumers has an approved open-access interconnection service schedule on file with the FERC for wholesale wheeling transactions. In 1992, Consumers also filed a separate but complementary open-access transmission tariff that would make both firm and non-firm transmission service available to eligible power generators, including investor-owned utilities, facilities that meet the ownership and technical requirements under PURPA, independent power producers, and municipal and cooperative utilities. The FERC accepted the filing, effective May 2, 1992, subject to refund, and ordered a hearing before an ALJ. In September 1993, the ALJ issued an initial decision that would compel reductions of the tariff rates ranging from 25% to 65%. On November 1, 1993, Consumers filed exceptions with the FERC, which are still pending, seeking reversal of the rate reductions proposed in the ALJ's initial decision. As of January 1, 1995, the amount of firm transmission service currently subject to the tariff is 21 MW. ENVIRONMENTAL MATTERS Consumers is subject to various federal, state and local laws and regulations relating to the environment. Consumers has been named as a party to several actions involving environmental issues. However, based on its present knowledge and subject to future legal and factual developments, CMS Energy and Consumers believe that it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition. See Item 1. BUSINESS. CONSUMERS AND CMS ENERGY ENVIRONMENTAL COMPLIANCE. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CMS Energy None in the fourth quarter of 1994 for CMS Energy. Consumers None in the fourth quarter of 1994 for Consumers. 42 PART II ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. CMS Energy Market prices for CMS Energy's common stock and related security holder matters are contained herein in Item 8, CMS Energy's Quarterly Financial and Common Stock Information, which is incorporated by reference herein. Number of common shareholders at February 28, 1995 was 62,996. Consumers Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In February, May, August, November and December 1994, Consumers paid $16 million, $66 million, $31 million, $36 million and $27 million cash in dividends, respectively, on its common stock. ITEM 6. SELECTED FINANCIAL DATA. CMS Energy Selected financial information is contained in Item 8, CMS Energy's Selected Financial Information which is incorporated by reference herein. Consumers Selected financial information is contained in Item 8, Consumers' Selected Financial Information which is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CMS Energy Management's discussion and analysis of financial condition and results of operations is contained in Item 8, CMS Energy's Management's Discussion and Analysis which is incorporated by reference herein. Consumers Management's discussion and analysis of financial condition and results of operations is contained in Item 8, Consumers' Management's Discussion and Analysis which is incorporated by reference herein. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements: CMS Energy Page Selected Financial Information 46 Management's Discussion and Analysis 48 Consolidated Statements of Income 60 Consolidated Statements of Cash Flows 61 Consolidated Balance Sheets 62 Consolidated Statements of Long-Term Debt 64 Consolidated Statements of Preferred Stock 65 Consolidated Statements of Common Stockholders' Equity 66 Notes to Consolidated Financial Statements 67 Report of Independent Public Accountants 91 Quarterly Financial and Common Stock Information 92 Consumers Page Selected Financial Information 94 Management's Discussion and Analysis 95 Consolidated Statements of Income 104 Consolidated Statements of Cash Flows 105 Consolidated Balance Sheets 106 Consolidated Statements of Long-Term Debt 108 Consolidated Statements of Preferred Stock 109 Consolidated Statements of Common Stockholder's Equity 110 Notes to Consolidated Financial Statements 111 Report of Independent Public Accountants 133 Quarterly Financial Information 134 44 (This page intentionally left blank) 45 CMS Energy Corporation 1994 Financial Statements 46 Selected Financial Information CMS Energy Corporation
1994 1993 1992 1991 1990 Operating revenue (in millions) ($) 3,619 3,482 3,146 2,998 3,028 Net income (loss) (in millions) (a) ($) 179 155 (297) (276) (494) Average common shares outstanding (in thousands) 85,888 81,251 79,877 79,988 81,339 Earnings (loss) per average common share (a) ($) 2.09 1.90 (3.72) (3.44) (6.07) Cash from operations (in millions) (b) ($) 612 484 456 530 375 Capital expenditures, excluding capital lease additions and DSM (in millions) (b) ($) 575 550 487 353 425 Total assets (in millions) ($) 7,384 6,964 6,848 6,194 7,917 Long-term debt, excluding current maturities (in millions) ($) 2,709 2,405 2,725 1,941 3,321 Non-current portion of capital leases (in millions) ($) 108 115 98 68 68 Total preferred stock (in millions) ($) 356 163 163 163 156 Cash dividends declared per common share ($) .78 .60 .48 .48 .42 Market price of common stock at year-end ($) 22-7/8 25-1/8 18-3/8 18-3/8 27-7/8 Book value per common share at year-end ($) 12.78 11.33 9.09 13.28 17.36 Return on average common equity (%) 17.3 18.3 (33.2) (22.4) (29.4) Return on assets (%) 4.7 4.5 (2.3) (0.6) (3.2) Number of common shareholders at year-end 63,628 66,795 70,801 72,729 76,348 Number of employees at year-end (full-time equivalents) 9,972 10,013 9,971 9,212 9,484 Electric utility statistics Sales (millions of kWh) 34,462 32,764 31,601 31,813 31,743 Customers (in thousands) 1,547 1,526 1,506 1,492 1,475 Average sales rate per kWh (cents) 6.29 6.28 5.82 5.73 5.89 Gas utility statistics Sales and transportation deliveries (bcf) 409 411 384 362 351 Customers (in thousands) (c) 1,448 1,423 1,402 1,382 1,362 Average sales rate per mcf ($) 4.48 4.46 4.55 4.58 4.64
47 Selected Financial Information (Continued) CMS Energy Corporation
1994 1993 1992 1991 1990 Electric and gas non-utility statistics CMS Energy's share of unconsolidated independent power production revenue (in millions) ($) 385 334 284 246 197 Independent power production sales (millions of kWh) 6,216 5,019 4,057 3,342 3,233 Natural gas pipeline, storage and marketing revenues (in millions) ($) 145 142 89 42 30 Gas marketed for end-users (bcf) 66 60 45 23 16 Exploration and production statistics Sales (net equiv. MMbbls) 5.6 5.0 4.3 3.7 3.5 Proven reserves (net equiv. MMbbls) 93.3 69.8 70.9 60.3 48.2 Proven reserves added (net equiv. MMbbls) 29.0 3.9 15.0 16.0 14.7 Finding cost ($/net equiv. bbl) 5.92 4.97 4.88 6.58 5.52 (a) Amount in 1991 included an extraordinary loss of $14 million, after tax or $.18 per average common share. (b) Certain prior year amounts were restated for comparative purposes. (c) Excludes off-system transportation customers.
48 CMS Energy Corporation Management's Discussion and Analysis 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 of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas. On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' or CMS Energy's consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive. On February 14, 1995, CMS Energy mailed a proxy statement to its shareholders seeking their approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy. This proposed new class of Common Stock, designated Class G Common Stock, would reflect the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, would be the "Consumers Gas Group"). The existing CMS Energy Common Stock would continue to be outstanding if and after any shares of Class G Common Stock were issued by CMS Energy and would reflect the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to any outstanding shares of the Class G Common Stock. CMS Energy also filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities. Such securities could encompass Common Stock of CMS Energy (including Class G if approved), Preferred Stock of CMS Energy or a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy will continually evaluate the capital markets and may offer such instruments from time to time, at terms to be determined at or prior to the time of the sale. Consolidated Earnings Consolidated net income for 1994 totaled $179 million or $2.09 per share, compared to net income of $155 million or $1.90 per share in 1993 and a net loss of $297 million or $3.72 per share in 1992. The improved net income in 1994 reflects a significant increase in utility electric sales, the impact from a May 1994 electric rate increase, the recognition of incentive revenue related to DSM programs, and the favorable resolution of a previously recorded gas cost contingency. The increased 1993 net income reflects the Settlement Order related to power purchases from the MCV Partnership as well as increased electric sales and gas deliveries. Earnings in 1994 and 1993 also reflect growth of non-utility businesses. Cash Position, Financing and Investing CMS Energy's primary ongoing source of operating cash is dividends from its principal subsidiaries. Consumers effected a quasi-reorganization as of December 31, 1992, which allowed it to resume paying common dividends (see Note 7 to the Consolidated Financial Statements). Consumers paid $176 million in common dividends in 1994. CMS Energy also received cash dividends of $9 million from its non-utility subsidiaries. CMS Energy paid $67 million in cash dividends to common shareholders compared to $49 million in 1993. The $18 million increase reflects an annual increase of $.12 per share, from $.72 per share to $.84 per share, commencing third quarter 1994. CMS Energy's consolidated cash requirements are met by its operating and financing activities. In 1994, 1993 and 1992, CMS Energy's consolidated cash from operations was derived mainly from Consumers' sale and transportation of natural gas and its generation, sale and transmission of electricity and from CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations for 1994 reflects Consumers' record- setting electric sales and increased electric rates which were approved by the MPSC in mid-1994. Cash from operations for 1993 primarily reflected increased electric sales and gas deliveries from 1992 levels and reduced after-tax cash shortfalls resulting from Consumers' purchases of power from the MCV Partnership. During 1992, CMS Energy generated cash primarily from its consolidated operating activities. CMS Energy's primary use of cash continues to reflect its utility construction expenditures, improvements in the reliability of its electric and gas utility transmission and distribution systems and expansion of its non-utility businesses. It also has used its cash to retire portions of long-term securities and to pay common and preferred dividends. Financing Activities: In January 1994, CMS Energy filed a shelf- registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. As of January 31, 1995, CMS Energy had issued approximately $99 million of GTNs with interest rates ranging from 6.75 to 8.50 percent and reduced the principal amount of Series B Notes outstanding by $114 million, to a balance of $167 million. Also, in July 1994, CMS Energy refinanced its Secured Credit Facility with a new $400 million Unsecured Credit Facility and extended the termination date to June 30, 1997. Additionally, in October 1994, CMS Energy filed a shelf- registration statement for the offering and issuance of up to two million shares of common stock. As described in the SEC filing, the shares may be offered and issued in connection with acquisitions of energy-related businesses and assets. In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility for the acquisition of HYDRA-CO. CMS Energy is currently evaluating permanent financing options. In early 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds of $193 million from the sale were used for general corporate purposes, including debt retirement and improvements to Consumers' distribution systems. Consumers continued its effort to reduce its future interest charges by retiring $101 million of high-cost first mortgage bonds. In November 1994, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its long-term, variable rate credit agreement and to reduce short-term borrowings. In October 1993, CMS Energy issued 4.6 million shares of common stock at a price of $26-5/8. The net proceeds of $119 million were used to reduce existing debt and for general corporate purposes. During 1993, Consumers retired $51 million of high-cost outstanding debt and refinanced $573 million of other debt at lower interest rates. In November 1993, CMS NOMECO amended the terms of its loan agreement and increased the amount to $110 million. For further information on financing activities, see Note 7. Investing Activities: Capital expenditures (excluding assets placed under capital leases of $36 million), deferred DSM costs and investments in unconsolidated subsidiaries totaled $637 million for 1994 as compared to $710 million in 1993 and $525 million in 1992. CMS Energy's expenditures for its utility, independent power production, oil and gas exploration and production, and natural gas pipeline, storage and marketing business segments were $456 million, $30 million, $115 million and $31 million, respectively. Financing and Investing Outlook: CMS Energy estimates that capital expenditures, including DSM, new lease commitments and investments in unconsolidated subsidiaries, will total approximately $2.2 billion over the next three years. In Millions Years Ended December 31 1995 1996 1997 - ----------------------- ---- ---- ---- Electric utility (a) $325 $255 $269 Gas utility (a) 127 119 111 Oil and gas exploration and production (b) 132 100 110 Independent power production (c) 255 144 117 Natural gas pipeline, storage and marketing 100 29 20 ---- ---- ---- $939 $647 $627 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to both utility businesses. (b)(c) 1995 capital expenditures include requirements of (b)$42 million and (c)$155 million for acquisitions which commenced in 1994 but did not close until 1995. CMS Energy is required to redeem or retire approximately $720 million of long-term debt during 1995 through 1997. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures and debt retirements. Additionally, CMS Energy will continue to evaluate the capital markets in 1995 as a source of financing its subsidiaries' investing activities. Consumers has several available sources of credit including unsecured, committed lines of credit totaling $185 million and a $470 million working capital facility. Consumers has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At December 31, 1994 and 1993, receivables sold totaled $275 million and $285 million, respectively. Electric Utility Results of Operations In Millions Pretax Operating Income ------------------------------ Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ 33 $ 34 Weather - 11 Resolution of MCV power cost issues - 126 Rate increase and other regulatory issues 38 5 O&M, general taxes and depreciation (22) (44) ----- ----- Total change $ 49 $132 ===== ===== Electric Sales: Total electric sales in 1994 were a record 34.5 billion kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent increase in system sales to Consumers' ultimate customers. Strong industrial sales accounted for 58 percent of the growth. In 1994, residential and commercial sales increased 1.6 percent and 3.0 percent, respectively, while industrial sales increased 6.8 percent. The significant increase in electric sales reflects the continued improvement in economic conditions in Michigan and broad-based growth in sales to industrial customers. Growth in industrial sales was the strongest in the automotive and chemical sectors. Total electric sales in 1993 were 32.8 billion kWh, a 3.7 percent increase from the 1992 levels. The 32.8 billion kWh includes a 3.8 percent increase in system sales. Power Costs: Power costs for 1994 totaled $950 million, a $42 million increase from the corresponding 1993 period. This increase reflects increased kWh production at Consumers' generating plants and greater power purchases from outside sources to meet increased sales demand. Power costs for 1993 compared to 1992 reflect the impact of $126 million relating to the resolution of MCV power cost issues (see Note 3). Operation and Maintenance: Increases in other operation and maintenance expense for 1994 and 1993 reflected increased expenditures to improve electric system reliability. Depreciation: The increased depreciation for 1994 reflects additional capital investments in property and equipment. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' obligation to purchase contract capacity from the MCV Partnership was 1,132 MW in 1994 and increases to 1,240 MW in 1995 and thereafter. In 1993, the MPSC issued the Settlement Order that permits Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing an after-tax loss of $343 million for the present value of estimated future underrecoveries of power purchases from the MCV Partnership. This loss included all fixed energy amounts at issue in the arbitration proceedings discussed below. Additional losses may occur if actual future experience materially differs from the 1992 estimates. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $61 million for 1994. Estimated future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Expected cash underrecoveries $60 $56 $55 $ 8 $ 9 Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award at this time until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed. In a second arbitration proceeding, the MCV Partnership is seeking additional payments from Consumers which the MCV has estimated at $6.3 million annually for an alleged breach of the PPA. In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew the lawsuit. In July 1994 and February 1995, Consumers terminated power purchase agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood and chipped tire plant. Consumers plans to seek MPSC approval to substitute 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. For further information, see Note 3. Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consumers filed a request with the MPSC in November 1994, to increase its retail electric rates in a range from $104 million to $140 million annually (see Note 4). Additionally, in January 1995, Consumers filed a request with the MPSC, seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease. If both aspects of the request are approved, the net result would be a decrease in electric depreciation expense of $7 million. Special Rates: In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility, and allow use of MCV contract capacity above the level currently authorized by the MPSC, to respond to customers' alternative energy options. PSCR Matters: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. From mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. In November 1994, an ALJ issued a proposal for decision that recommended a $4 million disallowance of replacement power costs related to the 1993 outage. Consumers accrued a loss for this issue for 1994. Recovery of replacement power costs and the prudency of actions taken during the 1994 outage will be reviewed by the MPSC during the 1994 PSCR reconciliation proceeding. Electric Conservation Efforts: In 1993, Consumers completed the customer participation portion of several DSM programs designed to encourage the efficient use of energy. During 1994, Consumers recognized $11 million in incentive revenue, related to Consumers' achievement of certain DSM program objectives approved by the MPSC in 1992. A final order, authorizing Consumers to collect the $11 million incentive, is expected from the MPSC by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to continue certain DSM programs. For further information, see Note 4. Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected. In 1990, the State of Michigan passed amendments to the Environmental Response Act, under which Consumers expects that it will ultimately incur costs at a number of sites, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates or from others. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. The EPA has asked a number of utilities in the Great Lakes area to voluntarily retire certain equipment containing specific levels of polychlorinated biphenyls. While Consumers believes that it is largely in compliance with the EPA's request, it has agreed to a 10-year retirement period for certain equipment included in the EPA's request. Consumers does not anticipate that any significant additional costs will be incurred as a result of this agreement. For further information regarding electric environmental matters, see Note 12. Electric Outlook Competition: Consumers currently expects customer demand for electricity within its service territory will increase by approximately 1.6 percent per year over the next five years. Economic growth and an increasing customer base are expected to lead to consistently higher annual sales. However, Consumers (along with the electric utility industry) is experiencing accelerating competitive pressures which may result in a negative impact on Consumers' sales growth. The primary sources of this competition include: the installation of cogeneration or other self- generation facilities by Consumers' larger industrial customers; the formation of municipal utilities which would displace retail service by Consumers to an entire community; and competition from neighboring utilities which offer flexible rate arrangements designed to encourage movement to their respective service areas. Several of Consumers' industrial customers are studying these options. Consumers is pursuing several strategies to retain its current "at-risk" customers. These strategies include a request that the MPSC allow Consumers to offer special competitive service rates to current industrial customers which have demonstrated an ability to seek alternate electric supplies and to attract new customers which are considering locating or expanding facilities in Michigan. As part of its current electric rate case, Consumers has requested that the MPSC eliminate the rate subsidization of residential customers. If approved, commercial and industrial customers' electric costs would decrease by a total of approximately $80 million per year. Consumers is committed to holding operation and maintenance costs level and continuing to improve customer service. Consumers is also working with large customers to identify ways to improve the efficiency with which energy is used. In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In February 1995, an ALJ issued a proposal for decision that addressed the methodology for pricing transmission rates to be used for the experiment. An MPSC order is expected by mid-1995. In the short-term, Consumers does not expect this experiment to have a material impact on its financial position or results of operations. Nuclear Matters: In late 1993, the NRC completed a review of Consumers' performance at Palisades that showed a decline in performance. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades during 1994 which found certain performance, operational and management deficiencies at the plant. Consumers subsequently filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned level of expenditures. Consumers' on-site storage pool at Palisades is at capacity, and it is unlikely that the DOE will begin accepting any spent nuclear fuel by the originally scheduled date in 1998. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued a decision, effectively allowing Consumers to continue using dry cask storage at Palisades. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed, prior to the year 2000, a temperature screening criterion established by NRC regulations. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 13. The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the FASB has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed, annual provisions for decommissioning could increase, estimated costs for decommissioning could be recorded as a liability rather than as accumulated depreciation, and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. Stray Voltage: Consumers has recently experienced increases in the number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending. CMS Energy believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. For further information, see Note 12. Gas Utility Results of Operations In Millions Pretax Operating Income ----------------------------- Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ (3) $ 7 Weather - 10 Regulatory recovery of gas cost 10 12 O&M, general taxes and depreciation (19) 9 ----- ----- Total change $(12) $38 ===== ===== Gas Deliveries: Gas sales and gas transported in 1994 totaled 409 bcf, a .4 percent decrease from 1993. In 1993, gas sales and gas transported totaled 410.6 bcf, a 6.9 percent increase from 1992 deliveries. Gas Utility Issues Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates by $21 million. The requested increase in revenue reflects increased expenditures, including those associated with postretirement benefits, and proposes a 13 percent return on equity. A final order from the MPSC is expected in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. In June 1994, the FERC approved a stipulation and agreement in full settlement of a rate proceeding originally filed by Michigan Gas Storage in 1993, which provides Michigan Gas Storage with estimated annual revenues of $20 million. For further information regarding gas utility rates, see Note 4. Gas Environmental Matters: Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time. 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 $112 million. These estimates are based on undiscounted 1994 costs. At December 31, 1994, Consumers has accrued a liability for $48 million. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in December 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recovered in rates, prudent costs must be approved in a rate case. The MPSC has approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 12. Gas Outlook Consumers currently anticipates gas deliveries to grow approximately 2.3 percent per year (excluding MCV transportation and off-system deliveries) over the next five years, primarily due to a steadily growing customer base. Additionally, Consumers has several strategies which will support increased load requirements in the future. These strategies include increasing efforts to promote natural gas to Consumers' current customers that are using various non-gas furnaces and appliances. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Management also believes there exists significant potential for developing industrial process fuel conversion projects. New technologies being developed on a national level, such as the emerging use of natural gas vehicles and commercial gas cooling equipment, also provide Consumers with sales growth opportunities. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load to natural gas. In 1994, Consumers purchased approximately 83 percent of its required gas supply under long-term contracts, and the balance on the spot market. Trunkline supplied approximately 35 percent of the total requirement. In late 1994, Consumers' supply contract with Trunkline was replaced by several one- and two-year contracts with independent producers. Consumers estimates its purchases under long-term gas contracts will range from 70 - 80 percent in future years. Consumers also has transmission contracts totaling approximately 90 percent of its supply requirements. These contracts vary in length from one to ten years. Consumers' ability to purchase gas during the off-season and store it in its extensive underground storage facilities continues to help provide customers with low, competitive gas rates. Oil and Gas Exploration and Production Pretax Operating Income: 1994 pretax operating income increased $5 million from 1993, reflecting higher gas sales volumes, lower international write-offs, and the gain from assignment of a gas supply contract, partially offset by lower average market prices for oil and gas. 1993 pretax operating income decreased $4 million from 1992, primarily reflecting lower average market prices for oil and $10 million of international write-offs, partially offset by higher gas and oil sales volumes and higher average market prices for gas. Capital Expenditures: In June 1994, CMS NOMECO acquired for $22.5 million a working interest in the Espinal block in Colombia, South America, which is operated by LASMO Oil (Colombia) Limited, from Sun Company, Inc. The other interest holder is Empresa Colombiana de Petroleos (Ecopetrol), the Colombian State Oil Company. The block which includes 250,000 acres is currently producing 8,500 barrels of oil per day. CMS NOMECO estimates the block to contain at least 75 million barrels of proven oil reserves of which CMS NOMECO's share of production is 14.7 percent. In September 1994, a consortium in which CMS NOMECO is a 29 percent participant was awarded the right to enter into an agreement with Maraven, S.A., a unit of the Venezuelan state oil company, to develop the Colon block in the Maracaibo basin of southwest Venezuela. The agreement commits the consortium to spend at least $160 million over the next three years in a development program involving reworking, re-equipping and re- entering wells, and drilling new wells to optimize production from existing proved reserves. Total production from the block is expected to approximate 30,000 barrels per day by 1997. The consortium's operating fee and profit compensation is approximately $4.90 per barrel of production during the 20-year life of the concession. The 1994 capital expenditures also reflect pipeline and road construction and development drilling in Ecuador. Production commenced in May 1994. By year end all three fields were producing at a pipeline-curtailed rate of 33,000 barrels per day compared to total productive capacity of 43,000 barrels per day. Further, the Ministry of Energy and Mines in Ecuador has recently informed the consortium members that the Ministry will seek to renegotiate the Risk Service Contract and other contracts governing the project. CMS NOMECO cannot predict the outcome of these negotiations. CMS NOMECO holds a 14 percent working interest. In mid-1994, CMS NOMECO negotiated an agreement to acquire Walter. Because of the need to obtain governmental approvals, the transaction did not close until early 1995. CMS NOMECO's acquisition of Walter will add net production of 5,500 barrels per day in 1995 and proven reserves of approximately 20 million barrels of oil. CMS Energy currently plans to invest $342 million over the next three years in its oil and gas exploration and production operations. These anticipated capital expenditures, which reflect the acquisition of Walter, will be concentrated in North and South America and Africa. Independent Power Production Pretax Operating Income: 1994 pretax operating income increased $15 million, primarily reflecting higher capacity sales from the MCV partnership, as well as additional equity earnings by the CMS Generation subsidiaries due to the addition of new electric generating capacity. Sales and revenues related to CMS Energy's ownership interest increased 24 percent and 15 percent, respectively, over the prior year. 1993 pretax operating income increased $21 million from 1992, primarily reflecting the addition of new electric generating capacity and improved equity earnings and operating efficiencies. Capital Expenditures: In 1994, GPSLP, an unconsolidated affiliate of CMS Generation, obtained financing and began construction on the Genesee Power Station. CMS Generation has a 50 percent ownership interest in GPSLP, the 35 MW wastewood-fueled power plant near Flint, Michigan. Completion of the project is scheduled for Spring 1996 with an estimated cost of $94 million. CMS Generation's share of GPSLP equity committed upon completion of the project approximates $11 million. In June 1994, CMS Generation acquired a 41 percent ownership interest in the Centrales Termicas Mendoza electric generating plant in western Argentina's Mendoza Province. CMS Generation is the lead developer and the plant operator. With major retrofitting and maintenance, this facility has the potential to produce 382 MW of generating capacity from oil and natural gas. CMS Generation's operational responsibility for the plant commenced on November 1, 1994. In July 1994, CMS Generation acquired a 32.5 percent ownership interest in Toledo Power Company, which holds two operating power plants totaling 135 MW of generating capacity located on the island of Cebu in the Philippines. In January 1995, CMS Generation completed its acquisition of Niagara Mohawk Power Corporation's independent power subsidiary, HYDRA-CO. CMS Generation purchased 100 percent of HYDRA-CO's stock for $207 million, including approximately $52 million of current assets. CMS Generation partially financed the acquisition with a $118 million bridge credit facility supplied by a consortium of four banks led by Union Bank of California. CMS Generation assumes ownership in 735 megawatts of gross capacity and 224 megawatts of net ownership. CMS Generation will manage and operate eight plants previously managed by HYDRA-CO and will also assume construction management responsibility for a 60-megawatt diesel- fueled plant which has begun in Jamaica. The plant is scheduled to go into service in the third quarter of 1996. CMS Energy currently plans to invest $516 million relating to its independent power production operations over the next three years, primarily in domestic and international subsidiaries and partnerships. These anticipated capital expenditures include a $155 million requirement for the HYDRA-CO acquisition. CMS Generation will also pursue acquisitions of operating electric generating plants in Latin America, southern Asia and the Pacific Rim region. Natural Gas Pipeline, Storage and Marketing Pretax Operating Income: 1994 pretax operating income increased $2 million over 1993, reflecting earnings growth from gas pipeline and storage projects and gas marketed to end-users. In 1994, 66 bcf was marketed compared to 60 bcf in 1993. Capital Expenditures: In January 1994, CMS Gas Transmission acquired a 50 percent ownership interest in Moss Bluff Gas Storage Systems, a high deliverability salt cavern storage facility on the Gulf Coast of Texas, for $18 million. Effective January 1, 1995, CMS Gas Transmission increased its ownership of Antrim Limited Partnership to 100 percent by acquiring the remaining 40 percent interest. Under a new agreement with MichCon, CMS Gas Transmission will provide a gas treating service for up to 260 MMcf/d of Antrim gas. CMS Gas Transmission currently plans to expand this existing 120 MMcf/d treating complex to accommodate new Antrim production. This $22 million expansion will treat gas connected to a number of gathering lines including CMS Gas Transmission's South Chester gathering system and deliver gas to MichCon's Northern Michigan pipeline network. CMS Energy currently plans to invest $149 million over the next three years relating to its non-utility gas operations, continuing to pursue development of natural gas storage, gas gathering and pipeline operations both domestically and internationally and work toward the development of a Midwest "market center" for natural gas through strategic alliances and asset acquisition and development. Other Other Income: Other income for 1994 decreased $34 million when compared to the corresponding 1993 period, reflecting the sale of the remaining MCV Bonds in December 1993 which eliminated the bond interest income. The 1992 loss included a $343 million charge related to the Settlement Order. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. On April 15, 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. 60 Consolidated Statements of Income CMS Energy Corporation
In Millions, Except Per Share Amounts Years Ended December 31 1994 1993 1992 Operating Revenue Electric utility $2,189 $2,077 $1,863 Gas utility 1,151 1,160 1,126 Oil and gas exploration and production 85 77 70 Independent power production 45 21 (8) Natural gas pipeline, storage and marketing 145 142 89 Other 4 5 6 --------------------------------- Total operating revenue 3,619 3,482 3,146 --------------------------------- Operating Expenses Operation Fuel for electric generation 306 293 305 Purchased power - related parties 482 467 460 Purchased and interchange power 162 148 112 Cost of gas sold 785 801 749 Other 625 571 555 --------------------------------- Total operation 2,360 2,280 2,181 Maintenance 192 206 203 Depreciation, depletion and amortization 379 364 347 General taxes 184 193 184 --------------------------------- Total operating expenses 3,115 3,043 2,915 --------------------------------- Pretax Operating Electric utility 335 286 154 Income (Loss) Gas utility 135 147 109 Oil and gas exploration and production 8 3 7 Independent power production 20 5 (16) Natural gas pipeline, storage and marketing 9 7 5 Other (3) (9) (28) --------------------------------- Total pretax operating income 504 439 231 --------------------------------- Income Taxes 104 92 22 --------------------------------- Net Operating Income 400 347 209 --------------------------------- Other Income Accretion income (Note 4) 13 14 15 (Deductions) Accretion expense (35) (36) - Other income taxes, net 12 17 168 MCV Bond income - 32 34 Loss on MCV power purchases - settlement (Note 3) - - (520) Other, net 18 15 9 --------------------------------- Total other income (deductions) 8 42 (294) --------------------------------- Fixed Charges Interest on long-term debt 193 204 169 Other interest 18 24 35 Capitalized interest (6) (5) (3) Preferred dividends 24 11 11 --------------------------------- Net fixed charges 229 234 212 --------------------------------- Net Income (Loss) $ 179 $ 155 $ (297) ================================= Average Common Shares Outstanding 86 81 80 ================================= Earnings (Loss) Per Average Common Share $ 2.09 $ 1.90 $(3.72) ================================= Dividends Declared Per Common Share $ .78 $ .60 $ .48 ================================= The accompanying notes are an integral part of these statements.
61 Consolidated Statements of Cash Flows CMS Energy Corporation
In Millions Years Ended December 31 1994 1993 1992 Cash Flows From Net income (loss) $ 179 $ 155 $(297) Operating Activities Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $49, $46 and $46, respectively) 379 364 347 Debt discount amortization 37 36 12 Capital lease amortization 36 31 41 Deferred income taxes and investment tax credit 56 56 (185) Accretion expense 35 36 - Accretion income - abandoned Midland project (13) (14) (15) MCV power purchases - settlement (Note 3) (87) (84) - Loss on MCV power purchases - settlement (Note 3) - - 520 Changes in other assets and liabilities (Note 15) 12 (88) 25 Other (22) (8) 8 ------ ------ ------ Net cash provided by operating activities 612 484 456 ------ ------ ------ Cash Flows From Capital expenditures (excludes capital lease additions Investing Activities of $36, $58 and $69, respectively and DSM) (Note 15) (575) (550) (487) Investments in partnerships and unconsolidated subsidiaries (53) (108) (12) Investments in nuclear decommissioning trust funds (49) (46) (46) Cost to retire property, net (38) (32) (14) Deferred demand-side management costs (9) (52) (26) Proceeds from sale of property 20 6 12 Proceeds from MCV Bonds - 322 10 Sale of subsidiary - (14) - Proceeds from Bechtel settlement - - 46 Other (5) (5) (1) ------ ------ ------ Net cash used in investing activities (709) (479) (518) ------ ------ ------ Cash Flows From Proceeds from bank loans, notes and bonds 701 673 607 Financing Activities Issuance of preferred stock 193 - - Increase (decrease) in notes payable, net 80 44 (493) Issuance of common stock 30 132 - Repayment of bank loans (473) (192) (1) Retirement of bonds and other long-term debt (279) (645) (12) Payment of common stock dividends (67) (49) (38) Payment of capital lease obligations (35) (26) (36) Retirement of common stock (2) (3) (1) ------ ------ ------ Net cash provided by (used in) financing activities 148 (66) 26 ------ ------ ------ Net Increase (Decrease) in Cash and Temporary Cash Investments 51 (61) (36) Cash and temporary cash investments Beginning of year 28 89 125 ------ ------ ------ End of year $ 79 $ 28 $ 89 ====== ====== ====== The accompanying notes are an integral part of these statements.
62 Consolidated Balance Sheets CMS Energy Corporation
ASSETS In Millions December 31 1994 1993 Plant and Property Electric $5,771 $5,472 (At Cost) Gas 2,102 1,964 Oil and gas properties (full-cost method) 934 845 Other 73 67 ---------------- 8,880 8,348 Less accumulated depreciation, depletion and amortization (Note 2) 4,299 4,022 ---------------- 4,581 4,326 Construction work-in-progress 245 257 ---------------- 4,826 4,583 ---------------- Investments First Midland Limited Partnership (Notes 3 and 18) 218 213 Independent power production 151 115 Midland Cogeneration Venture Limited Partnership (Notes 3 and 18) 74 67 Other 56 26 ---------------- 499 421 ---------------- Current Assets Cash and temporary cash investments at cost, which approximates market 79 28 Accounts receivable and accrued revenue, less allowances of $5 in 1994 and $4 in 1993 (Note 6) 154 149 Inventories at average cost Gas in underground storage 235 228 Materials and supplies 75 74 Generating plant fuel stock 37 41 Deferred income taxes (Note 5) 34 17 Trunkline settlement (Note 4) 30 31 Prepayments and other 186 195 ---------------- 830 763 ---------------- Non-current Assets Postretirement benefits (Note 10) 484 491 Nuclear decommissioning trust funds (Note 2) 213 165 Abandoned Midland project (Note 4) 147 162 Trunkline settlement (Note 4) 55 86 Other 330 293 ---------------- 1,229 1,197 ---------------- Total Assets $7,384 $6,964 ================
63 CMS Energy Corporation
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions December 31 1994 1993 Capitalization Common stockholders' equity $1,107 $ 966 (Note 7) Preferred stock of subsidiary 356 163 Long-term debt 2,709 2,405 Non-current portion of capital leases 108 115 ---------------- 4,280 3,649 ---------------- Current Liabilities Current portion of long-term debt and capital leases 64 368 Notes payable 339 259 Accounts payable 193 171 Accounts payable - related parties 50 46 Accrued taxes 217 233 MCV power purchases - settlement (Note 3) 95 82 Accrued interest 40 40 Accrued refunds 25 28 Other 198 189 ---------------- 1,221 1,416 ---------------- Non-current Deferred income taxes (Note 5) 582 509 Liabilities Postretirement benefits (Note 10) 550 540 MCV power purchases - settlement (Note 3) 324 391 Deferred investment tax credits 181 191 Trunkline settlement (Note 4) 55 86 Regulatory liabilities for income taxes, net (Notes 5 and 17) 16 6 Other 175 176 ---------------- 1,883 1,899 ---------------- Commitments and Contingencies (Notes 2, 3, 4, 11, 12 and 13) Total Stockholders' Investment and Liabilities $7,384 $6,964 ================ The accompanying notes are an integral part of these statements.
64 Consolidated Statements of Long-Term Debt CMS Energy Corporation In Millions
December 31 1994 1993 First Mortgage Bonds Series (%) Due 5-7/8 1996 $ 36 $ 36 6 1997 50 50 8-3/4 1997 - 5 8-3/4 1998 248 248 6-5/8 1998 45 45 6-7/8 1998 43 43 9-1/8 1998 - 5 7-5/8 1999 - 48 8-7/8 1999 200 200 7-1/2 2001 57 57 7-1/2 2002 62 62 7-1/2 2002 - 43 6-3/8 2003 300 300 7-3/8 2023 300 300 ------- ------- 1,341 1,442 Long-Term Bank Debt 400 469 Senior Deferred Coupon Notes 355 466 Unsecured Credit Facility 196 - Pollution Control Revenue Bonds 131 131 Bank Loans 110 115 Nuclear Fuel Disposal 95 90 General Term Notes 94 - Senior Serial Notes 36 45 4-5/8% Debentures - 26 Tax Exempt Bonds - 22 Other 6 13 ------- ------- Principal Amount Outstanding 2,764 2,819 Current Amounts (21) (333) Net Unamortized Discount (34) (81) ------- ------- Total Long-Term Debt $2,709 $2,405 ======= =======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Senior Unsecured Mortgage Improvement Long-Term Deferred General Credit Bonds Fund Bank Debt Coupon Notes Term Notes Facility Other Total 1995 $ - $8 $ - $ - $ - $ - $ 13 $ 21 1996 36 8 - - - - 46 90 1997 50 8 - 172 92 196 115 633 1998 336 7 200 - - - 37 580 1999 200 3 200 183 2 - 29 617 The accompanying notes are an integral part of these statements.
65 Consolidated Statements of Preferred Stock CMS Energy Corporation
Optional Redemption Number of Shares In Millions December 31 Series Price 1994 1993 1994 1993 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 7.45 101.00 379,549 379,549 38 38 7.68 101.00 207,565 207,565 21 21 7.72 101.00 289,642 289,642 29 29 7.76 102.21 308,072 308,072 31 31 Consumers' Class A Preferred Stock Cumulative, no par value, authorized 16,000,000 shares, with no mandatory redemption 2.08 (Note 7) 8,000,000 - 193 - ---- ---- Total Preferred Stock $356 $163 ==== ==== The accompanying notes are an integral part of these statements.
66 Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
In Millions, Except Number of Shares Other Retained Number Common Paid-in Earnings of Shares Stock Capital (Deficit) Total Balance at January 1, 1992 79,824,385 $1 $1,537 $(478) $1,060 Net loss (297) (297) Common stock dividends declared (38) (38) Common stock reacquired (9,101) (1) (1) Common stock reissued 150,438 3 3 ----------- -- ------- ------ ------- Balance at December 31, 1992 79,965,722 1 1,539 (813) 727 Net income 155 155 Common stock dividends declared (49) (49) Common stock reacquired (97,442) (3) (3) Common stock issued 5,135,726 132 132 Common stock reissued 192,789 4 4 ----------- -- ------- ------ ------- Balance at December 31, 1993 85,196,795 1 1,672 (707) 966 Net income 179 179 Common stock dividends declared (67) (67) Common stock reacquired (85,174) (2) (2) Common stock issued 1,389,578 30 30 Common stock reissued 33,350 1 1 ---------- -- ------- ------ ------- Balance at December 31, 1994 86,534,549 $1 $1,701 $(595) $1,107 ========== == ======= ====== ======= The accompanying notes are an integral part of these statements.
67 CMS Energy Corporation Notes to Consolidated Financial Statements 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas. 2: Summary of Significant Accounting Policies and Other Matters Basis of Presentation: The consolidated financial statements include CMS Energy, Consumers and Enterprises and their wholly owned subsidiaries. CMS Energy uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating revenue. For the years ended December 31, 1994, 1993 and 1992, equity earnings (losses) were $34 million, $17 million, and $(6) million, respectively. Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. Cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, is recorded in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities. Maintenance, Depreciation and Depletion: Property repairs and minor property replacements are charged 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 3.5 percent for 1994 and 3.4 percent for 1993 and 1992. The composite rate for gas utility plant was 4.2 percent for 1994, 4.4 percent for 1993 and 4.3 percent for 1992. CMS NOMECO follows the full-cost method of accounting and, accordingly, capitalizes its exploration and development costs, including the cost of non-productive drilling and surrendered acreage, on a country-by-country basis. The capitalized costs in each cost center are being amortized on an overall units-of-production method based on total estimated proven oil and gas reserves. The composite rates for Consumers' common property, CMS NOMECO's other property, and other property of CMS Energy and its subsidiaries were 4.3 percent in 1994, 4.5 percent in 1993 and 4.7 percent in 1992. New Accounting Standards: In December 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, effective for 1995 year- end financial statements. CMS Energy does not believe that it will be significantly affected by the statement, which requires disclosures about the nature of a company's operations and the use of estimates in financial statements. For other recent accounting standards regarding financial instruments, see Note 8. 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 federal law, the DOE is responsible for permanent disposal of spent nuclear fuel at costs to be paid by affected utilities. However, in 1994, the DOE asserted that it does not have a legal obligation to accept spent nuclear fuel without an operational repository. The DOE is exploring options to offset the costs incurred by nuclear utilities to store spent nuclear fuel on site. For fuel burned after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers it through electric rates and remits it to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983, until the spent fuel is delivered to the DOE, which was originally scheduled to occur in 1998. At December 31, 1994, Consumers has recorded a liability to the DOE of $95 million, including interest. Consumers has been recovering through electric rates the amount of this liability, excluding a portion of interest. Nuclear Plant Decommissioning: Consumers collects estimated costs to decommission its two nuclear plants through a monthly surcharge to electric customers which currently totals $45 million annually. On March 1, 1995, Consumers filed updated decommissioning estimates with the MPSC which increased the estimated decommissioning costs for Big Rock to $290 million from $221 million and for Palisades to $502 million from $423 million (in 1994 dollars). The increase in the estimated decommissioning costs principally reflects 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. Consumers currently plans to maintain the facilities in protective storage until radioactive waste disposal facilities are available. As a result, the majority of decommissioning costs will be incurred significantly later than originally anticipated. Consumers has asked the NRC for an exemption from its requirement for assurance that the Big Rock decommissioning funds will at least equal the adjusted "minimum certification" amount of $361 million (in 1994 dollars) since the site specific cost study for Big Rock demonstrates that a lesser amount will cover the projected decommissioning costs for which the assurance is required. When Big Rock's and Palisades' NRC licenses expire in 2000 and 2007, respectively, the trust funds are estimated to have accumulated to $257 million and $686 million, respectively. At the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds are estimated to provide $1 billion for Big Rock and $2.1 billion for Palisades including trust earnings over this period. Accordingly, Consumers believes that the current decommissioning surcharge is sufficient. At December 31, 1994, Consumers had an investment in nuclear decommissioning trust funds of $213 million. For information regarding reactor embrittlement at Palisades, see Note 13. Reclassifications: CMS Energy has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect the net income or net losses for the years presented. Related-Party Transactions: In 1994, 1993 and 1992, Consumers purchased $48 million, $52 million and $36 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 approximately $22 million, $27 million and $21 million for 1994, 1993 and 1992, respectively. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 18. Other related-party transactions are immaterial. Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers also 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 these unrecovered costs or refunds the excess recoveries to customers following reconciliation hearings conducted before the MPSC. Utility Regulation: Consumers accounts for the effects of regulation under SFAS 71, Accounting for the Effects of Certain Types of Regulation. As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. Consumers' regulatory assets and liabilities are described in Note 18. Other: For significant accounting policies regarding income taxes, see Note 5; for pensions and other postretirement benefits, see Note 10; and for cash equivalents, see Note 15. 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. At December 31, 1994, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership: Consumers' obligation for purchase of contract capacity from the MCV Partnership under the PPA was 1,132 MW in 1994 and increases to a maximum amount of 1,240 MW in 1995 and thereafter. Prior to 1993, the MPSC allowed Consumers to recover costs of power purchased from the MCV Partnership at levels significantly less than Consumers paid. In March 1993, the MPSC approved, with modifications, a settlement proposal which allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity effective January 1993. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be competitively bid into Consumers' next solicitation for power or, if necessary, utilized for current power needs. In either instance, the MPSC would determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. At the request of the MPSC, the MCV Partnership confirmed that it did not object to the Settlement Order. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. The PPA provides that Consumers is to pay to the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity 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. For all economic energy deliveries above the availability limits to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge. In 1992, Consumers recognized an after-tax loss of $343 million which was the present value of an undiscounted after-tax loss of $789 million, based on Consumers' estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility, and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries, including fixed energy charges (in connection with a dispute with the MCV Partnership discussed below) which were being escrowed, were $61 million in 1994 and $59 million in 1993. If Consumers is unable to sell any capacity above the current MPSC-authorized level, future additional after- tax losses and after-tax cash underrecoveries would be incurred. Consumers estimates its future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Expected cash underrecoveries $60 $56 $55 $ 8 $ 9 Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. At December 31, 1994 and 1993, the after-tax, present value of the Settlement Order liability totaled $272 million and $307 million, respectively. The reduction in the Settlement Order liability during 1994 reflects after-tax cash underrecoveries related to capacity totaling $57 million, partially offset by after-tax accretion expense of $22 million. In connection with the MPSC's approval of the settlement proposal discussed above, Consumers and the MCV Partnership engaged in arbitration under the PPA regarding the payment of certain fixed energy charges. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed. In May 1994, Consumers was notified by the MCV that it was initiating further arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, has been estimated by the MCV Partnership to total $6.3 million annually. An arbitrator has been selected and a ruling is expected in the third quarter of 1995. Consumers cannot predict the outcome of this arbitration. In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of the arbitration between the MCV Partnership and Consumers discussed above. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew this lawsuit. In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility. Additionally, in February 1995, Consumers agreed to pay $15 million to terminate a power purchase agreement with a 44 MW wood and chipped tire facility. Consumers plans to seek MPSC approval to substitute less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. This proposed substitution of capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. The capacity substitution represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for similar facilities. As a result, Consumers has recorded a regulatory asset of $45 million ($30 million in 1994), which it believes will ultimately be recoverable in rates. MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. Consumers also agreed not to appeal any MCV-related issues raised in future orders for these plan cases and related reconciliations to the extent those issues are resolved by the Settlement Order. In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992 confirming Consumers' recovery for the purchase of 840 MW from the MCV in accordance with the MPSC plan case order and allowing recovery for the purchase of power above 840 MW based on replacement power costs. The MPSC subsequently confirmed the recovery of MCV-related costs consistent with the Settlement Order as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals. 4: Rate Matters Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits, and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers by allocating $40 million of the rate increase to residential customers. In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes a proposed increase in Consumers' authorized rate of return on equity to 12.75 percent from 11.75 percent, recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. Consumers has requested that the MPSC eliminate the remainder of rate cross-subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 12). In January 1995, Consumers filed a request with the MPSC, seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts, which if approved would result in a net decrease in depreciation expense of $7 million (see Electric Rate Case discussion in the Management's Discussion and Analysis). Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could collect $35 million pretax annually for the next 10 years for its abandoned nuclear project. Consumers is amortizing the abandoned assets against current income over the recovery period using an interest method. Consumers was not permitted to earn a return on the portion of the abandoned investment for which the MPSC was allowing recovery. The loss of a return on the amount being recovered is reflected in earnings as accretion income. An after-tax total of $27 million remains to be included in accretion income through April 2001. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. Consumers and ABATE have appealed this decision to the Michigan Supreme Court. Management cannot predict the outcome of this issue. Electric DSM: As a result of settlement discussions regarding DSM and an MPSC order, Consumers agreed to spend $65 million over two years on DSM programs. Consumers completed the customer participation portion of these DSM programs in 1993. Based on the criteria set out in the DSM settlement agreement approved by the MPSC, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of $11 million of incentive revenue. Accordingly, during 1994, Consumers recognized $11 million in revenue, related to its DSM program. A final order from the MPSC is expected by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to recover DSM expenditures which exceeded $65 million and to continue certain programs ($30 million annually) in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from customers in accordance with an MPSC accounting order. The unamortized balance of deferred costs totaled $71 million at December 31, 1994 and 1993. PSCR Issues: In November 1994, an ALJ issued a proposal for decision in the 1993 PSCR reconciliation proceeding that addressed issues related to an extended refueling and maintenance outage that began at Palisades in June 1993 and ended in November 1993. Consumers conceded that one day of the 1993 outage was unnecessary, while the ALJ found that 22 days of the outage were the result of imprudent actions and recommended a disallowance of $4 million of replacement power costs. While Consumers has taken exception to the ALJ's proposal, it has accrued a loss for this issue for 1994. In addition, from mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. The 1994 outage will be reviewed as part of the 1994 reconciliation proceeding. The Energy Act imposes an obligation on the utility industry to decommission DOE uranium enrichment facilities. In 1994, the MPSC authorized Consumers to recover through electric rates its required decommissioning payments to the DOE. At December 31, 1994, Consumers' remaining liability and regulatory asset each totaled $25 million. Gas Rates: In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits against 1994 earnings. The agreement was reached in response to a claim that gas utility business earnings for 1993 were excessive. This charge against earnings partially offsets savings related to reduced state property taxes. The agreement also provides for an additional $4 million of postretirement benefit costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers filed a gas rate case in December 1994. Consumers requested an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. Consumers expects an MPSC decision in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced prospectively. As a result, Consumers was not allowed to recover $13 million of costs incurred prior to February 1993. Consumers previously had accrued a loss in excess of the disallowed amount. Future disallowances are not anticipated, unless appeals filed by the intrastate producers are successful. In 1992, the FERC approved a settlement involving Consumers, Trunkline and certain other parties, which resolved numerous claims and proceedings concerning Trunkline liquified natural gas costs. The settlement represents significant gas cost savings for Consumers and its customers in future years. In 1992, Consumers recorded a liability and regulatory asset for the principal amount of payments due Trunkline. In 1993, the MPSC approved a separate settlement agreement providing full recovery of the liability over a five-year period. At December 31, 1994, the remaining liability and regulatory asset were $85 million. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on the financial statements. 5: Income Taxes CMS Energy and its subsidiaries (including Consumers) file a consolidated federal income tax return. Income taxes are generally allocated based on each subsidiary's separate taxable income. CMS Energy and Consumers practice full deferred tax accounting for temporary differences. CMS Energy uses ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that can be carried 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 1994 1993 1992 - ----------------------- ----- ----- ----- Current federal income taxes $ 36 $ 19 $ 39 Deferred income taxes 66 67 (177) Deferred income taxes - tax rate change - (1) - Deferred ITC, net (10) (10) (8) ----- ----- ----- $ 92 $ 75 $(146) ===== ===== ===== Operating $ 104 $ 92 $ 22 Other (12) (17) (168) ----- ----- ----- $ 92 $ 75 $(146) ===== ===== ===== The principal components of CMS Energy's deferred tax assets (liabilities) recognized in the balance sheet are as follows: In Millions December 31 1994 1993 - ----------- ------- ------- Property $ (601) $ (580) Unconsolidated investments (246) (194) Postretirement benefits (Note 10) (179) (180) Abandoned Midland project (Note 4) (51) (57) Employee benefit obligations (includes postretirement benefits of $176 and $182) (Note 10) 205 204 AMT carryforward 154 110 MCV power purchases - settlement (Note 3) 146 165 ITC carryforward (expires 2005) 37 48 Other (13) (8) ------- ------- $ (548) $ (492) ======= ======= Gross deferred tax liabilities $(1,661) $(1,571) Gross deferred tax assets 1,113 1,079 ------- ------- $ (548) $ (492) ======= ======= The actual income tax expense (benefit) 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 1994 1993 1992 - ----------------------- ------ ------ ------ Net income (loss) before preferred dividends $ 203 $ 166 $ (286) Income tax expense (benefit) 92 75 (146) ------ ------ ------ 295 241 (432) Statutory federal income tax rate x 35% x 35% x 34% ------ ------ ------ Expected income tax expense (benefit) 103 84 (147) Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 6 9 ITC amortization and utilization (9) (11) (11) Nonconventional fuel tax credit (8) (6) (4) Other, net (5) (3) 2 ------ ------ ------ $ 92 $ 75 $ (146) ====== ====== ====== 6: Short-Term Financings In 1994, the FERC granted Consumers' request for authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At December 31, 1994, $170 million and $166 million were outstanding under these facilities at weighted average interest rates of 6.3 percent and 7.3 percent, respectively. Consumers has an established $500 million trade receivables purchase and sale program. At December 31, 1994 and 1993, receivables sold under the agreement totaled $275 million and $285 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. 7: Capitalization CMS Energy Capital Stock: On February 14, 1995, CMS Energy mailed a proxy statement to its shareholders seeking their approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy. This proposed new class of Common Stock, designated Class G Common Stock, would reflect the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, would be the "Consumers Gas Group"). The existing CMS Energy Common Stock would continue to be outstanding if and after any shares of Class G Common Stock were issued by CMS Energy and would reflect the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to any outstanding shares of the Class G Common Stock. CMS Energy also filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities. Such securities could encompass Common Stock of CMS Energy (including Class G if approved), Preferred Stock of CMS Energy or a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy will continually evaluate the capital markets and may offer such instruments from time to time, at terms to be determined at or prior to the time of the sale. CMS Energy's Articles permit it to issue up to 250 million shares of common stock at $.01 par value and up to 5 million shares of preferred stock at $.01 par value. Under the Unsecured Credit Facility and the Indentures pursuant to which the GTNs are issued, which currently contain CMS Energy's most restrictive dividend covenants, CMS Energy is permitted to pay, as dividends on its common stock, an amount not to exceed the total of its net income, as defined in the Indentures, and any proceeds received from the issuance or sale of common stock as defined in the agreements and $120 million, provided there exists no event of default under the terms of the Unsecured Credit Facility or GTNs. The same formula applies to limits available to repurchase or reacquire CMS Energy stock for either the payment of dividends or repurchase of stock. In October 1994, CMS Energy filed a shelf-registration statement for the offering and issuance of up to two million shares of common stock. As described in the SEC filing, the shares may be offered and issued in connection with acquisitions of energy-related business and assets. In October 1993, CMS Energy issued an additional 4.6 million shares of common stock at a price of $26-5/8. The net proceeds of $119 million were used to reduce existing debt and for general corporate purposes. Long-Term Debt: In October 1992, CMS Energy received proceeds of $130 million and $219 million from the issuance of Series A and Series B Notes, respectively. Interest will accrue and increase the principal to the face value of the Notes through October 1, 1995. After such date, interest will be paid semi-annually commencing April 1, 1996, at a rate of 9.5 percent per annum for the Series A Notes and 9.875 percent per annum for the Series B Notes. As of January 31, 1995, $328 million of Notes was outstanding. In January 1994, CMS Energy filed a shelf-registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. The net proceeds are being used to reduce the amount of Notes outstanding and for general corporate purposes. The GTNs may be offered from time to time on terms to be determined at the time of sale. As of January 31, 1995, $99 million of GTNs was outstanding at a weighted average interest rate of 7.5 percent and the principal amount of Series B Notes outstanding was reduced by $114 million to a balance of $167 million. In July 1994, CMS Energy refinanced its Secured Credit Facility with a new $400 million Unsecured Credit Facility and extended the termination date to June 30, 1997. As of December 31, 1994, $196 million was outstanding at a weighted average interest rate of 6.8 percent leaving $204 million available at December 31, 1994. Consumers Capital Stock: During 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds to Consumers were $193 million. The stock is redeemable at the option of Consumers, on or after April 1, 1999, at a redemption price of $25 per share plus accrued dividends. At December 31, 1992, Consumers effected a quasi-reorganization in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. This action had no effect on CMS Energy's consolidated financial statements. 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, Articles and the need for regulatory approvals in compliance with appropriate state and federal law. In the first quarter of 1994, Consumers redeemed first mortgage bonds totaling $101 million. These redemptions completed Consumers' commitment to the MPSC, under a 1993 financing order to refinance certain long-term debt. Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its then existing long-term, variable rate, credit agreement and to reduce short-term borrowings. At December 31, 1994, the new loan carried a weighted average interest rate of 6.5 percent. In 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for a fixed-rate interest of 5.2 percent on $250 million of its long-term bank debt. The swap agreement hedges the variable rate exposure associated with Consumers' long-term bank debt and had the effect of increasing the weighted average interest rate to 5.3 percent from 5.0 percent for the 12- month period ended December 31, 1994. The current swap agreement began to decrease in February 1995 and will terminate by May 1996. In February 1995, Consumers entered into another hedging agreement for $100 million to reduce its exposure to variable rate interest associated with its long- term bank debt. Other: Consumers has a total of $131 million of long-term PCRBs outstanding (secured by irrevocable letters of credit and first mortgage bonds) with a weighted average interest rate of 4.8 percent as of December 31, 1994. In 1994, Consumers received a $100 million equity investment from CMS Energy. The investment was consistent with CMS Energy's plan to improve Consumers' capital structure and was recognized and included in the capitalization structure employed by the MPSC as part of Consumers' most recent electric rate order. CMS NOMECO As of December 31, 1994, CMS NOMECO had total debt outstanding of $129 million. Senior serial notes amounting to $36 million with a weighted average interest rate of 9.4 percent are outstanding from a private placement. Available existing credit lines total $110 million. At December 31, 1994, $89 million was outstanding at a weighted average interest rate of 7.3 percent. CMS NOMECO also has $4 million outstanding under other credit agreements. CMS Generation In May 1994, MOAPA redeemed $22 million of Clark County, Nevada tax-exempt bonds. The bonds had been included in current maturities on the balance sheet and the funds held in a trust account had been included as other current assets. The bonds were issued in 1990 for the purpose of providing partial funding for the development of a proposed tires-to- energy solid waste disposal and resource recovery facility which was never constructed. In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility, for the acquisition of HYDRA-CO. CMS Energy is currently evaluating permanent financing options. 8: 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 $2.7 billion and $2.4 billion and the fair value of long-term debt was $2.6 billion and $2.6 billion as of December 31, 1994 and 1993, 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 fair values of CMS Energy's off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. The fair value of interest rate swap agreements was $(5) million and $6 million and guarantees/letters of credit outstanding were $123 million and $96 million as of December 31, 1994 and 1993, respectively (see Note 7). Effective January 1, 1994, CMS Energy adopted SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which did not materially impact CMS Energy's financial position or results of operations. 9: 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. The plan reserves for award not more than 2 percent of CMS Energy's common stock outstanding on January 1 each year, less the number of shares of restricted common stock awarded and of common stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1994, awards of up to 402,316 shares of common stock may be issued. Restricted shares of common stock are outstanding shares with full voting and dividend rights. Performance criteria were added in 1990 based on CMS Energy's total return to shareholders. Shares of restricted common stock cannot be distributed until they are vested and the performance objectives are met. Further, the restricted stock is subject to forfeiture if employment terminates before vesting. If key employees exceed performance objectives, the plan will allow additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1994, 314,856 shares of the 330,356 restricted shares outstanding are subject to performance objectives. Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, remains in effect until all authorized options are granted or September 25, 1995. At December 31, 1994, options for 43,000 shares remained to be granted. Under both plans, for stock options and stock appreciation rights, the exercise price on each grant date equaled the closing market price on the grant date. Options are exercisable upon grant and expire up to 10 years and one month from date of grant. The status of the restricted stock granted under the Performance Incentive Stock Plan and options granted under both plans follows: Restricted Stock Options ---------- --------------- Number Number Price of Shares of Shares per Share --------- --------- --------------- Outstanding at January 1, 1992 275,063 1,291,091 $ 7.13 - $34.25 Granted 101,000 215,000 $17.13 - $18.00 Exercised or Issued (37,422) (21,000) $13.00 - $16.00 Canceled (15,375) (50,000) $20.50 - $33.88 ------- --------- --------------- Outstanding at December 31, 1992 323,266 1,435,091 $ 7.13 - $34.25 Granted 132,000 249,000 $25.13 - $26.25 Exercised or Issued (54,938) (152,125) $ 7.13 - $21.13 Canceled (84,141) (33,000) $20.50 - $33.88 ------- --------- --------------- Outstanding at December 31, 1993 316,187 1,498,966 $ 7.13 - $34.25 Granted 133,500 273,000 $21.25 - $22.38 Exercised or Issued (39,361) (158,300) $ 7.13 - $22.00 Canceled (79,970) (123,000) $26.25 - $33.88 ------- --------- --------------- Outstanding at December 31, 1994 330,356 1,490,666 $ 7.13 - $34.25 ======= ========= =============== 10: Retirement Benefits Postretirement Benefit Plans Other Than Pensions: 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 18). CMS Energy's non-utility 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. Both the MPSC and FERC have generally allowed recovery of SFAS 106 costs. The MPSC's generic order allows utilities three years to seek recovery of costs. In May 1994, the MPSC authorized recovery of the electric utility portion of these costs over 18 years. In December 1994, Consumers requested recovery of the gas utility portion of these costs (see Note 4). CMS Energy funds the benefits using external Voluntary Employee Beneficiary Associations. Funding of the health care benefits coincides with Consumers' recovery in rates. A portion of the life insurance benefits have previously been funded. Retiree health care costs at December 31, 1994, are based on the assumption that costs would increase 10 percent in 1995, then decrease gradually to 6 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a 1 percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $85 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1994 by $10 million. For the years ended December 31, 1994, 1993 and 1992, the weighted average discount rate was 8 percent, 7.25 percent and 8 percent, respectively, and the expected long-term rate of return on plan assets was 7 percent, 8.5 percent and 8.5 percent, respectively. Net periodic postretirement benefit cost for health care benefits and life insurance benefits was $54 million in 1994, $51 million in 1993 and $49 million in 1992. The 1994, 1993 and 1992 cost was comprised of $13 million, $13 million and $10 million for service plus $41 million, $38 million and $39 million for interest, respectively. The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows: In Millions 1994 1993 ------ ------ Actuarial present value of estimated benefits Retirees $ 338 $ 282 Eligible for retirement 44 54 Active (upon retirement) 170 190 ------ ------ Accumulated postretirement benefit obligation 552 526 Plan assets at fair value 36 4 ------ ------ Projected postretirement benefit obligation in excess of plan assets (516) (522) Unrecognized prior service cost (39) (39) Unrecognized net loss 35 41 ------ ------ Recorded liability $ (520) $ (520) ====== ====== CMS Energy's postretirement health care plan is partially funded; the accumulated postretirement benefit obligation for that plan is $536 million and $514 million at December 31, 1994 and 1993, respectively. Supplemental Executive Retirement Plan: Certain management employees qualify under 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 and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1994 and 1993, trust assets at cost (which approximates market) were $19 million and $18 million, respectively, and were classified as other non- current assets. Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan is fully funded, no contributions were made for plan years 1992 through 1994. Years Ended December 31 1994 1993 1992 - ----------------------- ------ ------ ----- Discount rate 8.0% 7.25% 8.5% Rate of compensation increase 4.5% 4.5% 5.5% Expected long-term rate of return on assets 9.25% 8.75% 8.75% Net Pension Plan and SERP costs consisted of: In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- ----- Service cost $ 24 $ 19 $ 19 Interest cost 51 50 48 Actual return on plan assets 21 (92) (36) Net amortization and deferral (85) 34 (20) ----- ----- ----- Net periodic pension cost $ 11 $ 11 $ 11 ===== ===== ===== The funded status of the Pension Plan and SERP reconciled to the pension liability recorded at December 31 was: In Millions Pension Plan SERP 1994 1993 1994 1993 ----- ----- ----- ----- Actuarial present value of estimated benefits Vested $ 421 $ 471 $ 17 $ 16 Non-vested 61 56 - - ----- ----- ----- ----- Accumulated benefit obligation 482 527 17 16 Provision for future pay increases 154 138 11 8 ----- ----- ----- ----- Projected benefit obligation 636 665 28 24 Plan assets (primarily stocks and bonds, including $79 in 1994 and $87 in 1993 in common stock of CMS Energy) at fair value 637 692 - - ----- ----- ----- ----- Projected benefit obligation less than (in excess of) plan assets 1 27 (28) (24) Unrecognized net (gain) loss from experience different than assumed (35) (56) 5 8 Unrecognized prior service cost 40 45 2 (1) Unrecognized net transition (asset) obligation (39) (44) 1 1 ----- ----- ----- ----- Recorded liability $ (33) $ (28) $ (20) $(16) ===== ===== ===== ===== 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. 11: Leases CMS Energy, Consumers, and Enterprises lease various assets, including vehicles, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1996. The maximum amount of nuclear fuel that can be leased increased during 1994 to $80 million. The lease provides for an additional one-year extension 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 $59 million as of December 31, 1994. 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, 1994, were: In Millions Capital Operating Leases Leases ------- -------- 1995 $ 50 $ 10 1996 60 6 1997 17 5 1998 15 5 1999 12 4 2000 and thereafter 21 20 ----- ----- Total minimum lease payments 175 $ 50 Less imputed interest 24 ===== ----- Present value of net minimum lease payments 151 Less current portion 43 ----- Non-current portion $108 ===== Consumers recovers these 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 as of December 31, 1994, 1993 and 1992, were $10 million, $10 million and $15 million, respectively. Capital lease expenses for the years ended December 31, 1994, 1993 and 1992 were $43 million, $34 million and $47 million, respectively. Included in these amounts for the years ended 1994, 1993 and 1992, are nuclear fuel lease expenses of $21 million, $13 million and $17 million, respectively. 12: Commitments, Contingencies and Other Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve certain recreational areas and convey certain undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to the MPSC permitting Consumers to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan. In one, the state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, reduced only upon installation of "adequate" fish barriers and other changed conditions. Each year, a barrier net is installed at Ludington by Consumers and Detroit Edison from April to October. In the other, the Attorney General sought to have Ludington's bottomlands lease declared void. Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability will average less than 4 percent of the estimated total site remediation costs, and such liability will probably not exceed $6 million. At December 31, 1994, Consumers has accrued a liability for its estimated losses. Consumers and CMS Energy believe that it is unlikely that their liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on their financial positions or results of operations. Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time. Consumers has prepared plans for remedial investigation/feasibility studies for several of these former manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved three of four plans for remedial investigation/feasibility studies submitted by Consumers. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. 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 $112 million. These estimates are based on undiscounted 1994 costs. At December 31, 1994, Consumers has accrued a liability of $48 million. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in 1994. Consumers and CMS Energy believe that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recoverable in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC has approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. All of Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in the year 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $25 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and possible modifications at other coal-fired units to be an additional $50 million by the year 2000. Final acid rain program nitrogen oxide regulations specifying the controls to be installed at the other coal- fired units are not expected earlier than 1996. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries, DSM and new lease commitments, of $939 million for 1995, $647 million for 1996 and $627 million for 1997. Capital expenditures for 1995 include requirements of $197 million for acquisitions which commenced in 1994 but did not close until 1995. Commitments for Coal and Gas Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1995 to 2004. Consumers contracts for approximately 60 - 70 percent of its annual coal requirements which in 1994 totaled $261 million (63 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs. Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1995 to 2003. Consumers contracts for approximately 70 - 80 percent of its annual gas requirements which in 1994 totaled $662 million (83 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its gas needs. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. Other: As of December 31, 1994 CMS Energy and Enterprises have guaranteed up to $117 million in contingent obligations of unconsolidated affiliates of Enterprises' subsidiaries. CMS NOMECO has hedging arrangements which are used to reduce the risk of price fluctuations for its spot sales of oil and gas. These arrangements limit potential gains/losses from any future decrease/increase in the spot prices. 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, 1993, CMS NOMECO was party to gas price collar contracts on 7.3 bcf of gas for the delivery months of January through December 1994 at prices ranging from $2.05 to $2.30 per MMBtu. Also, CMS NOMECO has contracts on 7.3 bcf of gas for the delivery months of January through December 1995 at prices ranging from $2.05 to $2.35 per MMBtu. These hedging arrangements are accounted for as hedges; accordingly, any gains or losses are deferred and recognized on the settlement dates. As of December 31, 1993 and December 31, 1994, the fair value of these hedge arrangements was not materially different than the book value. 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 - 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed, escalated price 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 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 $2 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $2 million and up to $10 million. At December 31, 1994 and December 31, 1993, the seller had arranged a letter of credit in CMS NOMECO's favor for $3 million and $10 million, respectively. Consumers has experienced increases in the number of lawsuits filed against it relating to so-called stray voltage. Claimants contend that stray voltage results when small 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 including, when necessary, modifying the grounding of the customer's service. At January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending. 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 involving personal injury and property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. The ultimate effect of the proceedings discussed in this note is not expected to have a material impact on CMS Energy's financial position or results of operations. 13: Nuclear Matters In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied National Environmental Policy Act requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. As of February 28, 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades' 1995 refueling. In the latter part of 1995, Consumers plans to unload and replace one of the loaded casks. In a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although testing has not disclosed any leakage, Consumers has nevertheless decided to remove the spent fuel and insert it in another cask. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and concluded that the pad location is acceptable to support the casks. The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan, and no other states' repositories are available to Michigan generators of such waste. Consumers stores low- level waste at its nuclear plant sites and plans to continue to do so following final shutdown of the plants, if necessary, until a permanent storage site is provided. Consumers currently estimates that a permanent low-level radioactive waste disposal site will be available by the year 2027. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $33 million in any one year to NML and NEIL; $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 in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. In November 1993, Palisades returned to service following a planned refueling and maintenance outage that had been extended due to several unanticipated repairs (see Note 4). The results of an NRC review of Consumers' performance at Palisades published shortly after the planned outage showed a decline in performance ratings for the plant. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the deficiencies. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned levels of expenditures. As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. If the results of the calculation indicate that an NRC temperature screening criterion will be exceeded, Consumers must determine what, if any, plant modifications are necessary to avoid exceeding the screening criterion and prevent potential reactor vessel failure as a result of postulated pressurized thermal shock events. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed the screening criterion prior to the year 2000. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. It is currently estimated that expenditures for corrective action related to this issue could total $20 million to $30 million. Consumers cannot predict the outcome of these efforts. 14: Jointly Owned Utility Facilities Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities: In Millions December 31 1994 1993 - ----------- ----- ----- Net investment Ludington - 51% $119 $114 Campbell Unit 3 - 93.3% 337 349 Transmission lines - various 31 32 Accumulated depreciation Ludington $ 76 $ 74 Campbell Unit 3 224 210 Transmission lines 11 11 15: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were: In Millions 1994 1993 1992 ----- ----- ----- Cash transactions Interest paid (net of amounts capitalized) $162 $193 $203 Income taxes paid (net of refunds) 39 32 19 Non-cash transactions Nuclear fuel placed under capital lease $ 21 $ 28 $ 30 Other assets placed under capital leases 15 30 39 Capital leases refinanced - 42 - Assumption of debt - - 15 Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below: In Millions 1994 1993 1992 ----- ----- ----- Sale of receivables, net $ (10) $ 60 $ 25 Accounts receivable (15) 22 6 Accrued revenue 20 (48) 88 Inventories (4) (32) 23 Accounts payable 26 (31) 20 Accrued refunds (3) (49) (143) Other current assets and liabilities, net 4 (4) 46 Non-current deferred amounts, net (6) (6) (40) ----- ----- ----- $ 12 $(88) $ 25 ===== ===== ===== 16: Reportable Segments CMS Energy operates principally in the following five business segments: electric utility, gas utility, oil and gas exploration and production, independent power production, and natural gas pipeline, storage and marketing. The Consolidated Statements of Income show operating revenue and pretax operating income by business segments. Other segment information follows: In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ------- ------- ------- Depreciation, depletion and amortization Electric utility $ 257 $ 241 $ 230 Gas utility 76 73 76 Oil and gas exploration and production 41 45 38 Independent power production 2 2 2 Natural gas pipeline, storage and marketing 2 1 1 Other 1 2 - ------- ------- ------- $ 379 $ 364 $ 347 ======= ======= ======= Identifiable assets Electric utility (a) (b) $ 4,364 $ 4,100 $ 3,845 Gas utility (b) 1,673 1,628 1,574 Oil and gas exploration and production 469 398 364 Independent power production 536 488 333 Natural gas pipeline, storage and marketing 109 75 60 Other 233 275 672 ------- ------- ------- $ 7,384 $ 6,964 $ 6,848 ======= ======= ======= Capital expenditures (d)(e) Electric utility (c) $ 358 $ 403 $ 390 Gas utility (c) 134 158 116 Oil and gas exploration and production 115 83 68 Independent power production 30 110 12 Natural gas pipeline, storage and marketing 31 14 6 Other 5 - 2 ------- ------- ------- $ 673 $ 768 $ 594 ======= ======= ======= (a) Includes abandoned Midland investment of $147 million, $162 million and $175 million for 1994, 1993 and 1992, respectively. (b) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses. (c) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement 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. (d) Includes equity investments in unconsolidated partnerships of $53 million for 1994, $108 million for 1993 and $12 million for 1992. (e) Certain prior year amounts have been adjusted for comparative purposes. 17: 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. In Millions December 31 1994 1993 - ----------- ------- ------- Postretirement benefits (Note 10) $ 503 $ 510 Income taxes (Note 5) 189 189 Abandoned Midland project (Note 4) 147 162 Trunkline settlement (Note 4) 85 117 DSM - deferred costs (Note 4) 71 71 Manufactured gas plant sites (Note 12) 47 - Power purchase contract (Note 3) 30 - Uranium enrichment facility (Note 4) 25 33 Other 31 39 ------- ------- Total regulatory assets $ 1,128 $ 1,121 ======= ======= Income taxes (Note 5) $ (205) $ (195) DSM - deferred revenue (21) (17) ------- ------- Total regulatory liabilities $ (226) $ (212) ======= ======= At December 31, 1994, $864 million of Consumers' regulatory assets are being recovered through rates being charged to customers over periods of up to 18 years. Consumers anticipates MPSC approval for recovery of the remaining amounts. Consumers is experiencing increased competition, particularly in its electric utility business. Municipalization and self-generation, among other forms of competition, could restrict Consumers' ability to establish rates sufficient to recover specific costs associated with its regulatory assets. 18: Summarized Financial Information of Significant Related Energy Supplier Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1994 obligation to purchase electric capacity from the MCV Partnership was approximately 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows: Statements of Income In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- ----- Operating revenue (a) $ 579 $ 548 $ 488 Operating expenses 378 362 315 ----- ----- ----- Operating income 201 186 173 Other expense, net 183 189 190 ----- ----- ----- Net income (loss) $ 18 $ (3) $ (17) ===== ===== ===== Balance Sheets In Millions December 31 1994 1993 - ----------- ------ ------ Assets Current assets (a) $ 206 $ 181 Property, plant and equipment, net 2,012 2,073 Other assets 154 146 ------ ------ $2,372 $2,400 ====== ====== Liabilities and Partners' Equity Current liabilities $ 218 $ 198 Long-term debt and other non-current liabilities (b) 2,081 2,147 Partners' equity (c) 73 55 ------ ------ $2,372 $2,400 ====== ====== (a) Revenue from Consumers totaled $534 million, $505 million and $444 million for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993 and 1992, $48 million, $44 million and $38 million, respectively, were receivable from Consumers. (b) FMLP is a 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 (see Note 3). At December 31, 1994 and 1993, lease obligations of $1.7 billion were owed to the owner trust of which FMLP is the sole beneficiary. CMS Holdings' share of the interest and principal portion for the 1994 lease payments was $62 million and $20 million, respectively, and for the 1993 lease payments was $63 million and $16 million, respectively. The lease payments service $1.2 billion in non-recourse debt outstanding as of December 31, 1994 and 1993 of the owner-trust whose beneficiary is FMLP. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1994 and 1993, the owner-trust whose beneficiary is FMLP made debt payments of $175 million and $172 million, respectively. The 1993 amounts included $10 million of principal and $25 million of interest on the MCV Bonds held by Consumers through December 1993. (c) 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. 91 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt and preferred stock of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CMS Energy Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Detroit, Michigan, January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). 92 Quarterly Financial and Common Stock Information CMS Energy Corporation
In Millions, Except Per Share Amounts 1994 (Unaudited) 1993 (Unaudited) Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Operating revenue $1,142 $796 $767 $914 $1,046 $742 $758 $936 Pretax operating income $175 $108 $125 $96 $168 $82 $102 $87 Net income $78 $30 $40 $31 $72 $24 $32 $27 Earnings per average common share $.92 $.35 $.46 $.36 $.90 $.30 $.40 $.30 Dividends declared per common share $.18 $.18 $.21 $.21 $.12 $.12 $.18 $.18 Common stock prices (a) High $25 $22-7/8 $23-3/8 $23-1/4 $20-7/8 $25-1/2 $27-1/2 $27-1/8 Low $21-1/8 $19-5/8 $20-5/8 $20-7/8 $17-7/8 $19-1/2 $24-7/8 $23 (a) Based on New York Stock Exchange - Composite transactions.
93 Consumers Power Company 1994 Financial Statements 94 Selected Financial Information Consumers Power Company
1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------- Operating revenue (in millions) ($) 3,356 3,243 2,978 2,908 2,968 Net income (loss) (in millions) (a) ($) 226 198 (244) (249) (382) Net income (loss) after dividends on preferred stock (in millions) ($) 202 187 (255) (260) (393) Cash from operations (in millions) (b) ($) 598 403 470 347 474 Capital expenditures, excluding capital lease additions and DSM (in millions) ($) 447 451 411 279 339 Total assets (in millions) ($) 6,809 6,551 6,596 5,986 7,700 Long-term debt, excluding current maturities (in millions) ($) 1,953 1,839 2,079 1,846 2,944 Non-current portion of capital leases (in millions) ($) 108 106 88 57 56 Total preferred stock (in millions) ($) 356 163 163 163 168 Number of preferred shareholders at year-end 10,599 7,037 7,376 7,616 7,991 Book value per common share at year-end ($) 16.96 15.28 14.64 17.67 20.46 Return on average common equity (%) 14.9 14.8 (18.8) (16.2) (20.5) Return on assets (%) 4.9 4.7 (0.2) (0.6) (2.3) Number of employees at year-end (full-time equivalents) 9,482 9,567 9,531 8,933 9,209 Electric statistics Sales (millions of kWh) 34,462 32,764 31,601 31,813 31,743 Customers (in thousands) 1,547 1,526 1,506 1,492 1,475 Average sales rate per kWh (cents) 6.29 6.28 5.82 5.73 5.89 Gas statistics Sales and transportation deliveries (bcf) 409 411 384 362 351 Customers (in thousands) (c) 1,448 1,423 1,402 1,382 1,362 Average sales rate per mcf ($) 4.48 4.46 4.55 4.58 4.64 - ---------------------------------------------------------------------------------------------------------- (a) Amount in 1991 included an extraordinary loss of $14 million, after tax. (b) Certain prior period amounts were restated for comparative purposes. (c) Excludes off-system transportation customers.
95 Consumers Power Company Management's Discussion and Analysis Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive. Consolidated Earnings Consolidated net income after dividends on preferred stock totaled $202 million in 1994, compared to net income of $187 million in 1993 and a net loss of $255 million in 1992. The improved net income in 1994 reflects a significant increase in electric sales, the impact from a May 1994 electric rate increase, the recognition of incentive revenue related to DSM programs, and the favorable resolution of a previously recorded gas cost contingency. The increased 1993 net income reflects the Settlement Order related to power purchases from the MCV Partnership. Earnings in 1993 also reflect increased electric sales and gas deliveries. Cash Position, Financing and Investing Consumers' operating cash requirements are met by its operating and financing activities. In 1994, 1993 and 1992, cash from operations was derived mainly from the sale and transportation of natural gas and the generation, sale and transmission of electricity. Cash from operations for 1994 reflects record-setting electric sales and increased electric rates which were approved by the MPSC in mid-1994. Cash from operations for 1993 primarily reflected increased electric sales and gas deliveries from 1992 levels and reduced after-tax cash shortfalls resulting from Consumers' purchases of power from the MCV Partnership. During 1992, Consumers generated cash primarily from its consolidated operating activities. Consumers' primary use of cash continues to reflect extensive construction expenditures and improvements in the reliability of its electric and gas transmission and distribution systems. Consumers has also used its cash to retire portions of long-term debt when appropriate and to pay common and preferred dividends. Financing Activities: Consumers declared $176 million in common stock dividends during 1994, of which $16 million were attributable to 1993 earnings. Consumers also issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds of $193 million from the sale were used for general corporate purposes, including debt retirement and improvements to Consumers' distribution systems. Additionally, Consumers received a $100 million equity investment from CMS Energy in 1994. In early 1994, Consumers continued its effort to reduce its future interest charges by retiring $101 million of high-cost first mortgage bonds. In November 1994, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its long-term, variable rate credit agreement (see Note 7) and to reduce short-term borrowings. During 1993, Consumers retired $51 million of high-cost outstanding debt and refinanced $573 million of other debt at lower interest rates. Investing Activities: Capital expenditures (excluding assets placed under capital leases of $36 million) and deferred DSM costs totaled $456 million in 1994 as compared to $503 million in 1993 and $437 million in 1992. These amounts primarily represent capital investments in Consumers' electric and gas utility business units. Financing and Investing Outlook: Consumers estimates that capital expenditures, including DSM and new lease commitments, related to its electric and gas utility operations will total approximately $1.2 billion over the next three years. In Millions Years Ended December 31 1995 1996 1997 - ----------------------- ---- ---- ---- Consumers Construction (including DSM) $403 $347 $319 Nuclear fuel lease 32 4 38 Capital leases other than nuclear fuel 12 15 17 Michigan Gas Storage 5 8 6 ---- ---- ---- $452 $374 $380 ==== ==== ==== Consumers is required to redeem or retire approximately $190 million of long-term debt during 1995 through 1997. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures and debt retirements. Consumers has several available sources of credit including unsecured, committed lines of credit totaling $185 million and a $470 million working capital facility. Consumers has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At December 31, 1994 and 1993, receivables sold totaled $275 million and $285 million, respectively. At December 31, 1994, Consumers' capital structure consisted of approximately 34 percent common equity, 8 percent preferred stock, and 58 percent long- and short-term debt (including capital leases and notes payable). Consumers' goal is to achieve and maintain a capital structure consisting of approximately 36 percent common equity, 10 percent preferred stock and 54 percent debt. Management expects to achieve this structure through accumulated earnings, controlled capital expenditures, the issuance of new preferred stock and equity investments from CMS Energy. Electric Utility Results of Operations Electric Pretax Operating Income: The $49 million improvement in 1994 electric pretax operating income compared to 1993 reflects increased electric system sales of $33 million, partially offset by higher electric operating costs and depreciation. Other factors contributing to the 1994 increased electric pretax operating income were the impact of the May 1994 electric rate increase, and the recognition of $11 million in revenue, related to DSM, based on having achieved all objectives agreed upon with the MPSC. The 1993 increase of $132 million from the 1992 level reflects an increase of $126 million relating to the resolution of the recoverability of MCV power purchase costs under the PPA and increased electric system sales of $45 million, partially offset by higher electric operating costs and depreciation. In Millions Impact on Pretax Operating Income ---------------------------------- Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ 33 $ 34 Weather - 11 Resolution of MCV power cost issues - 126 Rate increase and other regulatory issues 38 5 O&M, general taxes and depreciation (22) (44) ----- ----- Total change $ 49 $132 ===== ===== Electric Sales: Total electric sales in 1994 were a record 34.5 billion kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent increase in system sales to Consumers' ultimate customers. Strong industrial sales accounted for 58 percent of the growth. In 1994, residential and commercial sales increased 1.6 percent and 3.0 percent, respectively, while industrial sales increased 6.8 percent. The significant increase in electric sales reflects the continued improvement in economic conditions in Michigan and broad-based growth in sales to industrial customers. Growth in industrial sales was the strongest in the automotive and chemical sectors. Total electric sales in 1993 were 32.8 billion kWh, a 3.7 percent increase from the 1992 levels. The 32.8 billion kWh includes a 3.8 percent increase in system sales. Power Costs: Power costs for 1994 totaled $950 million, a $42 million increase from the corresponding 1993 period. This increase reflects increased kWh production at Consumers' generating plants and greater power purchases from outside sources to meet increased sales demand. Power costs for 1993 totaled $908 million, a $31 million increase as compared to 1992. Operation and Maintenance: Increases in other operation and maintenance expense for 1994 and 1993 reflected increased expenditures to improve electric system reliability. Depreciation: The increased depreciation for 1994 reflects additional capital investments in property and equipment. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' obligation to purchase contract capacity from the MCV Partnership was 1,132 MW in 1994 and increases to 1,240 MW in 1995 and thereafter. In 1993, the MPSC issued the Settlement Order that permits Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing an after-tax loss of $343 million for the present value of estimated future underrecoveries of power purchases from the MCV Partnership. This loss included all fixed energy amounts at issue in the arbitration proceedings discussed below. Additional losses may occur if actual future experience materially differs from the 1992 estimates. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $61 million for 1994. Estimated future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Expected cash underrecoveries $60 $56 $55 $ 8 $ 9 Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award at this time until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed. In a second arbitration proceeding, the MCV Partnership is seeking additional payments from Consumers which the MCV has estimated at $6.3 million annually for an alleged breach of the PPA. In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew the lawsuit. In July 1994 and February 1995, Consumers terminated power purchase agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood and chipped tire plant. Consumers plans to seek MPSC approval to substitute 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. For further information, see Note 3. Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consumers filed a request with the MPSC in November 1994, to increase its retail electric rates in a range from $104 million to $140 million annually (see Note 4). Additionally, in January 1995, Consumers filed a request with the MPSC, seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease. If both aspects of the request are approved, the net result would be a decrease in electric depreciation expense of $7 million. Special Rates: In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility, and allow use of MCV contract capacity above the level currently authorized by the MPSC, to respond to customers' alternative energy options. PSCR Matters: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. From mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. In November 1994, an ALJ issued a proposal for decision that recommended a $4 million disallowance of replacement power costs related to the 1993 outage. Consumers accrued a loss for this issue for 1994. Recovery of replacement power costs and the prudency of actions taken during the 1994 outage will be reviewed by the MPSC during the 1994 PSCR reconciliation proceeding. Electric Conservation Efforts: In 1993, Consumers completed the customer participation portion of several DSM programs designed to encourage the efficient use of energy. During 1994, Consumers recognized $11 million in incentive revenue, related to Consumers' achievement of certain DSM program objectives approved by the MPSC in 1992. A final order, authorizing Consumers to collect the $11 million incentive, is expected from the MPSC by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to continue certain DSM programs. For further information, see Note 4. Electric Capital Expenditures: Consumers estimates capital expenditures, including deferred DSM costs and new lease commitments, related to its electric utility operations of $325 million for 1995, $255 million for 1996 and $269 million for 1997. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected. In 1990, the State of Michigan passed amendments to the Environmental Response Act, under which Consumers expects that it will ultimately incur costs at a number of sites, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates or from others. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. The EPA has asked a number of utilities in the Great Lakes area to voluntarily retire certain equipment containing specific levels of polychlorinated biphenyls. While Consumers believes that it is largely in compliance with the EPA's request, it has agreed to a 10-year retirement period for certain equipment included in the EPA's request. Consumers does not anticipate that any significant additional costs will be incurred as a result of this agreement. For further information regarding electric environmental matters, see Note 12. Electric Outlook Competition: Consumers currently expects customer demand for electricity within its service territory will increase by approximately 1.6 percent per year over the next five years. Economic growth and an increasing customer base are expected to lead to consistently higher annual sales. However, Consumers (along with the electric utility industry) is experiencing accelerating competitive pressures which may result in a negative impact on Consumers' sales growth. The primary sources of this competition include: the installation of cogeneration or other self- generation facilities by Consumers' larger industrial customers; the formation of municipal utilities which would displace retail service by Consumers to an entire community; and competition from neighboring utilities which offer flexible rate arrangements designed to encourage movement to their respective service areas. Several of Consumers' industrial customers are studying these options. Consumers is pursuing several strategies to retain its current "at-risk" customers. These strategies include a request that the MPSC allow Consumers to offer special competitive service rates to current industrial customers which have demonstrated an ability to seek alternate electric supplies and to attract new customers which are considering locating or expanding facilities in Michigan. As part of its current electric rate case, Consumers has requested that the MPSC eliminate the rate subsidization of residential customers. If approved, commercial and industrial customers' electric costs would decrease by a total of approximately $80 million per year. Consumers is committed to holding operation and maintenance costs level and continuing to improve customer service. Consumers is also working with large customers to identify ways to improve the efficiency with which energy is used. In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In February 1995, an ALJ issued a proposal for decision that addressed the methodology for pricing transmission rates to be used for the experiment. An MPSC order is expected by mid-1995. In the short-term, Consumers does not expect this experiment to have a material impact on its financial position or results of operations. Nuclear Matters: In late 1993, the NRC completed a review of Consumers' performance at Palisades that showed a decline in performance. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades during 1994 which found certain performance, operational and management deficiencies at the plant. Consumers subsequently filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned level of expenditures. Consumers' on-site storage pool at Palisades is at capacity, and it is unlikely that the DOE will begin accepting any spent nuclear fuel by the originally scheduled date in 1998. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued a decision, effectively allowing Consumers to continue using dry cask storage at Palisades. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed, prior to the year 2000, a temperature screening criterion established by NRC regulations. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 13. The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the FASB has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed, annual provisions for decommissioning could increase, estimated costs for decommissioning could be recorded as a liability rather than as accumulated depreciation, and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. Stray Voltage: Consumers has recently experienced increases in the number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending. Consumers believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. For further information, see Note 12. Gas Utility Results of Operations Gas Pretax Operating Income: For 1994, gas pretax operating income decreased $11 million compared to 1993, reflecting slightly lower gas sales and higher depreciation and gas operating costs, which include $10 million of postretirement benefit costs related to the gas settlement with the MPSC (see Note 4), partially offset by the favorable resolution of a previously recorded gas cost contingency. During 1993, gas pretax operating income increased $37 million from the 1992 level, reflecting higher gas deliveries (both sales and transportation volumes) and more favorable regulatory recovery of gas costs related to transportation. In Millions Impact on Pretax Operating Income --------------------------------- Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ (3) $ 7 Weather - 10 Regulatory recovery of gas cost 10 12 O&M, general taxes and depreciation (18) 8 ----- ----- Total change $(11) $37 ===== ===== Gas Deliveries: Gas sales and gas transported in 1994 totaled 409 bcf, a .4 percent decrease from 1993. In 1993, gas sales and gas transported totaled 410.6 bcf, a 6.9 percent increase from 1992 deliveries. Gas Utility Issues Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates by $21 million. The requested increase in revenue reflects increased expenditures, including those associated with postretirement benefits, and proposes a 13 percent return on equity. A final order from the MPSC is expected in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. In June 1994, the FERC approved a stipulation and agreement in full settlement of a rate proceeding originally filed by Michigan Gas Storage in 1993, which provides Michigan Gas Storage with estimated annual revenues of $20 million. For further information regarding gas utility rates, see Note 4. Gas Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its gas utility operations of $127 million for 1995, $119 million for 1996 and $111 million for 1997. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Gas Environmental Matters: Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time. 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 $112 million. These estimates are based on undiscounted 1994 costs. At December 31, 1994, Consumers has accrued a liability for $48 million. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in December 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recovered in rates, prudent costs must be approved in a rate case. The MPSC has approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 12. Gas Outlook Consumers currently anticipates gas deliveries to grow approximately 2.3 percent per year (excluding MCV transportation and off-system deliveries) over the next five years, primarily due to a steadily growing customer base. Additionally, Consumers has several strategies which will support increased load requirements in the future. These strategies include increasing efforts to promote natural gas to Consumers' current customers that are using various non-gas furnaces and appliances. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Management also believes there exists significant potential for developing industrial process fuel conversion projects. New technologies being developed on a national level, such as the emerging use of natural gas vehicles and commercial gas cooling equipment, also provide Consumers with sales growth opportunities. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load to natural gas. In 1994, Consumers purchased approximately 83 percent of its required gas supply under long-term contracts, and the balance on the spot market. Trunkline supplied approximately 35 percent of the total requirement. In late 1994, Consumers' supply contract with Trunkline was replaced by several one- and two-year contracts with independent producers. Consumers estimates its purchases under long-term gas contracts will range from 70 - 80 percent in future years. Consumers also has transmission contracts totaling approximately 90 percent of its supply requirements. These contracts vary in length from one to ten years. Consumers' ability to purchase gas during the off-season and store it in its extensive underground storage facilities continues to help provide customers with low, competitive gas rates. Other Other Income: Other income for 1994 decreased $38 million when compared to the corresponding 1993 period, reflecting the sale of the remaining MCV Bonds in December 1993 which eliminated the bond interest income. The 1992 loss included a $343 million after-tax charge related to the Settlement Order. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. On April 15, 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. 104 Consolidated Statements of Income Consumers Power Company
In Millions Years Ended December 31 1994 1993 1992 Operating Revenue Electric $2,189 $2,077 $1,863 Gas 1,151 1,160 1,126 Other 16 6 (11) --------------------------------- Total operating revenue 3,356 3,243 2,978 --------------------------------- Operating Expenses Operation Fuel for electric generation 306 293 305 Purchased power - related parties 482 467 460 Purchased and interchange power 162 148 112 Cost of gas sold 662 678 673 Other 560 516 492 --------------------------------- Total operation 2,172 2,102 2,042 Maintenance 188 203 201 Depreciation, depletion and amortization 335 316 307 General taxes 178 187 179 --------------------------------- Total operating expenses 2,873 2,808 2,729 --------------------------------- Pretax Operating Electric 335 286 154 Income (Loss) Gas 135 146 109 Other 13 3 (14) --------------------------------- Total pretax operating income 483 435 249 Income Taxes 120 116 51 --------------------------------- Net Operating Income 363 319 198 --------------------------------- Other Income Dividends from affiliates 17 16 16 (Deductions) Accretion income (Note 4) 13 14 15 Accretion expense (35) (36) - Other income taxes, net 13 25 178 MCV Bond income - 32 34 Loss on MCV power purchases - settlement (Note 3) - - (520) Other, net 6 1 (1) --------------------------------- Total other income (deductions) 14 52 (278) --------------------------------- Interest Charges Interest on long-term debt 135 152 150 Other interest 17 22 15 Capitalized interest (1) (1) (1) --------------------------------- Net interest charges 151 173 164 --------------------------------- Net Income (Loss) 226 198 (244) Preferred Stock Dividends 24 11 11 --------------------------------- Net Income (Loss) after Dividends on Preferred Stock $ 202 $ 187 $ (255) ================================= The accompanying notes are an integral part of these statements.
105 Consolidated Statements of Cash Flows Consumers Power Company In Millions
Years Ended December 31 1994 1993 1992 Cash Flows From Net income (loss) $ 226 $ 198 $(244) Operating Activities Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $49, $46 and $46, respectively) 335 316 308 Capital lease and other amortization 35 30 40 Deferred income taxes and investment tax credit 57 50 (179) Accretion expense 35 36 - Accretion income - abandoned Midland project (13) (14) (15) MCV power purchases - settlement (Note 3) (87) (84) - Loss on MCV power purchases - settlement (Note 3) - - 520 Other (14) (3) 3 Changes in other assets and liabilities (Note 15) 24 (126) 37 ------ ------ ------ Net cash provided by operating activities 598 403 470 ------ ------ ------ Cash Flows From Capital expenditures (excludes capital lease additions Investing Activities of $36, $58 and $69, respectively and DSM) (Note 15) (447) (451) (411) Investments in nuclear decommissioning trust funds (49) (46) (46) Cost to retire property, net (38) (32) (14) Deferred demand-side management costs (9) (52) (26) Proceeds from sale of property 14 1 12 Other 1 (2) (1) Proceeds from MCV Bonds - 322 10 Sale of subsidiary - (14) - Proceeds from loan to affiliate - - 50 Proceeds from Bechtel settlement - - 46 ------ ------ ------ Net cash used in investing activities (528) (274) (380) ------ ------ ------ Cash Flows From Repayment of bank loans (469) (31) - Financing Activities Payment of common stock dividends (176) (133) - Retirement of bonds and other long-term debt (Note 7) (133) (641) (12) Payment of capital lease obligations (34) (24) (35) Payment of preferred stock dividends (19) (11) (11) Proceeds from bank loans 400 - 60 Proceeds from preferred stock 193 - - Contribution from stockholder 100 - - Increase (decrease) in notes payable, net 80 44 (79) Proceeds from bonds - 644 - ------ ------ ------ Net cash used in financing activities (58) (152) (77) ------ ------ ------ Net Increase (Decrease) in Cash and Temporary Cash Investments 12 (23) 13 Cash and temporary cash investments Beginning of year 13 36 23 ------ ------ ------ End of year $ 25 $ 13 $ 36 ====== ====== ====== The accompanying notes are an integral part of these statements.
106 Consolidated Balance Sheets Consumers Power Company
ASSETS In Millions December 31 1994 1993 Plant (At original cost) Electric $5,771 $5,472 Gas 2,064 1,939 Other 30 26 --------------------- 7,865 7,437 Less accumulated depreciation, depletion and amortization (Note 2) 3,794 3,550 --------------------- 4,071 3,887 Construction work-in-progress 241 248 --------------------- 4,312 4,135 --------------------- Investments Stock of affiliates (Note 17) 317 291 First Midland Limited Partnership (Notes 3 and 19) 218 213 Midland Cogeneration Venture Limited Partnership (Notes 3 and 19) 74 67 Other 8 6 --------------------- 617 577 --------------------- Current Assets Cash and temporary cash investments at cost, which approximates market 25 13 Accounts receivable and accrued revenue, less allowances of $4 in 1994 and $4 in 1993 (Note 6) 100 110 Accounts receivable - related parties 12 12 Inventories at average cost Gas in underground storage 235 228 Materials and supplies 75 73 Generating plant fuel stock 37 41 Deferred income taxes (Note 5) 35 17 Trunkline settlement (Note 4) 30 31 Postretirement benefits (Note 10) 25 25 Prepayments and other 143 156 --------------------- 717 706 --------------------- Non-current Assets Postretirement benefits (Note 10) 478 485 Nuclear decommissioning trust funds (Note 2) 213 165 Abandoned Midland project (Note 4) 147 162 Trunkline settlement (Note 4) 55 86 Other 270 235 --------------------- 1,163 1,133 --------------------- Total Assets $6,809 $6,551 ===================== /TABLE 107 Consumers Power Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions December 31 1994 1993 Capitalization (Note 7) Common stockholder's equity Common stock $ 841 $ 841 Paid-in-capital 491 391 Revaluation capital 15 - Retained earnings since December 31, 1992 80 54 --------------------- 1,427 1,286 Preferred stock 356 163 Long-term debt 1,953 1,839 Non-current portion of capital leases 108 106 --------------------- 3,844 3,394 --------------------- Current Liabilities Current portion of long-term debt and capital leases 45 355 Notes payable 339 259 Accounts payable 165 148 Accounts payable - related parties 51 49 Accrued taxes 173 171 MCV power purchases - settlement (Note 3) 95 82 Accrued interest 37 39 Accrued refunds 25 28 Other 187 183 --------------------- 1,117 1,314 --------------------- Non-current Liabilities Deferred income taxes (Note 5) 568 485 Postretirement benefits (Note 10) 532 527 MCV power purchases - settlement (Note 3) 324 391 Deferred investment tax credit 179 190 Trunkline settlement (Note 4) 55 86 Regulatory liabilities for income taxes, net (Notes 5 and 18) 16 6 Other 174 158 --------------------- 1,848 1,843 --------------------- Commitments and Contingencies (Notes 2, 3, 4, 11, 12 and 13) Total Stockholders' Investment and Liabilities $6,809 $6,551 ===================== The accompanying notes are an integral part of these statements.
108 Consolidated Statements of Long-Term Debt Consumers Power Company
In Millions December 31 1994 1993 First Mortgage Bonds Series (%) Due 5-7/8 1996 $ 36 $ 36 6 1997 50 50 8-3/4 1997 - 5 8-3/4 1998 248 248 6-5/8 1998 45 45 6-7/8 1998 43 43 9-1/8 1998 - 5 7-5/8 1999 - 48 8-7/8 1999 200 200 7-1/2 2001 57 57 7-1/2 2002 62 62 7-1/2 2002 - 43 6-3/8 2003 300 300 7-3/8 2023 300 300 ------- ------- 1,341 1,442 Long-Term Bank Debt 400 469 Pollution Control Revenue Bonds 131 131 Nuclear Fuel Disposal 95 90 4-5/8% Debentures - 26 Other 5 12 ------- ------- Principal Amount Outstanding 1,972 2,170 Current Amounts (9) (321) Net Unamortized Discount (10) (10) ------- ------- Total Long-Term Debt $1,953 $1,839 ======= =======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Mortgage Improvement Long-Term Bonds Fund Bank Debt Other Total - ----------------------------------------------------------------------------------------------------------- 1995 $ - $8 $ - $ 1 $ 9 1996 36 8 - 29 73 1997 50 8 - 74 132 1998 336 7 200 2 545 1999 200 3 200 - 403 =========================================================================================================== The accompanying notes are an integral part of these statements.
109 Consolidated Statements of Preferred Stock Consumers Power Company
Optional Redemption Number of Shares In Millions December 31 Series Price 1994 1993 1994 1993 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 7.45 101.00 379,549 379,549 38 38 7.68 101.00 207,565 207,565 21 21 7.72 101.00 289,642 289,642 29 29 7.76 102.21 308,072 308,072 31 31 Class A Preferred Stock Cumulative, no par value, authorized 16,000,000 shares, with no mandatory redemption 2.08 (Note 7) 8,000,000 - 193 - ---- ---- Total Preferred Stock $356 $163 ==== ==== The accompanying notes are an integral part of these statements.
110 Consolidated Statements of Common Stockholder's Equity Consumers Power Company
In Millions Other Retained Common Paid-in Revaluation Earnings Stock Capital Capital (Deficit) Total Balance at January 1, 1992 (a) $841 $ 965 $ - $(319) $1,487 Net loss (244) (244) Preferred stock dividends declared (11) (11) Quasi-reorganization (Note 7) (574) 574 - ---- ------ ------ ------ ------- Balance at December 31, 1992 (a) 841 391 - - 1,232 Net income 198 198 Cash dividends declared: Common stock (133) (133) Preferred stock (11) (11) ---- ----- ------ ------ ------- Balance at December 31, 1993 (a) 841 391 - 54 1,286 Net income 226 226 Cash dividends declared: Common stock (176) (176) Preferred stock (24) (24) Implementation of SFAS 115 January 1, 1994, net of tax (Note 8) 20 20 Unrealized loss, net of tax (5) (5) Stockholder's contribution (Note 7) 100 100 ---- ----- ------ ------ ------- Balance at December 31, 1994 (a) $841 $ 491 $ 15 $ 80 $1,427 ==== ===== ====== ====== ======= (a) Number of common stock shares outstanding was 84,108,789. The accompanying notes are an integral part of these statements.
111 Consumers Power Company Notes to Consolidated Financial Statements 1: Corporate Structure Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. 2: Summary of Significant Accounting Policies and Other Matters Basis of Presentation: The consolidated financial statements include Consumers and its wholly owned subsidiaries. Consumers uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest. Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. Cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, is recorded in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities. Maintenance, Depreciation and Depletion: Property repairs and minor property replacements are charged 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 3.5 percent for 1994 and 3.4 percent for 1993 and 1992. The composite rate for gas utility plant was 4.2 percent for 1994, 4.4 percent for 1993 and 4.3 percent for 1992. The composite rate for other plant and property was 4.7 percent for 1994 and 1993 and 5.8 percent for 1992. New Accounting Standards: In December 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, effective for 1995 year- end financial statements. Consumers does not believe that it will be significantly affected by the statement, which requires disclosures about the nature of a company's operations and the use of estimates in financial statements. For other recent accounting standards regarding financial instruments, see Note 8. 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 federal law, the DOE is responsible for permanent disposal of spent nuclear fuel at costs to be paid by affected utilities. However, in 1994, the DOE asserted that it does not have a legal obligation to accept spent nuclear fuel without an operational repository. The DOE is exploring options to offset the costs incurred by nuclear utilities to store spent nuclear fuel on site. For fuel burned after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers it through electric rates and remits it to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983, until the spent fuel is delivered to the DOE, which was originally scheduled to occur in 1998. At December 31, 1994, Consumers has recorded a liability to the DOE of $95 million, including interest. Consumers has been recovering through electric rates the amount of this liability, excluding a portion of interest. Nuclear Plant Decommissioning: Consumers collects estimated costs to decommission its two nuclear plants through a monthly surcharge to electric customers which currently totals $45 million annually. On March 1, 1995, Consumers filed updated decommissioning estimates with the MPSC which increased the estimated decommissioning costs for Big Rock to $290 million from $221 million and for Palisades to $502 million from $423 million (in 1994 dollars). The increase in the estimated decommissioning costs principally reflects 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. Consumers currently plans to maintain the facilities in protective storage until radioactive waste disposal facilities are available. As a result, the majority of decommissioning costs will be incurred significantly later than originally anticipated. Consumers has asked the NRC for an exemption from its requirement for assurance that the Big Rock decommissioning funds will at least equal the adjusted "minimum certification" amount of $361 million (in 1994 dollars) since the site specific cost study for Big Rock demonstrates that a lesser amount will cover the projected decommissioning costs for which the assurance is required. When Big Rock's and Palisades' NRC licenses expire in 2000 and 2007, respectively, the trust funds are estimated to have accumulated to $257 million and $686 million, respectively. At the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds are estimated to provide $1 billion for Big Rock and $2.1 billion for Palisades including trust earnings over this period. Accordingly, Consumers believes that the current decommissioning surcharge is sufficient. At December 31, 1994, Consumers had an investment in nuclear decommissioning trust funds of $213 million. For information regarding reactor embrittlement at Palisades, see Note 13. Reclassifications: Consumers has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect the net income or net losses for the years presented. 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 also 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 these unrecovered costs or refunds the excess recoveries to customers following reconciliation hearings conducted before the MPSC. Utility Regulation: Consumers accounts for the effects of regulation under SFAS 71, Accounting for the Effects of Certain Types of Regulation. As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. Consumers' regulatory assets and liabilities are described in Note 18. Other: For significant accounting policies regarding income taxes, see Note 5; for pensions and other postretirement benefits, see Note 10; and for cash equivalents, see Note 15. 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. At December 31, 1994, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership: Consumers' obligation for purchase of contract capacity from the MCV Partnership under the PPA was 1,132 MW in 1994 and increases to a maximum amount of 1,240 MW in 1995 and thereafter. Prior to 1993, the MPSC allowed Consumers to recover costs of power purchased from the MCV Partnership at levels significantly less than Consumers paid. In March 1993, the MPSC approved, with modifications, a settlement proposal which allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity effective January 1993. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be competitively bid into Consumers' next solicitation for power or, if necessary, utilized for current power needs. In either instance, the MPSC would determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. At the request of the MPSC, the MCV Partnership confirmed that it did not object to the Settlement Order. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. The PPA provides that Consumers is to pay to the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity 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. For all economic energy deliveries above the availability limits to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge. In 1992, Consumers recognized an after-tax loss of $343 million which was the present value of an undiscounted after-tax loss of $789 million, based on Consumers' estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility, and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries, including fixed energy charges (in connection with a dispute with the MCV Partnership discussed below) which were being escrowed, were $61 million in 1994 and $59 million in 1993. If Consumers is unable to sell any capacity above the current MPSC-authorized level, future additional after- tax losses and after-tax cash underrecoveries would be incurred. Consumers estimates its future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Expected cash underrecoveries $60 $56 $55 $ 8 $ 9 Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. At December 31, 1994 and 1993, the after-tax, present value of the Settlement Order liability totaled $272 million and $307 million, respectively. The reduction in the Settlement Order liability during 1994 reflects after-tax cash underrecoveries related to capacity totaling $57 million, partially offset by after-tax accretion expense of $22 million. In connection with the MPSC's approval of the settlement proposal discussed above, Consumers and the MCV Partnership engaged in arbitration under the PPA regarding the payment of certain fixed energy charges. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed. In May 1994, Consumers was notified by the MCV that it was initiating further arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, has been estimated by the MCV Partnership to total $6.3 million annually. An arbitrator has been selected and a ruling is expected in the third quarter of 1995. Consumers cannot predict the outcome of this arbitration. In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of the arbitration between the MCV Partnership and Consumers discussed above. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew this lawsuit. In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility. Additionally, in February 1995, Consumers agreed to pay $15 million to terminate a power purchase agreement with a 44 MW wood and chipped tire facility. Consumers plans to seek MPSC approval to substitute less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. This proposed substitution of capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. The capacity substitution represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for similar facilities. As a result, Consumers has recorded a regulatory asset of $45 million ($30 million in 1994), which it believes will ultimately be recoverable in rates. MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. Consumers also agreed not to appeal any MCV-related issues raised in future orders for these plan cases and related reconciliations to the extent those issues are resolved by the Settlement Order. In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992 confirming Consumers' recovery for the purchase of 840 MW from the MCV in accordance with the MPSC plan case order and allowing recovery for the purchase of power above 840 MW based on replacement power costs. The MPSC subsequently confirmed the recovery of MCV-related costs consistent with the Settlement Order as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals. 4: Rate Matters Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits, and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers by allocating $40 million of the rate increase to residential customers. In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes a proposed increase in Consumers' authorized rate of return on equity to 12.75 percent from 11.75 percent, recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. Consumers has requested that the MPSC eliminate the remainder of rate cross-subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 12). In January 1995, Consumers filed a request with the MPSC, seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts, which if approved would result in a net decrease in depreciation expense of $7 million (see Electric Rate Case discussion in the Management's Discussion and Analysis). Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could collect $35 million pretax annually for the next 10 years for its abandoned nuclear project. Consumers is amortizing the abandoned assets against current income over the recovery period using an interest method. Consumers was not permitted to earn a return on the portion of the abandoned investment for which the MPSC was allowing recovery. The loss of a return on the amount being recovered is reflected in earnings as accretion income. An after-tax total of $27 million remains to be included in accretion income through April 2001. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. Consumers and ABATE have appealed this decision to the Michigan Supreme Court. Management cannot predict the outcome of this issue. Electric DSM: As a result of settlement discussions regarding DSM and an MPSC order, Consumers agreed to spend $65 million over two years on DSM programs. Consumers completed the customer participation portion of these DSM programs in 1993. Based on the criteria set out in the DSM settlement agreement approved by the MPSC, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of $11 million of incentive revenue. Accordingly, during 1994, Consumers recognized $11 million in revenue, related to its DSM program. A final order from the MPSC is expected by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to recover DSM expenditures which exceeded $65 million and to continue certain programs ($30 million annually) in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from customers in accordance with an MPSC accounting order. The unamortized balance of deferred costs totaled $71 million at December 31, 1994 and 1993. PSCR Issues: In November 1994, an ALJ issued a proposal for decision in the 1993 PSCR reconciliation proceeding that addressed issues related to an extended refueling and maintenance outage that began at Palisades in June 1993 and ended in November 1993. Consumers conceded that one day of the 1993 outage was unnecessary, while the ALJ found that 22 days of the outage were the result of imprudent actions and recommended a disallowance of $4 million of replacement power costs. While Consumers has taken exception to the ALJ's proposal, it has accrued a loss for this issue for 1994. In addition, from mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. The 1994 outage will be reviewed as part of the 1994 reconciliation proceeding. The Energy Act imposes an obligation on the utility industry to decommission DOE uranium enrichment facilities. In 1994, the MPSC authorized Consumers to recover through electric rates its required decommissioning payments to the DOE. At December 31, 1994, Consumers' remaining liability and regulatory asset each totaled $25 million. Gas Rates: In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits against 1994 earnings. The agreement was reached in response to a claim that gas utility business earnings for 1993 were excessive. This charge against earnings partially offsets savings related to reduced state property taxes. The agreement also provides for an additional $4 million of postretirement benefit costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers filed a gas rate case in December 1994. Consumers requested an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. Consumers expects an MPSC decision in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced prospectively. As a result, Consumers was not allowed to recover $13 million of costs incurred prior to February 1993. Consumers previously had accrued a loss in excess of the disallowed amount. Future disallowances are not anticipated, unless appeals filed by the intrastate producers are successful. In 1992, the FERC approved a settlement involving Consumers, Trunkline and certain other parties, which resolved numerous claims and proceedings concerning Trunkline liquified natural gas costs. The settlement represents significant gas cost savings for Consumers and its customers in future years. In 1992, Consumers recorded a liability and regulatory asset for the principal amount of payments due Trunkline. In 1993, the MPSC approved a separate settlement agreement providing full recovery of the liability over a five-year period. At December 31, 1994, the remaining liability and regulatory asset were $85 million. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on the financial statements. 5: Income Taxes Consumers and its subsidiaries file a consolidated federal income tax return with CMS Energy. Income taxes are generally allocated based on each company's separate taxable income. Consumers' accrued federal income tax benefits from CMS Energy were $33 million and $49 million as of December 31, 1994 and 1993, respectively. Consumers practices full deferred tax accounting for temporary differences as authorized by a generic MPSC order. Consumers uses ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that can be carried 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 1994 1993 1992 - ----------------------- ----- ----- ----- Current federal income taxes $ 51 $ 41 $ 52 Deferred income taxes 67 61 (172) Deferred income taxes - tax rate change - (2) - Deferred ITC, net (11) (9) (7) ----- ----- ----- $ 107 $ 91 $(127) ===== ===== ===== Operating $ 120 $ 116 $ 51 Other (13) (25) (178) ----- ----- ----- $ 107 $ 91 $(127) ===== ===== ===== The principal components of Consumers' deferred tax assets (liabilities) recognized in the balance sheet are as follows: In Millions December 31 1994 1993 - ----------- ------- ------- Property $ (535) $ (518) Unconsolidated investments (236) (184) Postretirement benefits (Note 10) (177) (178) Abandoned Midland project (Note 4) (51) (57) Employee benefit obligations (includes postretirement benefits of $172 and $178) (Note 10) 200 200 MCV power purchases - settlement (Note 3) 146 165 AMT carryforward 89 64 ITC carryforward (expires 2005) 37 48 Other (6) (8) ------- ------- $ (533) $ (468) ======= ======= Gross deferred tax liabilities $(1,388) $(1,319) Gross deferred tax assets 855 851 ------- ------- $ (533) $ (468) ======= ======= The actual income tax expense (benefit) 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 1994 1993 1992 - ----------------------- ------ ------ ------ Net income (loss) $ 226 $ 198 $ (244) Income tax expense (benefit) 107 91 (127) ------ ------ ------ 333 289 (371) Statutory federal income tax rate x 35% x 35% x 34% ------ ------ ------ Expected income tax expense (benefit) 117 101 (126) Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 6 9 ITC amortization and utilization (9) (10) (10) Affiliated companies' dividends (6) (6) (5) Other, net (6) (5) - ------ ------ ------ $ 107 $ 91 $ (127) ====== ====== ====== 6: Short-Term Financings In 1994, the FERC granted Consumers' request for authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At December 31, 1994, $170 million and $166 million were outstanding under these facilities at weighted average interest rates of 6.3 percent and 7.3 percent, respectively. Consumers has an established $500 million trade receivables purchase and sale program. At December 31, 1994 and 1993, receivables sold under the agreement totaled $275 million and $285 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. 7: Capitalization Capital Stock: During 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds to Consumers were $193 million. The stock is redeemable at the option of Consumers, on or after April 1, 1999, at a redemption price of $25 per share plus accrued dividends. At December 31, 1992, Consumers effected a quasi-reorganization in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. This action was approved by Consumers' Board of Directors and did not require shareholder approval. 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, Articles and the need for regulatory approvals in compliance with appropriate state and federal law. In the first quarter of 1994, Consumers redeemed first mortgage bonds totaling $101 million. These redemptions completed Consumers' commitment to the MPSC, under a 1993 financing order to refinance certain long-term debt. Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its then existing long-term, variable rate, credit agreement and to reduce short-term borrowings. At December 31, 1994, the new loan carried a weighted average interest rate of 6.5 percent. In 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for a fixed-rate interest of 5.2 percent on $250 million of its long-term bank debt. The swap agreement hedges the variable rate exposure associated with Consumers' long-term bank debt and had the effect of increasing the weighted average interest rate to 5.3 percent from 5.0 percent for the 12- month period ended December 31, 1994. The current swap agreement began to decrease in February 1995 and will terminate by May 1996. In February 1995, Consumers entered into another hedging agreement for $100 million to reduce its exposure to variable rate interest associated with its long- term bank debt. Other: Consumers has a total of $131 million of long-term PCRBs outstanding (secured by irrevocable letters of credit and first mortgage bonds) with a weighted average interest rate of 4.8 percent as of December 31, 1994. In 1994, Consumers received a $100 million equity investment from CMS Energy. The investment was consistent with CMS Energy's plan to improve Consumers' capital structure and was recognized and included in the capitalization structure employed by the MPSC as part of Consumers' most recent electric rate order. 8: Financial Instruments The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments, except as shown below, approximate fair value.
In Millions December 31 1994 1993 - ----------- Available-for-sale Amortized Fair Unrealized Amortized Fair Unrealized securities Cost Value Gain (Loss) Cost Value Gain - ------------------ --------- ----- ----------- --------- ----- ---------- Common stock of CMS Energy (Note 17) $ 43 $ 67 $ 24 $ 42 $ 72 $ 30 Nuclear decommissioning investments 223 213 (10) 165 165 -
The carrying amount of long-term debt was $2.0 billion and $1.8 billion, and the fair value, as calculated by debt-pricing specialists, was $1.9 billion and $2.0 billion at December 31, 1994 and 1993, 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 fair values of Consumers' off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. At December 31, 1994, the fair value of Consumers' interest rate swap agreement was $4 million, representing the amount that Consumers would receive to terminate the agreement. At December 31, 1993, Consumers would have paid $5 million to terminate the agreement. This beneficial change resulted from an increase in market interest rates. Guarantees and letters of credit were $7 million at December 31, 1994 and 1993. For held-to-maturity securities, see Note 17. Effective January 1, 1994, Consumers adopted SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which resulted in an increase in assets of $30 million with a corresponding increase in stockholders' equity of $20 million, net of tax. Consumers classifies unrealized losses on nuclear decommissioning investments in accumulated depreciation. 9: Executive Incentive Compensation Consumers participates in CMS Energy's Performance Incentive Stock Plan. Under the plan, restricted shares of common stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. The plan reserves for award not more than 2 percent of CMS Energy's common stock outstanding on January 1 each year, less the number of shares of restricted common stock awarded and of common stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1994, awards of up to 402,316 shares of common stock may be issued. Restricted shares of common stock are outstanding shares with full voting and dividend rights. Performance criteria were added in 1990 based on CMS Energy's total return to shareholders. Shares of restricted common stock cannot be distributed until they are vested and the performance objectives are met. Further, the restricted stock is subject to forfeiture if employment terminates before vesting. If key employees exceed performance objectives, the plan will allow additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1994, 314,856 shares of the 330,356 restricted shares outstanding are subject to performance objectives. Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, remains in effect until all authorized options are granted or September 25, 1995. At December 31, 1994, options for 43,000 shares remained to be granted. Under both plans, for stock options and stock appreciation rights, the exercise price on each grant date equaled the closing market price on the grant date. Options are exercisable upon grant and expire up to 10 years and one month from date of grant. The status of the restricted stock granted under the Performance Incentive Stock Plan and options granted under both plans follows and includes shares for employees of CMS Energy and non-utility affiliates. Restricted Stock Options ---------- --------------- Number Number Price of Shares of Shares per Share --------- --------- --------------- Outstanding at January 1, 1992 275,063 1,291,091 $ 7.13 - $34.25 Granted 101,000 215,000 $17.13 - $18.00 Exercised or Issued (37,422) (21,000) $13.00 - $16.00 Canceled (15,375) (50,000) $20.50 - $33.88 ------- --------- --------------- Outstanding at December 31, 1992 323,266 1,435,091 $ 7.13 - $34.25 Granted 132,000 249,000 $25.13 - $26.25 Exercised or Issued (54,938) (152,125) $ 7.13 - $21.13 Canceled (84,141) (33,000) $20.50 - $33.88 ------- --------- --------------- Outstanding at December 31, 1993 316,187 1,498,966 $ 7.13 - $34.25 Granted 133,500 273,000 $21.25 - $22.38 Exercised or Issued (39,361) (158,300) $ 7.13 - $22.00 Canceled (79,970) (123,000) $26.25 - $33.88 ------- --------- --------------- Outstanding at December 31, 1994 330,356 1,490,666 $ 7.13 - $34.25 ======= ========= =============== 10: Retirement Benefits Postretirement Benefit Plans Other Than Pensions: Consumers adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, effective as of the beginning of 1992 and recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 18). Both the MPSC and FERC have generally allowed recovery of SFAS 106 costs. The MPSC's generic order allows utilities three years to seek recovery of costs. In May 1994, the MPSC authorized recovery of the electric utility portion of these costs over 18 years. In December 1994, Consumers requested recovery of the gas utility portion of these costs (see Note 4). Consumers funds the benefits using external Voluntary Employee Beneficiary Associations. Funding of the health care benefits coincides with Consumers' recovery in rates. A portion of the life insurance benefits have previously been funded. Retiree health care costs at December 31, 1994, are based on the assumption that costs would increase 10 percent in 1995, then decrease gradually to 6 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a 1 percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $84 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1994 by $10 million. For the years ended December 31, 1994, 1993 and 1992, the weighted average discount rate was 8 percent, 7.25 percent and 8 percent, respectively, and the expected long-term rate of return on plan assets was 7 percent, 8.5 percent and 8.5 percent, respectively. Net periodic postretirement benefit cost for health care benefits and life insurance benefits was $53 million in 1994, $51 million in 1993 and $49 million in 1992. The 1994, 1993 and 1992 cost was comprised of $13 million, $13 million and $10 million for service plus $40 million, $38 million and $39 million for interest, respectively. The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows: In Millions 1994 1993 ------ ------ Actuarial present value of estimated benefits Retirees $ 336 $ 281 Eligible for retirement 43 54 Active (upon retirement) 166 187 ------ ------ Accumulated postretirement benefit obligation 545 522 Plan assets at fair value 35 4 ------ ------ Projected postretirement benefit obligation in excess of plan assets (510) (518) Unrecognized net loss from experience different than assumed 2 8 ------ ------ Recorded liability $ (508) $ (510) ====== ====== Consumers' postretirement health care plan is partially funded; the accumulated postretirement benefit obligation for that plan is $530 million and $510 million at December 31, 1994 and 1993, respectively. Supplemental Executive Retirement Plan: Certain management employees qualify under 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 and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1994 and 1993, trust assets at cost (which approximates market) were $14 million and $16 million, respectively, and were classified as other non- current assets. Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan is fully funded, no contributions were made for plan years 1992 through 1994. Amounts presented below for the Pension Plan include minor amounts for employees of CMS Energy and non-utility affiliates which are not distinguishable from the plan's total assets. Years Ended December 31 1994 1993 1992 - ----------------------- ------ ------ ----- Discount rate 8.0% 7.25% 8.5% Rate of compensation increase 4.5% 4.5% 5.5% Expected long-term rate of return on assets 9.25% 8.75% 8.75% Net Pension Plan and SERP costs consisted of: In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- ----- Service cost $ 23 $ 19 $ 19 Interest cost 50 49 47 Actual return on plan assets 21 (92) (36) Net amortization and deferral (85) 34 (20) ----- ----- ----- Net periodic pension cost $ 9 $ 10 $ 10 ===== ===== ===== The funded status of the Pension Plan and SERP reconciled to the pension liability recorded at December 31 was: In Millions Pension Plan SERP 1994 1993 1994 1993 ----- ----- ----- ----- Actuarial present value of estimated benefits Vested $ 421 $ 471 $ 13 $ 12 Non-vested 61 56 - - ----- ----- ----- ----- Accumulated benefit obligation 482 527 13 12 Provision for future pay increases 154 138 6 5 ----- ----- ----- ----- Projected benefit obligation 636 665 19 17 Plan assets (primarily stocks and bonds, including $79 in 1994 and $87 in 1993 in common stock of CMS Energy) at fair value 637 692 - - ----- ----- ----- ----- Projected benefit obligation less than (in excess of) plan assets 1 27 (19) (17) Unrecognized net (gain) loss from experience different than assumed (35) (56) 3 5 Unrecognized prior service cost 40 45 1 - Unrecognized net transition (asset) obligation (39) (44) 1 1 ----- ----- ----- ----- Recorded liability $ (33) $ (28) $ (14) $(11) ===== ===== ===== ===== 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. 11: Leases Consumers leases various assets, including vehicles, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1996. The maximum amount of nuclear fuel that can be leased increased during 1994 to $80 million. The lease provides for an additional one-year extension 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 $59 million as of December 31, 1994. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance. Minimum rental commitments under Consumers' non-cancelable leases at December 31, 1994, were: In Millions Capital Operating Leases Leases ------- -------- 1995 $ 43 $ 6 1996 60 3 1997 17 3 1998 15 2 1999 12 2 2000 and thereafter 21 20 ----- ----- Total minimum lease payments 168 $ 36 Less imputed interest 24 ===== ----- Present value of net minimum lease payments 144 Less current portion 36 ----- Non-current portion $108 ===== Consumers recovers these 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 as of December 31, 1994, 1993 and 1992, were $8 million, $8 million and $12 million, respectively. Capital lease expenses for the years ended December 31, 1994, 1993 and 1992 were $40 million, $32 million and $44 million, respectively. Included in these amounts for the years ended 1994, 1993 and 1992, are nuclear fuel lease expenses of $21 million, $13 million and $17 million, respectively. 12: Commitments and Contingencies Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve certain recreational areas and convey certain undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to the MPSC permitting Consumers to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan. In one, the state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, reduced only upon installation of "adequate" fish barriers and other changed conditions. Each year, a barrier net is installed at Ludington by Consumers and Detroit Edison from April to October. In the other, the Attorney General sought to have Ludington's bottomlands lease declared void. Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability will average less than 4 percent of the estimated total site remediation costs, and such liability will probably not exceed $6 million. At December 31, 1994, Consumers has accrued a liability for its estimated losses. Consumers believes that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time. Consumers has prepared plans for remedial investigation/feasibility studies for several of these former manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved three of four plans for remedial investigation/feasibility studies submitted by Consumers. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. 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 $112 million. These estimates are based on undiscounted 1994 costs. At December 31, 1994, Consumers has accrued a liability of $48 million. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recoverable in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC has approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. All of Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in the year 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $25 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and possible modifications at other coal-fired units to be an additional $50 million by the year 2000. Final acid rain program nitrogen oxide regulations specifying the controls to be installed at the other coal- fired units are not expected earlier than 1996. Management believes that Consumers annual operating costs will not be materially affected. Capital Expenditures: Consumers estimates capital expenditures, including DSM and new lease commitments, of $452 million for 1995, $374 million for 1996 and $380 million for 1997. Commitments for Coal and Gas Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1995 to 2004. Consumers contracts for approximately 60 - 70 percent of its annual coal requirements which in 1994 totaled $261 million (63 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs. Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1995 to 2003. Consumers contracts for approximately 70 - 80 percent of its annual gas requirements which in 1994 totaled $662 million (83 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its gas needs. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. Other: Consumers has experienced increases in the number of lawsuits filed against it relating to so-called stray voltage. Claimants contend that stray voltage results when small 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 including, when necessary, modifying the grounding of the customer's service. At January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending. In addition to the matters disclosed in these notes, Consumers and certain of its subsidiaries are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies, arising from the ordinary course of business involving personal injury and property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. The ultimate effect of the proceedings discussed in this note is not expected to have a material impact on Consumers' financial position or results of operations. 13: Nuclear Matters In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied National Environmental Policy Act requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. As of February 28, 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades' 1995 refueling. In the latter part of 1995, Consumers plans to unload and replace one of the loaded casks. In a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although testing has not disclosed any leakage, Consumers has nevertheless decided to remove the spent fuel and insert it in another cask. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and concluded that the pad location is acceptable to support the casks. The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan, and no other states' repositories are available to Michigan generators of such waste. Consumers stores low- level waste at its nuclear plant sites and plans to continue to do so following final shutdown of the plants, if necessary, until a permanent storage site is provided. Consumers currently estimates that a permanent low-level radioactive waste disposal site will be available by the year 2027. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $33 million in any one year to NML and NEIL; $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 in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. In November 1993, Palisades returned to service following a planned refueling and maintenance outage that had been extended due to several unanticipated repairs (see Note 4). The results of an NRC review of Consumers' performance at Palisades published shortly after the planned outage showed a decline in performance ratings for the plant. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the deficiencies. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned levels of expenditures. As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. If the results of the calculation indicate that an NRC temperature screening criterion will be exceeded, Consumers must determine what, if any, plant modifications are necessary to avoid exceeding the screening criterion and prevent potential reactor vessel failure as a result of postulated pressurized thermal shock events. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed the screening criterion prior to the year 2000. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. It is currently estimated that expenditures for corrective action related to this issue could total $20 million to $30 million. Consumers cannot predict the outcome of these efforts. 14: Jointly Owned Utility Facilities Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities: In Millions December 31 1994 1993 - ----------- ----- ----- Net investment Ludington - 51% $119 $114 Campbell Unit 3 - 93.3% 337 349 Transmission lines - various 31 32 Accumulated depreciation Ludington $ 76 $ 74 Campbell Unit 3 224 210 Transmission lines 11 11 15: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were: In Millions 1994 1993 1992 ----- ----- ----- Cash transactions Interest paid (net of amounts capitalized) $147 $177 $176 Income taxes paid (net of refunds) 34 90 6 Non-cash transactions Nuclear fuel placed under capital lease $ 21 $ 28 $ 30 Other assets placed under capital leases 15 30 39 Capital leases refinanced - 42 - Assumption of debt - - 15 Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below: In Millions 1994 1993 1992 ----- ----- ----- Sale of receivables, net $ (10) $ 60 $ 25 Accounts receivable (4) 19 30 Accrued revenue 24 (48) 91 Inventories (5) (32) 24 Accounts payable 19 (25) 21 Accrued refunds (3) (48) (143) Other current assets and liabilities, net 12 (45) 38 Non-current deferred amounts, net (9) (7) (49) ----- ----- ----- $ 24 $(126) $ 37 ===== ===== ===== 16: Reportable Segments The Consolidated Statements of Income show operating revenue and pretax operating income by segments. These amounts include earnings (losses) from investments accounted for by the equity method of $16 million, $6 million and $(10) million for 1994, 1993 and 1992, respectively. Other segment information follows: In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ------- ------- ------- Depreciation, depletion and amortization Electric $ 257 $ 241 $ 230 Gas 76 73 76 Other 2 2 1 ------- ------- ------- $ 335 $ 316 $ 307 ======= ======= ======= Identifiable assets Electric (a) (b) $ 4,364 $ 4,100 $ 3,845 Gas (b) 1,673 1,628 1,574 Other (c) 772 823 1,177 ------- ------- ------- $ 6,809 $ 6,551 $ 6,596 ======= ======= ======= Capital expenditures (d) Electric $ 358 $ 403 $ 390 Gas 134 158 116 ------- ------- ------- $ 492 $ 561 $ 506 ======= ======= ======= (a) Includes abandoned Midland investment of $147 million, $162 million and $175 million for 1994, 1993 and 1992, respectively. (b) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses. (c) Reclassified 1992 to include independent power production, which is no longer significant enough for Consumers to report separately. Also, other was reduced in 1993 by the sale of the remaining $309 million of MCV Bonds. (d) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement 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. 17: Related-Party Transactions Consumers has an investment of $250 million in 10 shares of Enterprises' preferred stock. Beginning in 1997, a five-year redemption program of $50 million per year will commence. In addition, Consumers has an investment in approximately 3 million shares of CMS Energy common stock with a fair value totaling $67 million (see Note 8) at December 31, 1994. As a result of these two investments, Consumers received dividends on affiliates' common and preferred stock totaling $17 million in 1994 and $16 million in 1993 and 1992. MGL, a wholly owned subsidiary of Consumers, was dissolved in December 1994. As a result, MGL's $10 million promissory note to its wholly owned subsidiary, CMS Midland, was replaced with a short-term note from Consumers, in satisfaction of a covenant related to CMS Midland's general partnership interest in the MCV Partnership. Consumers purchases a portion of its gas from an affiliate, CMS NOMECO. The amounts of purchases for the years ended 1994, 1993 and 1992 were $1 million, $3 million and $3 million, respectively. In 1994, 1993 and 1992, Consumers purchased $48 million, $52 million and $36 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Consumers and its subsidiaries sold, stored and transported natural gas and provided other services to the MCV Partnership totaling approximately $13 million for 1994 and $14 million for 1993 and 1992. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 19. Other related-party transactions are immaterial. 18: 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. In Millions December 31 1994 1993 - ----------- ------- ------- Postretirement benefits (Note 10) $ 503 $ 510 Income taxes (Note 5) 189 189 Abandoned Midland project (Note 4) 147 162 Trunkline settlement (Note 4) 85 117 DSM - deferred costs (Note 4) 71 71 Manufactured gas plant sites (Note 12) 47 - Power purchase contract (Note 3) 30 - Uranium enrichment facility (Note 4) 25 33 Other 31 39 ------- ------- Total regulatory assets $ 1,128 $ 1,121 ======= ======= Income taxes (Note 5) $ (205) $ (195) DSM - deferred revenue (21) (17) ------- ------- Total regulatory liabilities $ (226) $ (212) ======= ======= At December 31, 1994, $864 million of Consumers' regulatory assets are being recovered through rates being charged to customers over periods of up to 18 years. Consumers anticipates MPSC approval for recovery of the remaining amounts. Consumers is experiencing increased competition, particularly in its electric utility business. Municipalization and self-generation, among other forms of competition, could restrict Consumers' ability to establish rates sufficient to recover specific costs associated with its regulatory assets. 19: Summarized Financial Information of Significant Related Energy Supplier Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1994 obligation to purchase electric capacity from the MCV Partnership was approximately 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows: Statements of Income In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- ----- Operating revenue (a) $ 579 $ 548 $ 488 Operating expenses 378 362 315 ----- ----- ----- Operating income 201 186 173 Other expense, net 183 189 190 ----- ----- ----- Net income (loss) $ 18 $ (3) $ (17) ===== ===== ===== Balance Sheets In Millions December 31 1994 1993 - ----------- ------ ------ Assets Current assets (a) $ 206 $ 181 Property, plant and equipment, net 2,012 2,073 Other assets 154 146 ------ ------ $2,372 $2,400 ====== ====== Liabilities and Partners' Equity Current liabilities $ 218 $ 198 Long-term debt and other non-current liabilities (b) 2,081 2,147 Partners' equity (c) 73 55 ------ ------ $2,372 $2,400 ====== ====== (a) Revenue from Consumers totaled $534 million, $505 million and $444 million for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993 and 1992, $48 million, $44 million and $38 million, respectively, were receivable from Consumers. (b) FMLP is a 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 (see Note 3). At December 31, 1994 and 1993, lease obligations of $1.7 billion were owed to the owner trust of which FMLP is the sole beneficiary. CMS Holdings' share of the interest and principal portion for the 1994 lease payments was $62 million and $20 million, respectively, and for the 1993 lease payments was $63 million and $16 million, respectively. The lease payments service $1.2 billion in non-recourse debt outstanding as of December 31, 1994 and 1993 of the owner-trust whose beneficiary is FMLP. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1994 and 1993, the owner-trust whose beneficiary is FMLP made debt payments of $175 million and $172 million, respectively. The 1993 amounts included $10 million of principal and $25 million of interest on the MCV Bonds held by Consumers through December 1993. (c) 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. 133 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To Consumers Power Company: We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt and preferred stock of CONSUMERS POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Consumers Power Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 8 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for certain investments in debt and equity securities. ARTHUR ANDERSEN LLP Detroit, Michigan, January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). 134 Quarterly Financial Information Consumers Power Company
In Millions 1994 (Unaudited) 1993 (Unaudited) Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Operating revenue $1,074 $734 $705 $843 $988 $681 $702 $872 Pretax operating income $172 $105 $117 $89 $156 $74 $101 $104 Net income $85 $46 $52 $43 $78 $26 $45 $49 Preferred stock dividends $3 $7 $7 $7 $3 $3 $3 $2 Net income after preferred stock dividends $82 $39 $45 $36 $75 $23 $42 $47
135 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CMS Energy None for CMS Energy. Consumers None for Consumers. PART III (ITEMS 10., 11., 12. and 13.) CMS Energy CMS Energy's definitive Proxy Statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. BUSINESS for information pursuant to Item 10. Consumers Consumers' definitive Proxy Statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. BUSINESS for information pursuant to Item 10. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are listed in Item 8 in the Index to Financial Statements, and are incorporated by reference herein. (a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are listed after the Exhibits in the Index to Financial Statement Schedules, and are incorporated by reference herein. (a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below and are incorporated by reference herein. (b) Reports on Form 8-K for CMS Energy and Consumers. CMS Energy Current Reports dated October 5, 1994, November 21, 1994, January 10, 1995 and February 2, 1995 covering matters reported pursuant to Item 5. Other Events. Consumers Current reports dated October 5, 1994, November 21, 1994, January 10, 1995 and February 2, 1995 covering matters reported pursuant to Item 5. Other Events. (c) Exhibits, including those incorporated by reference (see also Exhibit volume). 136 The following exhibits are applicable to CMS Energy and Consumers except where otherwise indicated "CMS ONLY": CMS Energy and Consumers Exhibit Numbers - --------------- (1)-(2) - Not applicable. (3)(a) (CMS ONLY) - Articles of Incorporation of CMS Energy Corporation, as Amended. (Designated in CMS Energy Corporation's Form S-8 dated June 30, 1989, File No. 1-9513, as Exhibit (4).) (3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation. (3)(c) - Restated Articles of Incorporation of Consumers Power Company. (3)(d) - Copy of By-Laws of Consumers Power Company. (4)(a) - Composite Working Copy of Indenture dated as of September 1, 1945, between Consumers Power Company and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. (Designated in Consumers Power Company's Registration No. 2-65973 as Exhibit (b)(1)-4.) Indentures Supplemental thereto: Consumers Power Company Sup Ind/Dated as of File Reference Exhibit ------------------- ---------------- ------- 65th 02/15/88 Form 8-K dated Feb 18, 1988 File No 1-5611 (4) 66th 04/15/88 Form 10-Q for quarter ended March 31, 1988 File No 1-5611 (4)(d) 67th 11/15/89 Reg No 33-31866 (4)(d) 68th 06/15/93 Reg No 33-41126 (4)(c) 69th 09/15/93 Form 8-K dated September 21, 1993 File No 1-5611 (4) (4)(b) (CMS ONLY) - Indenture between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form S-3 Registration Statement filed May 1, 1992, File No. 33-47629, as Exhibit (4)(a).) First Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).) Second Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).) (4)(c) (CMS ONLY) - Indenture between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee, dated as of January 15, 1994. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4a).) First Supplemental Indenture dated as of January 20, 1994 between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4b).) (5)-(9) - Not applicable. (10)(a) (CMS ONLY) - Credit Agreement dated as of July 29, 1994, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent and the Operational Agent, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1994, File No. 1-9513, as Exhibit (4).) (10)(b) - Employment Agreement dated as of August 1, 1990 among Consumers Power Company, CMS Energy Corporation and William T. McCormick, Jr. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(c).) (10)(c) - Employment contract effective as of March 1, 1987 among CMS Energy Corporation, Consumers Power Company and S. Kinnie Smith, Jr. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1987, File No. 1-5611, as Exhibit (10)(g).) (10)(d) - Employment Agreement effective as of June 15, 1988 among Consumers Power Company, CMS Energy Corporation and Victor J. Fryling. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1988, File No. 1-5611, as Exhibit (10)(i).) (10)(e) - Employment Agreement dated May 26, 1989 between Consumers Power Company and Michael G. Morris. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(f).) (10)(f) - Employment Agreement dated May 26, 1989 between Consumers Power Company and David A. Mikelonis. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1- 5611, as Exhibit 10(h).) (10)(g) - Employment Agreement dated May 26, 1989 among Consumers Power Company, CMS Energy Corporation and John W. Clark. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(f).) (10)(h) - Employment Agreement dated March 25, 1992 between Consumers Power Company, CMS Energy Corporation and Alan M. Wright. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(j).) (10)(i) - Employment Agreement dated March 25, 1992 between Consumers Power Company and Paul A. Elbert. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(k).) (10)(j) - Consumers Power Company's Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(g).) (10)(k) - CMS Energy Corporation's Performance Incentive Stock Plan effective as of December 1, 1989. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(h).) (10)(l) - CMS Deferred Salary Savings Plan effective January 1, 1994. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1993, File No. 1-9513, as Exhibit (10)(m).) (10)(m) - Consumers Power Company's Executive Incentive Compensation Plan effective February 1993, as amended March 1994. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(n).) (10)(n) - Consumers Power Company's Supplemental Executive Retirement Plan effective November 1, 1990. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(o).) (10)(o) - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.1.) Indenture Supplemental thereto: Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.2.) (10)(p) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, Midland Cogeneration Venture Limited Partnership and United States Trust Company of New York, Trustee. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513, as Exhibit (28)(b).) Indenture Supplemental thereto: Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.4.) (10)(q) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland Holdings Corporation as Indemnitor and CMS Energy Corporation as Guarantor. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(v).) (10)(r) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to The Connecticut National Bank and Others. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(y) and Form 10-Q for the quarter ended September 30, 1991, File No. 1-9513, as Exhibit (19)(d).)** (10)(s) - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy Corporation to Midland Cogeneration Venture Limited Partnership. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(z).)** (10)(t) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(aa).)** (10)(u) - Amended and Restated Participation Agreement dated as of June 1, 1990 among Midland Cogeneration Venture Limited Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.13.) Amendment No. 1 dated as of July 1, 1991. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(w).) (10)(v) - Power Purchase Agreement dated as of July 17, 1986 between Midland Cogeneration Venture Limited Partnership and Consumers Power Company. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.4.) Amendments thereto: Amendment No. 1 dated September 10, 1987. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.5.) Amendment No. 2 dated March 18, 1988. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.6.) Amendment No. 3 dated August 28, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.7.) Amendment No. 4A dated May 25, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.8.) (10)(w) - Request for Approval of Settlement Proposal to Resolve MCV Cost Recovery Issues and Court Remand, filed with the Michigan Public Service Commission on July 7, 1992, MPSC Case No. U-10127. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1991 as amended by Form 8 dated July 15, 1992 as Exhibit (28).) (10)(x) - Settlement Proposal Filed on July 7, 1992 as Revised on September 8, 1992 by Filing with the Michigan Public Service Commission. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 8-K dated September 8, 1992 as Exhibit (28).) (10)(y) - Michigan Public Service Commission Order Dated March 31, 1993, Approving with Modifications the Settlement Proposal Filed on July 7, 1992, as Revised on September 8, 1992. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1992 as Exhibit (10)(cc).) (10)(z) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy Corporation, Midland Group, Ltd., Consumers Power Company, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(y).) (10)(aa) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy Corporation, Consumers Power Company and The Dow Chemical Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(z).) (10)(bb) - Parent Guaranty dated as of June 14, 1990 from CMS Energy Corporation to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(aa).)** (11)-(12) - Not applicable. (13) - Not Applicable. (14)-(20) - Not applicable. (21)(a) (CMS ONLY) - Subsidiaries of CMS Energy Corporation. (21)(b) - Subsidiaries of Consumers Power Company. (22) - Not applicable. (23) - Consents of experts and counsel. (24)(a) - Power of Attorney for CMS Energy Corporation. (24)(b) - Power of Attorney for Consumers Power Company. (25)-(26) - Not applicable. (27)(a) - Financial Data Schedule UT for CMS Energy Corporation. (27)(b) - Financial Data Schedule UT for Consumers Power Company. (28) - Not applicable * Five copies of this exhibit have been signed by, or on behalf of, each of five Owner Participants. With regard to each of the agreements, each copy is substantially identical in all material respects except as to the parties thereto. Therefore, pursuant to Instruction 2, Item 601(a) of Regulation S-K, CMS Energy Corporation and Consumers Power Company are filing a copy of only one such document. ** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers. Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith. 143 Index to Financial Statement Schedules Page Schedule II Valuation and Qualifying Accounts and Reserves 1994, 1993 and 1992: CMS Energy Corporation . . . . . . . . . . . . . 144 Consumers Power Company. . . . . . . . . . . . . 145 Report of Independent Public Accountants CMS Energy Corporation . . . . . . . . . . . . . 146 Consumers Power Company. . . . . . . . . . . . . 147 Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. 144 CMS ENERGY CORPORATION Schedule II - Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1994, 1993 and 1992 (Millions of Dollars)
Balance at Charged Charged to Balance Beginning to other at End Description of Period Expense Accounts Deductions of Period Accumulated provision for uncollectible accounts (substantially all Consumers Power Company): 1994 $4 $12 - $11(a) $5 1993 $5 $ 9 - $10(a) $4 1992 $5 $11 - $11(a) $5 Reserve for rights to additional MCV Bonds: 1994 - - - - - 1993 - - - - - 1992 $366 - - $366 - (a) Accounts receivable written off including net uncollectible amounts of $10 in 1994, $8 in 1993, and $10 in 1992 charged directly to operating expense and credited to accounts receivable.
145 CONSUMERS POWER COMPANY Schedule II - Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1994, 1993 and 1992 (Millions of Dollars)
Balance at Charged Charged to Balance Beginning to other at End Description of Period Expense Accounts Deductions of Period Accumulated provision for uncollectible accounts: 1994 $4 $11 - $11(a) $4 1993 $5 $ 9 - $10(a) $4 1992 $5 $11 - $11(a) $5 Reserve for rights to additional MCV Bonds: 1994 - - - - - 1993 - - - - - 1992 $366 - - $366 - (a) Accounts receivable written off including net uncollectible amounts of $10 in 1994, $8 in 1993, and $10 in 1992 charged directly to operating expense and credited to accounts receivable.
146 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CMS Energy Corporation's 1994 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Detroit, Michigan, January 31, 1995. 147 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To Consumers Power Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consumers Power Company's 1994 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Detroit, Michigan, January 31, 1995. 148 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1995. CMS ENERGY CORPORATION By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 15th day of March 1995. Signature Title - ----------------------------------- ---------------------------------- (i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director - ----------------------------------- William T. McCormick, Jr. (ii) Principal financial officer: Senior Vice President, Chief Financial Officer A M Wright and Treasurer - ----------------------------------- Alan M. Wright (iii) Controller or principal accounting officer: Vice President, Controller P. D. Hopper and Chief Accounting Officer - ----------------------------------- Preston D. Hopper (iv) A majority of the Directors including those named above: James J. Duderstadt* Director - ----------------------------------- James J. Duderstadt 149 Signature Title - ----------------------------------- ---------------------------------- K R Flaherty* Director - ----------------------------------- Kathleen R. Flaherty Victor J. Fryling* Director - ----------------------------------- Victor J. Fryling Earl D. Holton* Director - ----------------------------------- Earl D. Holton Lois A. Lund* Director - ----------------------------------- Lois A. Lund Frank H. Merlotti* Director - ----------------------------------- Frank H. Merlotti W. U. Parfet* Director - ----------------------------------- William U. Parfet Percy A. Pierre* Director - ----------------------------------- Percy A. Pierre S. Kinnie Smith, Jr.* Director - ----------------------------------- S. Kinnie Smith, Jr. Robert D. Tuttle* Director - ----------------------------------- Robert D. Tuttle Kenneth Whipple* Director - ----------------------------------- Kenneth Whipple John B. Yasinsky* Director - ----------------------------------- John B. Yasinsky * By Thomas A. McNish ---------------------------------- Thomas A. McNish, Attorney-in-Fact 150 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Power Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1995. CONSUMERS POWER COMPANY By William T. McCormick, Jr. ----------------------------- William T. McCormick, Jr. Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Power Company and in the capacities and on the 15th day of March 1995. Signature Title - ----------------------------------- ---------------------------------- (i) Principal executive officer: President and Michael G. Morris Chief Executive Officer - ----------------------------------- Michael G. Morris (ii) Principal financial officer: Senior Vice President and A M Wright Chief Financial Officer - ----------------------------------- Alan M. Wright (iii) Controller or principal accounting officer: Vice President and Dennis DaPra Controller - ----------------------------------- Dennis DaPra (iv) A majority of the Directors including those named above: James J. Duderstadt* Director - ----------------------------------- James J. Duderstadt 151 Signature Title - ----------------------------------- ---------------------------------- K R Flaherty* Director - ----------------------------------- Kathleen R. Flaherty Victor J. Fryling* Director - ----------------------------------- Victor J. Fryling Earl D. Holton* Director - ----------------------------------- Earl D. Holton Lois A. Lund* Director - ----------------------------------- Lois A. Lund William T. McCormick, Jr.* Director - ----------------------------------- William T. McCormick, Jr. Frank H. Merlotti* Director - ----------------------------------- Frank H. Merlotti W. U. Parfet* Director - ----------------------------------- William U. Parfet Percy A. Pierre* Director - ----------------------------------- Percy A. Pierre S. Kinnie Smith, Jr.* Director - ----------------------------------- S. Kinnie Smith, Jr. Robert D. Tuttle* Director - ----------------------------------- Robert D. Tuttle Kenneth Whipple* Director - ----------------------------------- Kenneth Whipple John B. Yasinsky* Director - ----------------------------------- John B. Yasinsky *By Thomas A. McNish ---------------------------------- Thomas A. McNish, Attorney-in-Fact EX-99 2 EXHIBIT COVER AND INDEX - -------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 CMS ENERGY CORPORATION AND CONSUMERS POWER COMPANY FORM 10-K EXHIBITS FOR FISCAL YEAR ENDED DECEMBER 31, 1994 - -------------------------------------------------------------------------- The following exhibits are applicable to CMS Energy and Consumers except where otherwise indicated "CMS ONLY": CMS Energy and Consumers Exhibit Numbers - --------------- (1)-(2) - Not applicable. (3)(a) (CMS ONLY) - Articles of Incorporation of CMS Energy Corporation, as Amended. (Designated in CMS Energy Corporation's Form S-8 dated June 30, 1989, File No. 1-9513, as Exhibit (4).) (3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation. (3)(c) - Restated Articles of Incorporation of Consumers Power Company. (3)(d) - Copy of By-Laws of Consumers Power Company. (4)(a) - Composite Working Copy of Indenture dated as of September 1, 1945, between Consumers Power Company and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. (Designated in Consumers Power Company's Registration No. 2-65973 as Exhibit (b)(1)-4.) Indentures Supplemental thereto: Consumers Power Company Sup Ind/Dated as of File Reference Exhibit ------------------- ---------------- ------- 65th 02/15/88 Form 8-K dated Feb 18, 1988 File No 1-5611 (4) 66th 04/15/88 Form 10-Q for quarter ended March 31, 1988 File No 1-5611 (4)(d) 67th 11/15/89 Reg No 33-31866 (4)(d) 68th 06/15/93 Reg No 33-41126 (4)(c) 69th 09/15/93 Form 8-K dated September 21, 1993 File No 1-5611 (4) (4)(b) (CMS ONLY) - Indenture between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form S-3 Registration Statement filed May 1, 1992, File No. 33-47629, as Exhibit (4)(a).) First Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).) Second Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).) (4)(c) (CMS ONLY) - Indenture between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee, dated as of January 15, 1994. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4a).) First Supplemental Indenture dated as of January 20, 1994 between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4b).) (5)-(9) - Not applicable. (10)(a) (CMS ONLY) - Credit Agreement dated as of July 29, 1994, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent and the Operational Agent, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1994, File No. 1-9513, as Exhibit (4).) (10)(b) - Employment Agreement dated as of August 1, 1990 among Consumers Power Company, CMS Energy Corporation and William T. McCormick, Jr. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(c).) (10)(c) - Employment contract effective as of March 1, 1987 among CMS Energy Corporation, Consumers Power Company and S. Kinnie Smith, Jr. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1987, File No. 1-5611, as Exhibit (10)(g).) (10)(d) - Employment Agreement effective as of June 15, 1988 among Consumers Power Company, CMS Energy Corporation and Victor J. Fryling. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1988, File No. 1-5611, as Exhibit (10)(i).) (10)(e) - Employment Agreement dated May 26, 1989 between Consumers Power Company and Michael G. Morris. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(f).) (10)(f) - Employment Agreement dated May 26, 1989 between Consumers Power Company and David A. Mikelonis. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1- 5611, as Exhibit 10(h).) (10)(g) - Employment Agreement dated May 26, 1989 among Consumers Power Company, CMS Energy Corporation and John W. Clark. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(f).) (10)(h) - Employment Agreement dated March 25, 1992 between Consumers Power Company, CMS Energy Corporation and Alan M. Wright. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(j).) (10)(i) - Employment Agreement dated March 25, 1992 between Consumers Power Company and Paul A. Elbert. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(k).) (10)(j) - Consumers Power Company's Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(g).) (10)(k) - CMS Energy Corporation's Performance Incentive Stock Plan effective as of December 1, 1989. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(h).) (10)(l) - CMS Deferred Salary Savings Plan effective January 1, 1994. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1993, File No. 1-9513, as Exhibit (10)(m).) (10)(m) - Consumers Power Company's Executive Incentive Compensation Plan effective February 1993, as amended March 1994. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(n).) (10)(n) - Consumers Power Company's Supplemental Executive Retirement Plan effective November 1, 1990. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(o).) (10)(o) - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.1.) Indenture Supplemental thereto: Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.2.) (10)(p) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, Midland Cogeneration Venture Limited Partnership and United States Trust Company of New York, Trustee. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513, as Exhibit (28)(b).) Indenture Supplemental thereto: Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.4.) (10)(q) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland Holdings Corporation as Indemnitor and CMS Energy Corporation as Guarantor. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(v).) (10)(r) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to The Connecticut National Bank and Others. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(y) and Form 10-Q for the quarter ended September 30, 1991, File No. 1-9513, as Exhibit (19)(d).)** (10)(s) - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy Corporation to Midland Cogeneration Venture Limited Partnership. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(z).)** (10)(t) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(aa).)** (10)(u) - Amended and Restated Participation Agreement dated as of June 1, 1990 among Midland Cogeneration Venture Limited Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.13.) Amendment No. 1 dated as of July 1, 1991. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(w).) (10)(v) - Power Purchase Agreement dated as of July 17, 1986 between Midland Cogeneration Venture Limited Partnership and Consumers Power Company. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.4.) Amendments thereto: Amendment No. 1 dated September 10, 1987. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.5.) Amendment No. 2 dated March 18, 1988. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.6.) Amendment No. 3 dated August 28, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.7.) Amendment No. 4A dated May 25, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.8.) (10)(w) - Request for Approval of Settlement Proposal to Resolve MCV Cost Recovery Issues and Court Remand, filed with the Michigan Public Service Commission on July 7, 1992, MPSC Case No. U-10127. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1991 as amended by Form 8 dated July 15, 1992 as Exhibit (28).) (10)(x) - Settlement Proposal Filed on July 7, 1992 as Revised on September 8, 1992 by Filing with the Michigan Public Service Commission. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 8-K dated September 8, 1992 as Exhibit (28).) (10)(y) - Michigan Public Service Commission Order Dated March 31, 1993, Approving with Modifications the Settlement Proposal Filed on July 7, 1992, as Revised on September 8, 1992. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1992 as Exhibit (10)(cc).) (10)(z) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy Corporation, Midland Group, Ltd., Consumers Power Company, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(y).) (10)(aa) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy Corporation, Consumers Power Company and The Dow Chemical Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(z).) (10)(bb) - Parent Guaranty dated as of June 14, 1990 from CMS Energy Corporation to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(aa).)** (11)-(12) - Not applicable. (13) - Not Applicable. (14)-(20) - Not applicable. (21)(a) (CMS ONLY) - Subsidiaries of CMS Energy Corporation. (21)(b) - Subsidiaries of Consumers Power Company. (22) - Not applicable. (23) - Consents of experts and counsel. (24)(a) - Power of Attorney for CMS Energy Corporation. (24)(b) - Power of Attorney for Consumers Power Company. (25)-(26) - Not applicable. (27)(a) - Financial Data Schedule UT for CMS Energy Corporation. (27)(b) - Financial Data Schedule UT for Consumers Power Company. (28) - Not applicable *Five copies of this exhibit have been signed by, or on behalf of, each of five Owner Participants. With regard to each of the agreements, each copy is substantially identical in all material respects except as to the parties thereto. Therefore, pursuant to Instruction 2, Item 601(a) of Regulation S-K, CMS Energy Corporation and Consumers Power Company are filing a copy of only one such document. ** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers. Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith. EX-3 3 CMS ENERGY BY-LAWS EXHIBIT (3)(b) EXHIBIT (3)(b) CMS ENERGY CORPORATION BYLAWS ARTICLE I: LOCATION OF OFFICES Section 1 - Registered Office: The registered office of CMS Energy Corporation, (the "Corporation") shall be at such place in the City of Dearborn, County of Wayne, Michigan, or elsewhere in the State of Michigan, as the Board of Directors may from time to time designate. Section 2 - Other Offices: The Corporation may have and maintain other offices within or without the State of Michigan. ARTICLE II: CORPORATE SEAL Section 1 - Corporate Seal: The Corporation shall have a corporate seal bearing the name of the Corporation. The form of the corporate seal may be altered by the Board of Directors. ARTICLE III: FISCAL YEAR Section 1 - Fiscal Year: The fiscal year of the Corporation shall begin with the first day of January and end with the thirty-first day of December of each year. ARTICLE IV: SHAREHOLDERS' MEETINGS Section 1 - Annual Meetings: An annual meeting of the shareholders for election of Directors and for such other business as may come before the meeting shall be held at the registered office of the Corporation or at such other place within or without the State of Michigan, at 10:00 AM, Eastern Daylight Saving Time, or at such other time on the fourth Friday in April of each year or upon such other day as the Board of Directors may designate, but in no event shall such date be more than ninety (90) days after the fourth Friday in April. Section 2 - Special Meetings: Special meetings of the shareholders may be called by the Board of Directors or by the Chairman of the Board. Such meetings shall be held at the registered office of the Corporation or at such other place within or without the State of Michigan as the Board of Directors may designate. Section 3 - Notices: Except as otherwise provided by law, written notice of any meeting of the shareholders shall be given, either personally or by mail to each shareholder of record entitled to vote at such meeting, not less than ten (10) days nor more than sixty (60) days prior to the date of the meeting, at their last known address as the same appears on the stock records of the Corporation. Written notice shall be considered given when deposited, with postage thereon prepaid, in a post office or official depository under the control of the United States postal service. Such notice shall specify the time and place of holding the meeting, the purpose or purposes for which such meeting is called, and the record date fixed for the determination of shareholders entitled to notice of and to vote at such meeting. The Board of Directors shall fix a record date for determining shareholders entitled to notice of and to vote at such meeting. The Board of Directors shall fix a record date for determining shareholders entitled to notice of and to vote at a meeting of shareholders, which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of the meeting. Such record date shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date for purposes of the adjourned meeting. No notice of an adjourned meeting shall be necessary if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting only such business may be transacted as might have been transacted at the original meeting. If, after an adjournment, the Board of Directors shall fix a new record date for the adjourned meeting, a notice of the adjourned meeting shall be mailed, in conformity with the provisions of the first paragraph of this Section 3, to each shareholder of record on the new record date entitled to vote at the adjourned meeting. Section 4 - Quorum: Except as otherwise provided by law or by the Articles of Incorporation of the Corporation, the holders of the shares of stock of the Corporation entitled to cast a majority of the votes at a meeting shall constitute a quorum for the transaction of business at the meeting, but a lesser number may convene any meeting and, by a majority vote of the shares present at the meeting, may adjourn the same from time to time until a quorum shall be present. Section 5 - Voting: Shareholders may vote at all meetings in person or by proxy in writing, but all proxies shall be filed with the Secretary of the meeting before being voted upon. Subject to the provisions of the Articles of Incorporation of the Corporation at all meetings of the shareholders of the Corporation each holder of Common Stock shall be entitled on all questions to one vote for each share of stock held by such holder, and a majority of the votes cast by the holders of shares entitled to vote thereon shall be sufficient for the adoption of any question presented, unless otherwise provided by law or by the Articles of Incorporation of the Corporation. Section 6 - Inspectors: In advance of any meeting of shareholders the Board of Directors shall appoint one or more inspectors to act at such meeting or any adjournment thereof. The inspectors shall have such powers and duties as are provided by law. ARTICLE V: DIRECTORS Section 1 - Number: The Board of Directors of the Corporation shall consist of not less than seven (7) nor more than seventeen (17) members, as fixed from time to time by resolution of the Board of Directors. Section 2 - Election: The Directors shall be elected annually at the annual meeting of the shareholders or at any adjournment thereof. Section 3 - Term of Office: Subject to the provisions of the Articles of Incorporation of the Corporation and unless otherwise provided by law, the Directors shall hold office from the date of their election until the next succeeding annual meeting and until their successors are elected and shall qualify. Section 4 - Vacancies: Any vacancy or vacancies in the Board of Directors arising from any cause may be filled by the affirmative vote of a majority of the Directors then in office although less than a quorum. An increase in the number of members shall be construed as creating a vacancy. ARTICLE VI: DIRECTORS' MEETINGS Section 1 - Organization Meeting: As soon as possible after their election, the Board of Directors shall meet and organize and may also transact other business. Section 2 - Other Meetings: Meetings of the Board of Directors may be held at any time upon call of the Secretary or an Assistant Secretary made at the direction of the Chairman of the Board, the President, a Vice Chairman, if any, or a Vice President. Section 3 - Place of Meeting: All meetings of Directors shall be held at such place within or without the State of Michigan as may be designated in the call therefore. Section 4 - Notice: A reasonable notice of all meetings, in writing or otherwise, shall be given to each Director or sent to the Director's residence or place of business; provided, however, that no notice shall be required for an organization meeting if held on the same day as the shareholders' meeting at which Directors were elected. No notice of the holding of an adjourned meeting shall be necessary. Notice of all meetings shall specify the time and place of holding the meeting and unless otherwise stated any and all business may be transacted at any such meeting. Notice of the time, place and purpose of any meeting may be waived in writing either before or after the holding thereof. Section 5 - Quorum: At all meetings of the Board of Directors a majority of the Board then in office shall constitute a quorum but a majority of the Directors present may convene and adjourn any such meeting from time to time until a quorum shall be present; provided, that if the Board shall consist of ten (10) and not more than fifteen (15), then five (5) members shall constitute a quorum; and if the Board shall consist of more than fifteen (15), then seven (7) members shall constitute a quorum. Section 6 - Voting: All questions coming before any meeting of the Board of Directors for action shall be decided by a majority vote of the Directors present at such meeting, unless otherwise provided by law, the Articles of Incorporation of the Corporation or by these Bylaws. Section 7 - Participation by Communications Equipment: A Director or a member of a Committee designated by the Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 8 - Action Without Meeting: Any action required or permitted to be taken pursuant to authorization voted at a meeting of the Board of Directors or a Committee thereof, may be taken without a meeting if, before or after the action, all members of the Board or of the Committee consent thereto in writing. The written consents shall be filed with the minutes of the proceedings of the Board or Committee, and the consents shall have the same effect as a vote of the Board or Committee for all purposes. ARTICLE VII: EXECUTIVE AND OTHER COMMITTEES Section 1 - Number and Qualifications: By resolution passed by a majority of the whole Board, the Board of Directors may from time to time designate one or more of their number to constitute an Executive or any other Committee of the Board, as the Board of Directors may from time to time determine to be desirable, and may fix the number of and designate the Chairman of each such Committee. Except as otherwise provided by law, the powers of each such Committee shall be as defined in the resolution or resolutions of the Board of Directors relating to the authorization of such Committee, and may include, if such resolution or resolutions so provide, the power and authority to declare a dividend or to authorize issuance of shares of stock of the Corporation. Section 2 - Appointment: The appointment of members of each such Committee, or other action respecting any Committee, may take place at any meeting of the Directors. Section 3 - Term of Office: The members of each Committee shall hold office at the pleasure of the Board of Directors. Section 4 - Vacancies: Any vacancy or vacancies in any such Committee arising from any cause shall be filled by resolution passed by a majority of the whole Board of Directors. By like vote the Board may designate one or more Directors to serve as alternate members of a Committee, who may replace an absent or disqualified member at a meeting of a Committee; provided, however, in the absence or disqualification of a member of a Committee, the members of the Committee present at a meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act in the place of the absent or disqualified member. Section 5 - Minutes: Except as provided in Section 2 of Article X hereof or as otherwise determined by the Board of Directors, each such Committee shall make a written report or recommendation following its meetings or keep minutes of all its meetings. Section 6 - Quorum: At all meetings of any duly authorized Committee of the Board of Directors, a majority of the members of such Committee shall constitute a quorum but a majority of the members present may convene and adjourn any such meeting from time to time until a quorum shall be present; provided, that with respect to any Committee of the Board other than the Executive Committee, if the membership of such Committee is four (4) or less, then two (2) members of such Committee shall constitute a quorum and one member may convene and adjourn any such meeting from time to time until a quorum shall be present. ARTICLE VIII: OFFICERS Section 1 - Election: The officers shall be chosen by the Board of Directors. The Corporation shall have a Chairman of the Board, a President, a Secretary and a Treasurer, and such other officers as the Board of Directors may from time to time determine, who shall have respectively such duties and authority as may be provided by these Bylaws or as may be provided by resolution of the Board of Directors not inconsistent herewith. Any two (2) or more of such offices may be held by the same persons but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, by the Articles of Incorporation of the Corporation or by these Bylaws to be executed, acknowledged or verified by two (2) or more officers. Section 2 - Qualifications: The Chairman of the Board, the President and Vice Chairmen, if any, shall be chosen from among the Board of Directors, but the other officers need not be members of the Board. Section 3 - Vacancies: Any vacancy or vacancies among the officers arising from any cause shall be filled by the Board of Directors. In case of the absence of any officer of the Corporation or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may delegate, for the time being, the powers or duties, or any of them, of any officer to any other officer or to any Director. Section 4 - Term of Office: Each officer of the Corporation shall hold office until a successor is chosen and qualified, or until the officer's resignation or removal. Any officer appointed by the Board of Directors may be removed at any time by the Board of Directors with or without cause. Section 5 - Compensation: The compensation of the officers shall be fixed by the Board of Directors. ARTICLE IX: AGENTS Section 1 - Resident Agent: The Corporation shall have and continuously maintain a resident agent, which may be either an individual resident in the State of Michigan whose business office is identical with the Corporation's registered office or a Michigan corporation or a foreign corporation authorized to transact business in Michigan and having a business office identical with the Corporation's registered office. The Board of Directors shall appoint the resident agent. Section 2 - Other Agents: The Board of Directors may appoint such other agents as may in their judgment be necessary for the proper conduct of the business of the Corporation. ARTICLE X: POWERS AND DUTIES Section 1 - Directors: The business and affairs of the Corporation shall be managed by the Board of Directors which shall have and exercise all of the powers and authority of the Corporation except as otherwise provided by law, by the Articles of Incorporation of the Corporation or by these Bylaws. Section 2 - Executive Committee: In the interim between meetings of the Board of Directors the Executive Committee shall have and exercise all the powers and authority of the Board of Directors except as otherwise provided by law. The Executive Committee shall meet from time to time on the call of the Chairman of the Board or the Chairman of the Committee. The Secretary shall keep minutes in sufficient detail to advise fully the Board of Directors of the actions taken by the Committee and shall submit copies of such minutes to the Board of Directors for its approval or other action at its next meeting. Section 3 - Chairman of the Board: The Chairman of the Board shall be the chief executive officer of the Corporation and, subject to the supervision of the Board of Directors and of the Executive Committee, shall have general charge of the business and affairs of the Corporation; shall preside at all meetings of Directors and shareholders; and shall perform and do all acts and things incident to the position of Chairman of the Board, and such other duties as may be assigned from time to time by the Board of Directors or the Executive Committee. Unless otherwise provided by the Board or the Executive Committee, the Chairman of the Board shall have full power and authority on behalf of the Corporation to execute any shareholders' consents and to attend and act and to vote in person or by proxy at any meetings of shareholders of any corporation in which the Corporation may own stock and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Corporation might have possessed and exercised if present. If the Chairman of the Board shall not exercise such powers, or in the absence or inability to act of the Chairman, the President may exercise such powers. In the absence or inability to act of the President, a Vice Chairman, if any, may exercise such powers. In the absence or inability to act of a Vice Chairman, any Vice President may exercise such powers. The Board of Directors or Executive Committee by resolution from time to time may confer like powers upon any other person or persons. Section 4 - President: The President shall be the chief operating officer of the Corporation; shall perform and do all acts and things incident to such position and such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee or the Chairman of the Board; in the absence of the Chairman of the Board and a Vice Chairman, shall preside at meetings of Directors; and in the absence of the Chairman of the Board shall preside at meetings of shareholders. Section 5 - Vice Chairman: A Vice Chairman, if any, shall perform such of the duties of the Chairman of the Board or the President on behalf of the Corporation as may be respectively assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President; in the absence of the Chairman of the Board shall preside at meetings of Directors; and in the absence of the Chairman of the Board and the President shall preside at meetings of shareholders. Section 6 - Vice Presidents: Vice Presidents, if any, shall perform such of the duties of the Chairman of the Board or the President or the Vice Chairman, if any, on behalf of the Corporation as may be respectively assigned to them from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President or a Vice Chairman. The Board of Directors or Executive Committee may designate one or more of the Vice Presidents as Executive Vice President or Senior Vice President. Section 7 - Controller: Subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and the Vice President having general charge of accounting, the Controller, if any, shall have charge of the supervision of the account-ing system of the Corporation, including the preparation and filing of all tax returns and financial reports required by law to be made to any and all public authorities and officials; and shall perform such other duties as may be assigned, from time to time, by the Board of Directors, the Executive Committee, the Chairman of the Board, the President, a Vice Chairman, if any, or Vice President having general charge of accounting. Section 8 - Treasurer: It shall be the duty of the Treasurer to have the care and custody of all the funds and securities, including the invest-ment thereof, of the Corporation which may come into Treasurer's hands, and to endorse checks, drafts and other instruments for the payment of money for deposit or collection when necessary or proper and to deposit the same to the credit of the Corporation in such bank or banks or depository as may be designated, may endorse all commercial documents requiring endorsements for or on behalf of the Corporation, may sign all receipts and vouchers for the payments made to the Corporation, shall render an account of transactions to the Board of Directors or the Executive Committee as often as the Board or the Committee shall require, and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and a Vice Chairman, if any. Section 9 - Secretary: The Secretary shall act as custodian of and record the minutes of all meetings of the Board of Directors, of the Executive Committee, of the shareholders and of any Committees of the Board of Directors which keep formal minutes; shall attend to the giving and serving of all notices of the Corporation; shall prepare or cause to be prepared the list of shareholders required to be produced at any meeting; shall attest the seal of the Corporation upon all contracts and instruments executed under such seal, shall affix or cause to be affixed the seal of the Corporation thereto and to all certificates of shares of the capital stock, shall have charge of the stock records of the Corporation, and shall, in general, perform all the duties of Secretary, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and a Vice Chairman, if any. Section 10 - General Counsel: The General Counsel, if any, shall have charge of all matters of a legal nature involving the Corporation. Section 11 - Assistant Controllers, Assistant Secretaries and Assistant Treasurers: An Assistant Controller, an Assistant Secretary or an Assistant Treasurer, if any, shall, in the absence or inability to act or at the request of the Controller, Secretary or Treasurer, respectively, perform the duties of the Controller or Secretary or Treasurer, respectively, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Chairman of the Board, the President or a Vice Chairman, if any. The performance of any such duty shall be conclusive evidence of right to act. Section 12 - Principal Financial Officer and Principal Accounting Officer: The Board of Directors or the Executive Committee may from time to time designate officers of the Corporation to be the Principal Financial Officer and the Principal Accounting Officer of the Corporation. ARTICLE XI: STOCK Section 1 - Stock Certificates: The shares of stock of the Corporation shall be represented by certificates which shall be numbered and shall be entered on the stock records of the Corporation and registered as they are issued. Each certificate shall state on its face that the Corporation is formed under the laws of Michigan, the name of the person or persons to whom issued, the number and class of shares and the designation of the series the certificate represents, and the par value of each share represented by the certificate; shall be signed by the Chairman of the Board or a Vice Chairman or the President or one of the Vice Presidents and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary; and shall be sealed with the seal of the Corporation or a facsimile thereof. When such certificates are countersigned by a transfer agent or registered by a registrar, the signatures of any such Chairman of the Board, Vice Chairman, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. In case any officer, who shall have signed or whose facsimile signature shall have been placed on any such certifi-cate, shall cease to be such officer of the Corporation before such certificate shall have been issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if the person, who signed such certificate or whose facsimile signature shall have been placed thereon, were such officer of the Corporation at the date of issue. Each certificate shall set forth on its face or back or state that the Corporation will furnish to a shareholder upon request and without charge a full statement of the designations, relative rights, preferences and limitations of the shares of stock of each class authorized to be issued and of each series so far as the same have been prescribed and the authority of the Board of Directors to designate and prescribe the relative rights, preferences and limitations of other series. Section 2 - Stock Records: The shares of stock of the Corporation shall be transferable on the stock records of the Corporation in person or by proxy duly authorized and upon surrender and cancellation of the old certificates therefore. The Board of Directors may fix a date preceding the date fixed for any meeting of the shareholders or any dividend payment date or the date for the allotment of rights or the date when any change, conversion or exchange of stock shall go into effect or the date for any other action, as the record date for the determination of the shareholders entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights in respect of any such change, conversion or exchange of stock or to take such other action, as the case may be, notwithstanding any transfer of shares on the records of the Corporation or otherwise after any such record date fixed as aforesaid. The record date so fixed by the Board shall not be more than sixty (60) nor less than ten (10) days before the date of the meeting of the shareholders, nor more than sixty (60) days before any other action. If the Board of Directors does not fix a date of record, as aforesaid, the record date shall be as provided by law. Section 3 - Stock - Preferred and Common: The Preferred Stock, and the Common Stock of the Corporation shall consist of shares having a par value of $.01 per share. The designations, relative rights, preferences, limitations and voting powers, or restrictions, or qualifications of the shares of Preferred Stock and Common Stock shall be as set forth in the Articles of Incorporation of the Corporation. Section 4 - Replacing Certificates: In case of the alleged loss, theft or destruction of any certificate of shares of stock and the submission of proper proof thereof, a new certificate may be issued in lieu thereof upon delivery to the Corporation by the owner or legal representative of a bond of indemnity against any claim that may be made against the Corporation on account of such alleged lost, stolen or destroyed certificate or such issuance of a new certificate. ARTICLE XII: AUTHORIZED SIGNATURES Section 1 - Authorized Signatures: All checks, drafts and other negotiable instruments issued by the Corporation shall be made in the name of the Corporation and shall be signed manually or signed by facsimile signature by such one of the officers of the Corporation or such other person as the Chairman of the Board may from time to time designate. ARTICLE XIII: INSURANCE Section 1 - Insurance: The Corporation may purchase and maintain liability insurance, to the full extent permitted by law, on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity. ARTICLE XIV: AMENDMENTS OF BYLAWS Section 1 - Amendments, How Effected: These Bylaws may be amended or repealed, or new Bylaws may be adopted, either by the majority vote of the votes cast by the shareholders entitled to vote thereon or by the majority vote of the Directors then in office at any meeting of the Directors. December 2, 1994 EX-3 4 CONSUMERS ARTICLES OF INCORPORATION EXHIBIT (3)(c) EXHIBIT (3)(c) STATE OF MICHIGAN MICHIGAN DEPARTMENT OF COMMERCE CORPORATION DIVISION LANSING, MICHIGAN RESTATED ARTICLES OF INCORPORATION (Profit Corporation) 021-395 These Restated Articles of Incorporation are executed pursuant to the provisions of Sections 641 through 651, Act 284, Public Acts of 1972, as amended, (the "Act"). These Restated Articles of Incorporation were duly adopted on March 25, 1994 by the Board of Directors of Consumers Power Company, without a vote of the shareholders, in accordance with provisions of Section 642 of the Act. These Restated Articles of Incorporation only restate and integrate and do not further amend the provisions of the Articles of Incorporation as heretofore amended and there is no material discrepancy between those provisions and the provisions of these Restated Articles. The present name of the corporation is Consumers Power Company. The former name of the corporation was Consumers Power Company of Michigan. Consumers Power Company is the successor to a corporation of the same name which was organized in Maine in 1910 and did business in Michigan from 1915 to 1968. The date of filing the original Articles of Incorporation in Michigan was January 22, 1968. RESTATED ARTICLES OF INCORPORATION The following restated Articles of Incorporation supersede the original Articles as amended and shall be the Articles of Incorporation of the corporation. ARTICLE I The name of the corporation is CONSUMERS POWER COMPANY (hereinafter called the "Company"). ARTICLE II The purposes for which the Company is formed are as follows: (a) To generate, manufacture, produce, gather, purchase, store, transmit, distribute, transform, use, sell and supply electric energy or gas, either artificial or natural, or both electric energy and gas, to the public generally, and to public utilities, natural gas companies and to any and all other entities (whether governmental, public or private); and generally to carry on the electric business or the gas business, or both businesses, as a public utility. (b) To generate, manufacture, produce, purchase, transmit, distribute, transform, use, sell and supply hot water, steam, heat, power and energy, or any or all thereof, to the public generally, and to any and all other entities (whether governmental, public or private); and generally to carry on any or all of such businesses as a public utility. (c) To acquire by lease, purchase, grant, donation, devise, bequest or otherwise, all such lands, easements, royalties, leaseholds, flowage rights, water power and other property, real, personal or mixed, tangible or intangible, and any interest therein, wherever the same may be located and whether within or without the State of Michigan, as may be necessary, incidental or appropriate to the carrying out of any of its purposes, and to hold, convey, mortgage or lease, with or without any of its franchises, corporate or otherwise, any of the foregoing. (d) To dam any stream or streams, lake or other body of water, and excavate, construct, maintain, repair and improve any existing stream, lake, reservoir, body of water, or canal, or which it may excavate and construct, with water power appurtenant thereto; to flood, flow and submerge land and property by any means whatsoever, including but not limited to, the construction of the necessary dams or other facilities in any canal, or in creeks, streams, reservoirs, lakes or other bodies of water or watercourses, natural or artificial; to excavate, construct, improve, maintain, repair, remove and replace reservoirs, dams, dikes and other facilities; and to condemn all lands, easements, rights of way, waterpowers, flowage rights, gas royalties, natural gas leaseholds, royalty interests, and other property, and any and all interests therein, to the extent authorized, and subject to the limitations imposed by the laws of the State of Michigan or of any other State applicable thereto. (e) To explore for, mine, produce, gather, purchase, store, transmit, distribute, refine, sell and supply natural gas, oil and other hydrocarbons. (f) To sell appliances and carry on an appliance business. (g) To carry on any and all other businesses and perform any and all other acts incident to or appropriate in connection with any of the foregoing. (h) To guarantee, subscribe for, purchase, invest in, own, hold or otherwise acquire, sell, assign, transfer, mortgage, pledge or otherwise dispose of, the shares of the capital stock of, or any bonds, securities or evidences of indebtedness created by, or any other evidences of interest in, any other corporation or corporations or other entity of the District of Columbia or of the State of Michigan or any other State, country, nation or government so far as permitted by the laws applicable thereto, and while the owner thereof to exercise all the rights, powers and privileges of ownership, including the right to vote thereon or with respect thereto and to receive all dividends or payments thereon, so far as permitted by the laws applicable thereto; to lend money to or aid in any lawful manner whatsoever any corporation or other entity now existing or hereafter formed whose shares of capital stock, bonds, securities or evidences of indebtedness, or other evidences of interest therein, are held or are in any manner guaranteed by the Company; and to do any and all lawful acts and things to protect, preserve, improve or enhance the value of any such shares of capital stock, bonds, securities, evidences of indebtedness or other interests. (i) To acquire, purchase, hold, sell and transfer shares of its own capital stock, bonds and other evidences of indebtedness to the extent and in the manner authorized by, and subject to any requirements of, the laws applicable thereto. (j) To borrow money and issue, sell or pledge bonds, promissory notes, bills of exchange, debentures and other obligations and evidences of indebtedness, whether secured by mortgage, pledge or otherwise, or unsecured. (k) To make contributions of money, property, services or otherwise for public welfare, including, among other things, charitable, scientific, educational and religious purposes. (l) To conduct its business in the State of Michigan, other States, the District of Columbia, the territories and colonies of the United States and in foreign countries and the territories and colonies thereof and to have one or more offices within or without the State of Michigan. (m) To have and to exercise all such powers as may be conferred by the laws of the State of Michigan applicable to the Company or to corporations engaged in the State of Michigan in any business which may be carried on by the Company. The foregoing clauses shall be construed both as purposes and powers, but no recitation, expression or declaration of specific or special purposes or powers hereinabove enumerated shall be deemed to be exclusive, it being hereby expressly declared that all purposes and powers not inconsistent therewith or with the laws of the State of Michigan applicable to the Company are hereby included, and the Company shall possess all such incidental and other powers as are reasonably necessary, appropriate or convenient to the accomplishment of any of the foregoing purposes or powers, either alone or in association with other corporations, associations, firms, individuals or entities (whether governmental, public or private), to the same extent and as fully as individuals might or could do, as principals, agents, contractors or otherwise. ARTICLE III The street and mailing address of the registered office is 212 West Michigan Avenue, Jackson, Michigan 49201. The name of the resident agent at the registered office is T. A. McNish. ARTICLE IV The total number of shares of all classes of stock which the Company shall have authority to issue is 188,500,000: 23,500,000 shares of preferred stock, 7,500,000 of which are of the par value of $100 per share and are of a class designated Preferred Stock, and 16,000,000 shares of which are of no par value and are of a class designated Class A Preferred Stock; 40,000,000 shares are of the par value of $1 per share and are of a class designated Preference Stock; and 125,000,000 shares are of the par value of $10 per share and are of a class designated Common Stock. ARTICLE V A director shall not be personally liable to the Company or its shareholders for monetary damages for breach of duty as a director except (i) for a breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for a violation of Section 551(1) of the Michigan Business Corporation Act, and (iv) any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article V, and no modification to its provisions by law, shall apply to, or have any effect upon, the liability or alleged liability of any director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment, repeal or modification. ARTICLE VI Each director and each officer of the Company shall be indemnified by the Company to the fullest extent permitted by law against expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the defense of any proceeding in which he or she was or is a party or is threatened to be made a party by reason of being or having been a director or an officer of the Company. Such right of indemnification is not exclusive of any other rights to which such director or officer may be entitled under any now or hereafter existing statute, any other provision of these Articles, bylaw, agreement, vote of shareholders or otherwise. If the Business Corporation Act of the State of Michigan is amended after approval by the shareholders of this Article VI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the Business Corporation Act of the State of Michigan, as so amended. Any repeal or modification of this Article VI by the shareholders of the Company shall not adversely affect any right or protection of a director of the Company existing at the time of such repeal or modification. ARTICLE VII The statement of the designations and the voting and other powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the Common Stock, of the Preference Stock, of the Preferred Stock and of the Class A Preferred Stock is as follows: PREFERRED STOCK Preferred Stock Issuable in Series The shares of Preferred Stock may be divided into and issued in series. Each such series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes, and all shares of the Preferred Stock shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The rate of dividend; (b) The price at which shares may be redeemed, such price to be not less than $100 or more than $115 per share, plus accrued dividends to the date of redemption; (c) The amount payable upon shares in event of involuntary liquidation, which amount shall not be less than $100 per share or more than $115 per share, plus accrued dividends; (d) The amount payable upon shares in event of voluntary liquidation, which amount shall not be less than $100 per share or more than $115 per share, plus accrued dividends; (e) The terms and conditions, if any, on which shares shall be by their terms convertible into or exchangeable for shares of any other class of stock of the Company over which the Preferred Stock has preference as to payment of dividends and as to assets; (f) Subject to the rights and preferences of shares of Preferred Stock set forth under the heading "General Provisions", the terms and conditions of a sinking or purchase fund, if any, for the redemption or purchase of such shares. No change shall be made in any of the rights and preferences of any series of Preferred Stock at the time outstanding in those respects in which the shares thereof vary from the shares of other series of Preferred Stock at the time outstanding without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of such series of Preferred Stock at the time outstanding, in addition to such other vote, if any, as may be required for such change under the applicable provisions of these Articles or of the Michigan General Corporation Act. Series Established By Articles There are hereby established six series of Preferred Stock designated, respectively, as $4.50 Preferred Stock, $4.16 Preferred Stock, $7.45 Preferred Stock, $7.72 Preferred Stock, $7.76 Preferred Stock and $7.68 Preferred Stock. $4.50 Preferred Stock The rights and preferences of the shares of $4.50 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $4.50 per annum; (b) The price at which shares may be redeemed is $110 per share, plus accrued dividends to the date of redemption; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $105 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $4.16 Preferred Stock The rights and preferences of the shares of $4.16 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $4.16 per annum; (b) The price at which shares may be redeemed is $103.25 per share, plus accrued dividends to the date of redemption; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $101 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.45 Preferred Stock The rights and preferences of the shares of $7.45 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.45 per annum; (b) The price at which shares may be redeemed is $108 per share if redeemed prior to April 1, 1978; $106 per share if redeemed thereafter and prior to April 1, 1981; $103 per share if redeemed thereafter and prior to April 1, 1986; and at $101 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to April 1, 1978 none of the shares may be redeemed if such redemption is a part of or in anticipation of any refunding operation involving the application, directly or indirectly, of borrowed funds or the proceeds of an issue of any stock ranking prior to or on a parity with the $7.45 Preferred Stock if such borrowed funds have an interest rate or cost to the Company (computed in accordance with generally accepted financial practice), or such stock has a dividend rate or cost to the Company (so computed), less than $7.45 per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $100 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.72 Preferred Stock The rights and preferences of the shares of $7.72 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.72 per annum; (b) The price at which shares may be redeemed is $108 per share if redeemed prior to July 1, 1977; $106 per share if redeemed thereafter and prior to July 1, 1982; $103 per share if redeemed thereafter and prior to July 1, 1987; and at $101 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to July 1, 1977 none of the shares may be redeemed if such redemption is a part of or in anticipation of any refunding operation involving the application, directly or indirectly, of borrowed funds or the proceeds of an issue of any stock ranking prior to or on a parity with the $7.72 Preferred Stock if such borrowed funds have an interest rate or cost to the Company (computed in accordance with generally accepted financial practice), or such stock has a dividend rate or cost to the Company (so computed), less than 7.72% per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $100 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.76 Preferred Stock The rights and preferences of the shares of $7.76 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.76 per annum; (b) The price at which shares may be redeemed is $109.19 per share if redeemed prior to June 1, 1978; $107.25 per share if redeemed thereafter and prior to June 1, 1983; $105.31 per share if redeemed thereafter and prior to June 1, 1988; and at $102.21 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to June 1, 1978 none of the shares may be redeemed if such redemption is for the purpose or in anticipation of refunding such share through the use, directly or indirectly, of funds borrowed by the Company, or through the use, directly or indirectly, of funds derived through the issuance by the Company of stock ranking prior to or on a parity with the $7.76 Preferred Stock as to dividends or assets, if such borrowed funds have an effective interest cost to the Company (computed in accordance with generally accepted financial practice) or such stock has an effective dividend cost to the Company (so computed) of less than 7.7439% per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in the event of voluntary liquidation is $101.43 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.68 Preferred Stock The rights and preferences of the shares of $7.68 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.68 per annum; (b) The price at which shares may be redeemed is $108 per share if redeemed prior to November 1, 1978; $106 per share if redeemed thereafter and prior to November 1, 1983; $103 per share if redeemed thereafter and prior to November 1, 1988; and at $101 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to November 1, 1978 none of the shares may be redeemed if such redemption is for the purpose or in anticipation of refunding such share through the use, directly or indirectly, of funds borrowed by the Company, or through the use, directly or indirectly, of funds derived through the issuance by the Company of stock ranking prior to or on a parity with the $7.68 Preferred Stock as to dividends or assets, if such borrowed funds have an effective interest cost to the Company (computed in accordance with generally accepted financial practice) or such stock has an effective dividend cost to the Company (so computed), of less than 7.68% per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $100 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. Authority of Board of Directors as to Other Series To the extent that series of Preferred Stock have not been established and variations in the relative rights and preferences as between series have not been fixed and determined as hereinbefore set forth in these Articles, authority is vested in the Board of Directors of the Company to divide the shares of Preferred Stock into and to establish series of Preferred Stock, to fix and determine within the limitations hereinabove set forth in these Articles the relative rights and preferences of the shares of any series so established, to issue and sell any and all of the authorized and unissued shares of Preferred Stock as shares of any series thereof established by these Articles or by action of the Board of Directors pursuant hereto, and to create a sinking or purchase fund for the redemption or purchase of shares of any series without the necessity of providing a sinking or purchase fund for any other series, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Preferred Stock of any series, the Board of Directors may resell or convert and sell or otherwise dispose of, in their discretion, any shares so acquired as shares of the same series or of any other duly created series of Preferred Stock. CLASS A PREFERRED STOCK Class A Preferred Stock Issuable in Series The shares of Class A Preferred Stock may be divided into and issued in series. Each such series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes, and all shares of the Class A Preferred Stock shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The rate of dividend; (b) The price at which shares may be redeemed; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) The voting rights of the holders of such series, if any; provided that such holders of all series shall have the voting rights hereinafter specified in these Articles; (f) The terms and conditions, if any, on which shares shall be by their terms convertible into or exchangeable for any other securities; and (g) The terms and conditions of a sinking or purchase fund, if any, for the redemption or purchase of such shares. No change shall be made in any of the rights and preferences of any series of Class A Preferred Stock at the time outstanding in those respects in which the shares thereof vary from the shares of other series of Class A Preferred Stock at the time outstanding without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of such series of Class A Preferred Stock at the time outstanding, in addition to such other vote, if any, as may be required for such change under the applicable provisions of these Articles or of the Michigan Business Corporation Act. Series Established by Articles There is hereby established one series of Class A Preferred Stock designated $2.08 Class A Preferred Stock, Cumulative, without par value. $2.08 Class A Preferred Stock The rights and preferences of $2.08 Class A Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $2.08 per annum; (b) The shares of this series will not be redeemable prior to April 1, 1999. On or after April 1, 1999, all or any of the shares of the $2.08 Class A Preferred Stock will be redeemable at the option of the Company, in the manner provided in the Articles of the Company, upon not less than 30 nor more than 60 days' notice, at a redemption price equal to $25 per share, plus an amount equivalent to accrued dividends; (c) The amount payable in event of involuntary liquidation is $25 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $25 per share, plus accrued dividends; (e) The holders of shares of this series shall not be entitled to any voting rights, except for those voting rights provided to such holders of all series of Class A Preferred Stock as specified in the Articles or as provided by applicable law; (f) Shares are not, by their terms, convertible or exchangeable; (g) The holders of shares of this series shall not be entitled to the benefit of a sinking or purchase fund. Authority of Board of Directors As to Other Series To the extent that series of Class A Preferred Stock have not been established and variations in the relative rights and preferences as between series have not been fixed and determined as hereinbefore set forth in these Articles, authority is vested in the Board of Directors of the Company to divide the shares of Class A Preferred Stock into and to establish series of Class A Preferred Stock, to fix and determine the relative rights and preferences of the shares of any series so established, to issue and sell any and all of the authorized and unissued shares of Class A Preferred Stock as shares of any series thereof established by these Articles or by action of the Board of Directors pursuant hereto, and to create a sinking or purchase fund for the redemption or purchase of shares of any series without the necessity of providing a sinking or purchase fund for any other series, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Class A Preferred Stock of any series, the Board of Directors may resell or convert and sell or otherwise dispose of, in their discretion, any shares so acquired as shares of the same series or of any other duly created series of Class A Preferred Stock. PREFERRED STOCK AND CLASS A PREFERRED STOCK General Provisions In these General Provisions, the Company's Preferred Stock, par value $100 per share, is referred to as the "Preferred Stock"; the Company's Class A Preferred Stock is referred to as the "Class A Preferred Stock"; and the Preferred Stock and Class A Preferred Stock are together referred to as the "Company Preferred Stock". (A) The holders of the Company Preferred Stock of each series shall be entitled to receive dividends, payable when and as declared by the Board of Directors, at such rates as shall be determined for the respective series thereof from the first day of the current dividend period within which such stock shall have been originally issued except that, as to any share of Company Preferred Stock originally issued subsequent to December 31, 1972, from the date upon which such share shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other stock of the Company not having preference over the Company Preferred Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Company Preferred Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other stock of the Company not having preference over the Company Preferred Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Company Preferred Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on all series of the Company Preferred Stock for all dividend periods terminating on the same or an earlier date. As to all series of the Company Preferred Stock, the term "dividend period" shall mean any of the four calendar quarters in each year commencing, respectively, the first day of January, April, July and October and the first days of each such calendar quarter shall be the dividend payment dates for the regular quarterly dividends payable for the preceding dividend period on such series. (B) When full cumulative dividends as aforesaid upon all series of the Company Preferred Stock then outstanding for all past dividend periods and for the current dividend periods shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock or any other stock over which the Company Preferred Stock has a preference as to payment of dividends, and no holders of any series of the Company Preferred Stock as such shall be entitled to share therein; provided, however, that no dividends (other than dividends paid in or presently thereafter repaid to the Company for or as a capital contribution with respect to stock over which the Company Preferred Stock has preference as to payment of dividends and as to assets) shall be paid or any other distribution of assets made, by purchase of shares or otherwise, on Common Stock or on any other stock over which the Company Preferred Stock has preference as to payment of dividends or as to assets except out of earned surplus of the Company available for distribution to stock over which the Company Preferred Stock has preference as to payment of dividends and as to assets, or if, at the time of declaration thereof or the making of such distribution there shall not remain to the credit of earned surplus account (after deducting therefrom the amount of such dividends and distribution), an amount at least equal to (i) $7.50 per share on all then outstanding shares of the Preferred Stock, (ii) in respect to the Class A Preferred Stock 7.5% of the aggregate amount established by the Board of Directors to be payable on the shares of each series thereof in the event of involuntary liquidation of the Company, and (iii) $7.50 per share on all then outstanding shares of all other stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets. So long as any shares of the Company Preferred Stock are outstanding, the payment of dividends on the Common Stock (other than dividends payable in Common Stock) and the making of any distribution of assets to holders of Common Stock by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of Common Stock dividends") shall be subject to the following limitations (except as such payments may be approved or permitted by subsequent order of the Securities and Exchange Commission or any successor thereto or any other Federal governmental agency having the same or similar jurisdiction, or, in the event that the Company ceases to be subject to the jurisdiction of said Commission or of any successor thereto or of any such other Federal governmental agency, except as such payments may be permitted in accordance with a waiver of such limitations which shall have been approved by the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Preferred Stock and Class A Preferred Stock (voting as separate classes) at the time outstanding): (a) If and so long as the ratio of the aggregate of the par value of, or stated capital represented by, the outstanding shares of Common Stock (including premiums on the Common Stock but excluding premiums on the Company Preferred Stock) and of the surplus of the Company to the total capitalization and surplus of the Company at the end of a period of twelve consecutive calendar months within the fourteen calendar months immediately preceding the calendar month in which the proposed payment of Common Stock dividends is to be made (which period is hereinafter referred to as the "base period"), adjusted to reflect the proposed payment of Common Stock dividends (which ratio is hereinafter referred to as the "capitalization ratio"), is less than 20%, the payment of Common Stock dividends, including the proposed payment, during the twelve calendar months period ending with and including the calendar month in which the proposed payment is to be made shall not exceed 50% of the net income of the Company available for the payment of dividends on the Common Stock during the base period; (b) If and so long as the capitalization ratio is 20% or more but less than 25%, the payment of Common Stock dividends, including the proposed payment, during the twelve calendar months period ending with and including the calendar month in which the proposed payment is to be made shall not exceed 75% of the net income of the Company available for the payment of dividends on the Common Stock during the base period; (c) Except to the extent permitted under paragraphs (a) and (b) above, the Company shall not make any payment of Common Stock dividends which would reduce the capitalization ratio to less than 25%. For the purpose of the foregoing provisions, the following terms shall have the following meanings: (1) The term "net income of the Company available for the payment of dividends on the Common Stock" shall mean for any base period the balance remaining after deducting from the total gross revenues of the Company from all sources during such period the following: (a) All operating expenses and taxes, including charges to income for general taxes and for federal and state taxes measured by income, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant; (b) the amount, if any, by which the aggregate of the charges to income during the period in question for repairs, maintenance and provision for depreciation is less than the maintenance and replacement requirement embodied in the Indenture, or any indenture supplemental thereto, succeeding the same or in substitution therefor; (c) all interest charges and other income deductions, including charges to income for amortization of debt discount, premium and expense and of the Company Preferred Stock premium and expense; and (d) all dividends applicable to the period in question on stock having preference over the Common Stock as to the payment of dividends. (2) The term "total capitalization" shall mean the aggregate of the principal amount of all outstanding indebtedness of the Company maturing more than twelve months after the date of determination of total capitalization, plus the par value of, or stated capital represented by, the outstanding shares of all classes of stock of the Company, including any premiums on capital stock. (3) The term "surplus" shall include capital surplus, earned surplus and any other surplus of the Company, adjusted to eliminate any amounts which may then be classified by the Company on its books as amounts in excess of the original cost of utility plant and which are not provided for by reserve and any items set forth on the asset side of the balance sheet of the Company as a result of accounting convention, such as unamortized debt discount and expense and the Company Preferred Stock expense, unless any such amount or item, as the case may be, is being amortized or is being provided for by reserve. (C) Upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Company Preferred Stock of each series, without any preference of the shares of any series of the Company Preferred Stock over the shares of any other series of the Company Preferred Stock, shall be entitled to receive out of the assets of the Company, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other stock not having preference as to assets over the Company Preferred Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. In case the assets shall not be sufficient to pay in full the amounts determined to be payable on all the shares of the Company Preferred Stock in the event of voluntary or involuntary liquidation, as the case may be, then the assets available for such payment shall be distributed to the extent available as follows: first, to the payment, pro rata, of $100 per share on each share of Preferred Stock outstanding irrespective of series and the amount established by the Board of Directors to be payable on each outstanding share of each series of Class A Preferred Stock in the event of involuntary liquidation; second, to the payment of the accrued dividends on such shares, such payment to be made pro rata in accordance with the amount of accrued dividends on each such share; and, third, to the payment of any amounts in excess of $100 per share of the Preferred Stock outstanding and the difference between the amount established by the Board of Directors to be payable on the outstanding shares of each series of Class A Preferred Stock in the event of voluntary liquidation and the amount similarly determined to be payable on such shares in the event of involuntary liquidation, plus accrued dividends which shall have been determined to be payable on the shares of any series in the event of voluntary or involuntary liquidation, as the case may be, such payment also to be made pro rata in accordance with the amounts, if any, so payable on each such share. After payment to the holders of the Company Preferred Stock of the full preferential amounts hereinbefore provided for, the holders of the Company Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed among the holders of the Common Stock or of any other stock over which the Company Preferred Stock has preference as to assets. Without limiting the right of the Company to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger, or consolidation, the sale of all the property of the Company to, or the merger or consolidation of the Company into or with any other corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (D) At the option of the Board of Directors of the Company, the Company may redeem any series of the Company Preferred Stock determined to be redeemable, or any part of any series, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Company Preferred Stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the By-laws of the Company or by resolution of the Board of Directors; and, provided, further, that in every case of redemption of less than all of the outstanding shares of any one series of the Company Preferred Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the By-laws of the Company or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Company may deposit, or may cause its nominee to deposit, the aggregate redemption price with some bank or trust company named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Company or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no such deposit is made, upon said redemption date (unless the Company defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares, and from and after the making of said deposit, or, if no such deposit is made, after the redemption date (the Company not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Company, or its nominee, with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust company, or if no such deposit is made, from the Company, without interest thereon, upon endorsement, if required, and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Company as aforesaid, such nominee shall upon such deposit become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Company Preferred Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Company such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. Nothing herein contained shall limit any legal right of the Company to purchase any shares of the Company Preferred Stock. (E) So long as any shares of the Preferred Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of the Preferred Stock (voting together as a single class) at the time outstanding, adopt an amendment to these Articles if such amendment would either (i) authorize or create any class of stock preferred as to dividends or assets over the Preferred Stock or (ii) change any of the rights and preferences of the then outstanding Preferred Stock; provided, however, that nothing in this paragraph contained shall authorize the adoption of any amendment of these Articles by the vote of the holders of a less number of shares of the Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for such amendment by the laws of the State of Michigan at the time applicable thereto. (F) So long as any shares of Class A Preferred Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Class A Preferred Stock at the time outstanding (voting together as a single class) adopt an amendment to these Articles if such amendment would either (i) authorize or create any class of stock preferred as to dividends or assets over the Class A Preferred Stock or (ii) change any of the rights and preferences of the then outstanding Class A Preferred Stock; provided, however, that nothing in this paragraph contained shall authorize the adoption of any amendment of these Articles by the vote of the holders of a lesser number of shares of Class A Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for such amendment by the laws of the State of Michigan at the time applicable thereto. (G) So long as any shares of the Company Preferred Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of the Preferred Stock and Class A Preferred Stock (voting as separate classes) at the time outstanding, (a) issue, sell or otherwise dispose of any shares of the Company Preferred Stock or issue, sell or otherwise dispose of any stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, unless, in any such case, (i) the net income of the Company available for the payment of dividends for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance, sale or disposition of such stock (including, in any case in which such stock is to be issued, sold or otherwise disposed of in connection with the acquisition of new property, the net income of the property to be so acquired, computed on the same basis as the net income of the Company available for the payment of dividends) is at least equal to two times the annual dividend requirements on all outstanding shares of the Company Preferred Stock and of all stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued, and (ii) the gross income of the Company available for the payment of interest for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance, sale or disposition of such stock (including, in any case in which such stock is to be issued, sold or otherwise disposed of in connection with the acquisition of new property, the gross income of the property to be so acquired, computed on the same basis as the gross income of the Company available for the payment of interest) is at least equal to one and one-half times the aggregate of the annual interest requirements (adjusted by provision for amortization of debt discount and expense or of premium on debt, as the case may be) on all outstanding indebtedness of the Company and the annual dividend requirements (adjusted by provision for amortization of the Company Preferred Stock premium and expense) on all outstanding shares of the Company Preferred Stock and of all stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued; or (b) issue, sell or otherwise dispose of any shares of the Company Preferred Stock or issue, sell or otherwise dispose of any stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, unless, in any such case, the aggregate of the par value of, or stated capital represented by, the outstanding shares of Common Stock and of the surplus of the Company (paid-in, earned and other, if any) shall be not less than the aggregate amount payable in the event of involuntary liquidation upon all outstanding shares of the Company Preferred Stock and of all stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued, provided that no portion of the surplus of the Company utilized to satisfy the foregoing requirement shall be available for dividends or other distributions of assets, by purchase of shares or otherwise, on Common Stock or on any other stock over which the Company Preferred Stock has preference as to the payment of dividends and as to assets until shares of the Company Preferred Stock or of stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets are retired and then only to the extent of the amount payable in the event of involuntary liquidation upon such shares or until and then only to the extent that the par value of, or stated capital represented by, the outstanding shares of Common Stock shall have been increased. For the purpose of the foregoing provisions, the following terms shall have the following meanings: (1) The term "net income of the Company available for the payment of dividends" shall mean the balance remaining after deducting from the total gross revenues of the Company from all sources the following: (a) all operating expenses and taxes, including charges to income for general taxes and for federal and state taxes measured by income, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant, (b) the amount, if any, by which the aggregate of the charges to income during the period in question for repairs, maintenance and provision for depreciation is less than the maintenance and replacement requirement embodied in the Indenture, or any indenture supplemental thereto, succeeding the same or in substitution therefor, and (c) all interest charges and other income deductions, including charges to income for the amortization of debt discount, premium and expense and of the Company Preferred Stock premium and expense. (2) The term "gross income of the Company available for the payment of interest" shall mean the balance remaining after deducting from the total gross revenues of the Company from all sources the following: (a) all operating expenses and taxes, including charges to income for general taxes and for federal and state taxes measured by income, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant and (b) the amount, if any, by which the aggregate of the charges to income during the period in question for repairs, maintenance and provision for depreciation is less than the maintenance and replacement requirement embodied in the Indenture, or any indenture supplemental thereto, succeeding the same or in substitution therefor. (3) The term "accrued dividends" shall be deemed to mean in respect of any share of any series of the Company Preferred Stock as of any given date, the amount, if any, by which the product of the rate of dividend per annum, determined upon the shares of such series, multiplied by the number of years and any fractional part of a year which shall have elapsed from the date after which dividends on such stock became cumulative to such given date, exceeds the total dividends actually paid on such stock and the dividends declared and set apart for payment. Accumulations of dividends shall not bear interest. The term "outstanding", whenever used herein with respect to shares of the Company Preferred Stock or of any other class of stock which are by their terms redeemable, or with respect to bonds or other evidences of indebtedness shall not include any such shares or bonds or evidences of indebtedness which have been called for redemption in accordance with the provisions applicable thereto, of which call for redemption notice shall have been given, as required by such provisions and for the redemption of which a sum of money sufficient to pay the amount payable on such redemption shall have been deposited with a bank or trust company, irrevocably in trust for such purpose, or any bonds or other evidences of indebtedness for the payment of which at maturity provision has been made in a similar manner. The term "capital represented by" whenever used herein with respect to shares of stock of the Company shall mean at any time the amount paid in on or contributed, transferred or otherwise then held and recorded or accounted for, as permitted by the provisions of law applicable thereto, as capital with respect to said shares. COMMON STOCK Each share of Common Stock of the Company shall be equal to every other share of said stock in every respect. The entire consideration received for shares of Common Stock shall be capital. VOTING POWERS GENERALLY At all meetings of the shareholders of the Company, the holders of the Preferred Stock and the holders of Common Stock shall be entitled on all questions to one vote for each share of stock held by them respectively, regardless of class. Whenever and as often as four quarterly dividends payable on the Company Preferred Stock of any series shall be in default, in whole or in part, the holders of the Company Preferred Stock of all series shall have the exclusive right, voting separately and as a single class, to vote for and to elect the smallest number of directors which shall constitute a majority of the then authorized number of directors of the Company, and, in all matters other than the election of directors, each holder of one or more shares of the Company Preferred Stock shall be entitled to one vote for each such share of stock held. In the event of defaults entitling the holders of Company Preferred Stock to elect a majority of the directors as aforesaid, the holders of the Common Stock shall, subject to the prior rights of the holders of the Preference Stock, have the exclusive right, voting separately and as a class, to vote for and to elect the greatest number of directors which shall constitute a minority of the then authorized number of directors of the Company, and, in all matters other than the election of directors, each holder of Common Stock shall be entitled to one vote for each such share of stock held. The right of the holders of the Company Preferred Stock to elect a majority of the directors, however, shall cease when all defaults in the payment of dividends on their stock shall have been cured, and such dividends shall be declared and paid out of any funds legally available therefor as soon as, in the judgment of the Board of Directors, is reasonably practicable. The terms of office of all persons who may be directors of the Company at the time when the right to elect a majority of the directors shall accrue to the holders of the Company Preferred Stock, as herein provided, shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders, at the request in writing of the holders of not less than 1,000 shares of the then outstanding Company Preferred Stock entitled to vote addressed to the Secretary of the Company at its principal business office. Any vacancy in the Board of Directors occurring during any period that the Company Preferred Stock shall have elected representatives on the Board shall be filled by a majority vote of the remaining directors (or the one director) representing the class of stock theretofore represented by the director causing the vacancy. Upon the termination of such exclusive right of the holders of the Company Preferred Stock to elect a majority of the directors of the Company, the terms of office of all the directors of the Company shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders, at the request in writing of the holders of not less than 1,000 shares of the then outstanding Common Stock addressed to the Secretary of the Company at its principal business office. At all meetings of the shareholders held for the purpose of electing directors during such times as the holders of the Company Preferred Stock shall have the exclusive right to elect a majority of the directors of the Company, the presence in person or by proxy of the holders of a majority of the outstanding shares of Common Stock shall be required to constitute a quorum of such class for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of the Company Preferred Stock shall be required to constitute a quorum of such class for the election of directors; provided, however, that the absence of a quorum of the holders of stock of either class shall not prevent the election at any such meeting, or adjournment thereof, of directors by the other class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting; and provided, further, that, in the absence of a quorum of the holders of stock of either class, a majority of those holders of such stock who are present in person or by proxy shall have the power to adjourn the election of those directors to be elected by that class from time to time without notice, other than announcement at the meeting, until the requisite amount of holders of stock of such class shall be present in person or by proxy. At all elections of directors, shareholders will be entitled to as many votes as shall equal the number of their shares of stock multiplied by the number of directors to be elected for whom such shareholders may vote, and they may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as they may see fit. For the purposes of the foregoing provisions, the Company Preferred Stock of all series shall be deemed to be a single class. PRE-EMPTIVE RIGHTS The holders of shares of Preferred Stock, Class A Preferred Stock, or of Common Stock shall have no pre-emptive rights to subscribe for or purchase any additional issues of shares of the capital stock of the Company of any class now or hereafter authorized or any bonds, debentures, or other obligations or rights or options convertible into or exchangeable for or entitling the holder or owner to subscribe for or purchase any shares of capital stock, or any rights to exchange shares issued for shares to be issued. PREFERENCE STOCK Preference Stock Issuable in Series The shares of Preference Stock may be divided into and issued in series. Each such series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes, and all shares of the Preference Stock shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The rate of dividend; (b) The price at which shares may be redeemed; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) The terms and conditions, if any, on which shares shall be by their terms convertible into or exchangeable for shares of any other class of stock of the Company; (f) The terms and conditions of a sinking or purchase fund, if any, for the redemption or purchase of such shares. No change shall be made in any of the rights and preferences of any series of Preference Stock at the time outstanding in those respects in which the shares thereof vary from the shares of other series of Preference Stock at the time outstanding without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of such series of Preference Stock at the time outstanding, in addition to such other vote, if any, as may be required for such change under the applicable provisions of these Articles or of the laws of the State of Michigan at the time applicable thereto. PREFERENCE STOCK Authority of Board of Directors as to Other Series To the extent that series of Preference Stock have not been established and variations in the relative rights and preferences as between series have not been fixed and determined in these Articles, authority is vested in the Board of Directors of the Company to divide the shares of Preference Stock into and to establish series of Preference Stock, to fix and determine the relative rights and preferences of the shares of any series so established, to issue and sell any and all of the authorized and unissued shares of Preference Stock as shares of any series thereof established by action of the Board of Directors pursuant hereto, and to create a sinking or purchase fund for the redemption or purchase of shares of any series without the necessity of providing a sinking or purchase fund for any other series. PREFERENCE STOCK General Provisions The following provisions shall apply to all shares of the Preference Stock irrespective of series: (A) The shares of Preference Stock shall be subordinate to the Preferred Stock but in preference to the Common Stock as to the payment of dividends. The holders of the Preference Stock of each series shall be entitled to receive dividends, payable when and as declared by the Board of Directors, at such rates as shall be determined for the respective series, from the date upon which such share shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other stock of the Company not having preference over the Preference Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Preference Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other stock of the Company not having preference over the Preference Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Preference Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on the Preference Stock of all series for all dividend periods terminating on the same or an earlier date. As to all series of Preference Stock, the term "dividend period" shall mean any of the four calendar quarters in each year commencing, respectively, the first day of January, April, July and October and the first days of each such calendar quarter shall be the dividend payment dates for the regular quarterly dividends payable for the preceding dividend period of such series. (B) When full cumulative dividends as aforesaid upon the Preference Stock of all series then outstanding for all past dividend periods and for the current dividend periods shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock or any other stock over which the Preference Stock has a preference as to payment of dividends, and no holders of any series of the Preference Stock as such shall be entitled to share therein. (C) The shares of Preference Stock shall be subordinate to the Preferred Stock but in preference to the Common Stock upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary. Upon any such dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of Preference Stock of each series, without any preference of the shares of any series of Preference Stock over the shares of any other series of Preference Stock, shall be entitled to receive out of the assets of the Company, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other stock not having preference as to assets over the Preference Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. In case the assets shall not be sufficient to pay in full the amounts determined to be payable on all the shares of Preference Stock in the event of voluntary or involuntary liquidation, as the case may be, then the assets available for such payment shall be distributed ratably among the holders of the Preference Stock of all series in accordance with the amounts determined to be payable on the shares of each series, in the event of voluntary or involuntary liquidation, as the case may be, in proportion to the full preferential amounts to which they are respectively entitled. After payment to the holders of the Preference Stock of the full preferential amounts hereinbefore provided for, the holders of the Preference Stock as such shall have no right or claim to any of the remaining assets of the Company, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed among the holders of the Common Stock or of any other stock over which the Preference Stock has preference as to assets. Without limiting the right of the Company to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger, or consolidation, the sale of all the property of the Company to, or the merger or consolidation of the Company into or with any other corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (D) At the option of the Board of Directors of the Company, the Company may redeem any series of Preference Stock determined to be redeemable, or any part of any series, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Preference Stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the By- laws of the Company or by resolution of the Board of Directors; and, provided, further, that in every case of redemption of less than all of the outstanding shares of any one series of Preference Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the By-laws of the Company or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Company may deposit, or may cause its nominee to deposit, the aggregate redemption price with some bank or trust Company named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Company or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no such deposit is made, upon said redemption date (unless the Company defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares and from and after the making of said deposit, or, if no such deposit is made, after the redemption date (the Company not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Company, or its nominee, with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust Company, or if no such deposit is made, from the Company, without interest thereon, upon endorsement, if required, and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Company as aforesaid, such nominee shall upon such deposit become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Preference Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Company such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. Nothing herein contained shall limit any legal right of the Company to purchase any shares of the Preference Stock. (E-1) So long as any shares of the Preference Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Preference Stock at the time outstanding, adopt an amendment to these Articles if such amendment would either (i) authorize or create, or increase the authorized amount of, any class of stock, other than shares of the Preferred Stock (whether now or hereafter authorized), which is entitled to dividends or assets in priority to the Preference Stock or (ii) change any of the rights and preferences of the then outstanding Preference Stock. (E-2) So long as any shares of the Preference Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least a majority of the shares of Preference Stock at the time outstanding, adopt an amendment to these Articles if such amendment would either (i) increase the authorized amount of Preference Stock or (ii) authorize or create, or increase the authorized amount of, any class of stock, which is entitled to dividends or assets on a parity with the Preference Stock, provided; however, that nothing in this paragraph or in paragraph E-1 above contained shall authorize the adoption of any amendment of these Articles by the vote of the holders of a less number of shares of Preference Stock, or of any other class of stock, or of all classes of stock, than is required for such amendment by the laws of the State of Michigan at the time applicable thereto. PREFERENCE STOCK Voting Powers The holders of Preference Stock shall not have any right to vote for the election of directors or for any other purpose, except as otherwise provided by law, as set forth in the two immediately preceding paragraphs and as set forth below. Whenever and as often as six quarterly dividends payable on the Preference Stock of any series shall be in default, in whole or in part, the holders of the Preference Stock of all series shall have the exclusive right, voting separately and as a single class, to vote for and to elect two directors, subject to the prior rights of the holders of the Preferred Stock. In the event of defaults entitling the Preference Stock to elect two directors as aforesaid, the holders of the Common Stock shall have the exclusive right, voting separately and as a class, to elect the remaining number of directors of the Company, subject to the prior rights of the holders of the Preferred Stock. The right of the holders of the Preference Stock to elect two directors, however, shall cease when all defaults in the payment of dividends on their stock shall have been cured, and such dividends shall be declared and paid out of any funds legally available therefor as soon as, in the judgment of the Board of Directors, is reasonably practicable. The terms of office of all persons who may be directors of the Company at the time when the right to elect two directors shall accrue to the holders of the Preference Stock, as herein provided, shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders, at the request in writing of the holders of not less than 1,000 shares of the then outstanding Preference Stock addressed to the Secretary of the Company at its principal business office. Any vacancy in the Board of Directors occurring during any period when the Preference Stock shall have elected representatives on the Board shall be filled by a majority vote of the remaining directors (or the one director) representing the class of stock theretofore represented by the director causing the vacancy. In the event of simultaneous vacancies among directors elected by the holders of the Preference Stock, an election, pursuant to the provisions of this paragraph, will be held. Upon the termination of such exclusive right of the holders of the Preference Stock to elect two directors of the Company, the terms of office of all the directors of the Company shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders at the request in writing of the holders of not less than 1,000 shares of the then outstanding Common Stock addressed to the Secretary of the Company at its principal business office. At all meetings of the shareholders held for the purpose of electing directors during such times as the holders of the Preference Stock shall have the exclusive right to elect two of the directors of the Company, the presence in person or by proxy of the holders of a majority of the outstanding shares of Common Stock shall be required to constitute a quorum of such class for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of Preference Stock of all series shall be required to constitute a quorum of such class for the election of directors; provided, however, that the absence of a quorum of the holders of stock of either class shall not prevent the election at any such meeting, or adjournment thereof, of directors by the other class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting; and provided, further, that, in the absence of a quorum of the holders of stock of either class, a majority of those holders of such stock who are present in person or by proxy shall have the power to adjourn the election of those directors to be elected by that class from time to time without notice, other than announcement at the meeting, until the requisite amount of holders of stock of such class shall be present in person or by proxy. At all elections of directors, each shareholder will be entitled to as many votes as shall equal the number of his shares of stock multiplied by the number of directors to be elected for whom such shareholder may vote, and he may cast all of such votes for a single director or may distribute them between the two directors to be voted for, as he may see fit. For the purposes of the foregoing provisions, the Preference Stock of all series shall be deemed to be a single class. PREFERENCE STOCK Pre-emptive Rights The holders of shares of Preference Stock shall have no pre- emptive rights to subscribe for or purchase any additional issues of shares of the capital stock of the Company of any class now or hereafter authorized or any bonds, debentures or other obligations or rights or options convertible into or exchangeable for or entitling the holder or owner to subscribe for or purchase any shares of capital stock, or any rights to exchange shares issued for shares to be issued. ARTICLE VIII Each director shall be a shareholder of the Company and any Director ceasing to be a shareholder shall thereupon immediately cease to be a Director. Signed on March 25, 1994 CONSUMERS POWER COMPANY (SEAL) By /s/Michael G. Morris --------------------------------------- Michael G. Morris President and Chief Executive Officer STATE OF MICHIGAN) ) SS. COUNTY OF JACKSON) On this 25th day of March 1994 before me appeared Michael G. Morris, to me personally known, who, being by me duly sworn, did say that he is President and Chief Executive Officer of Consumers Power Company, who executed the foregoing instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said officer acknowledged said instrument to be the free act and deed of said corporation. /s/Margaret Hillman ----------------------------- Margaret Hillman (SEAL) Notary Public for Jackson County, State of Michigan. My commission expires August 21, 1995. EX-3 5 CONSUMERS BY-LAWS EXHIBIT (3)(d) EXHIBIT (3)(d) CONSUMERS POWER COMPANY BYLAWS ARTICLE I: LOCATION OF OFFICES Section 1 - Registered Office: The registered office of Consumers Power Company, (the "Company") shall be at such place in the City of Jackson, County of Jackson, Michigan, or elsewhere in the State of Michigan, as the Board of Directors may from time to time designate. Section 2 - Other Offices: The Company may have and maintain other offices within or without the State of Michigan. ARTICLE II: CORPORATE SEAL Section 1 - Corporate Seal: The Company shall have a corporate seal bearing the name of the Company. The form of the corporate seal may be altered by the Board of Directors. ARTICLE III: FISCAL YEAR Section 1 - Fiscal Year: The fiscal year of the Company shall begin with the first day of January and end with the thirty- first day of December of each year. ARTICLE IV: SHAREHOLDERS' MEETINGS Section 1 - Annual Meetings: An annual meeting of the shareholders for election of Directors and for such other business as may come before the meeting shall be held at the registered office of the Company or at such other place within or without the State of Michigan, at 10:00 AM, Eastern Daylight Saving Time, or at such other time on the fourth Friday in April of each year or upon such other date as the Board of Directors may designate, but in no event shall such date be more than ninety (90) days after the fourth Friday in April. Section 2 - Special Meetings: Special meetings of the shareholders may be called by the Board of Directors or by the Chairman of the Board. Such meetings shall be held at the registered office of the Company or at such other place within or without the State of Michigan as the Board of Directors may designate. Section 3 - Notices: Except as otherwise provided by law, written notice of any meeting of the shareholders shall be given, either personally or by mail to each shareholder of record entitled to vote at such meeting, not less than ten (10) days nor more than sixty (60) days prior to the date of the meeting, at their last known address as the same appears on the stock records of the Company. Written notice shall be considered given when deposited, with postage thereon prepaid, in a post office or official depository under the control of the United States postal service. Such notice shall specify the time and place of holding the meeting, the purpose or purposes for which such meeting is called, and the record date fixed for the determination of shareholders entitled to notice of and to vote at such meeting. The Board of Directors shall fix a record date for determining shareholders entitled to notice of and to vote at a meeting of shareholders, which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of the meeting. Such record date shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date for purposes of the adjourned meeting. No notice of an adjourned meeting shall be necessary if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting only such business may be transacted as might have been transacted at the original meeting. If, after an adjournment, the Board of Directors shall fix a new record date for the adjourned meeting, a notice of the adjourned meeting shall be mailed, in conformity with the provisions of the first paragraph of this Section 3, to each shareholder of record on the new record date entitled to vote at the adjourned meeting. Section 4 - Quorum: Except as otherwise provided by law or by the Articles of Incorporation of the Company, the holders of the shares of stock of the Company entitled to cast a majority of the votes at a meeting shall constitute a quorum for the transaction of business at the meeting, but a lesser number may convene any meeting and, by a majority vote of the shares present at the meeting, may adjourn the same from time to time until a quorum shall be present. Section 5 - Voting: Shareholders may vote at all meetings in person or by proxy in writing, but all proxies shall be filed with the Secretary of the meeting before being voted upon. The voting powers of the shares of Preferred Stock, Class A Preferred Stock, Preference Stock and Common Stock shall be as provided by law or set forth in the Articles of Incorporation of the Company. Section 6 - Inspectors: In advance of any meeting of shareholders the Board of Directors shall appoint one or more inspectors to act at such meeting or any adjournment thereof. The inspectors shall have such powers and duties as are provided by law. ARTICLE V: DIRECTORS Section 1 - Number: The Board of Directors of the Company shall consist of not less than seven (7) nor more than seventeen (17) members, as fixed from time to time by resolution of the Board of Directors. Section 2 - Election: The Directors shall be elected annually at the annual meeting of the shareholders or at any adjournment thereof. Section 3 - Term of Office: Subject to the provisions of the Articles of Incorporation of the Company and unless otherwise provided by law, the Directors shall hold office from the date of their election until the next succeeding annual meeting and until their successors are elected and shall qualify. Section 4 - Vacancies: Any vacancy or vacancies in the Board of Directors arising from any cause may be filled by the affirmative vote of a majority of the Directors then in office although less than a quorum. An increase in the number of members shall be construed as creating a vacancy. ARTICLE VI: DIRECTORS' MEETINGS Section 1 - Organization Meeting: As soon as possible after their election, the Board of Directors shall meet and organize and may also transact other business. Section 2 - Other Meetings: Meetings of the Board of Directors may be held at any time upon call of the Secretary or an Assistant Secretary made at the direction of the Chairman of the Board, the President, a Vice Chairman, if any, or a Vice President. Section 3 - Place of Meeting: All meetings of Directors shall be held at such place within or without the State of Michigan as may be designated in the call therefor. Section 4 - Notice: A reasonable notice of all meetings, in writing or otherwise, shall be given to each Director or sent to the Director's residence or place of business; provided, however, that no notice shall be required for an organization meeting if held on the same day as the shareholders' meeting at which the Directors were elected. No notice of the holding of an adjourned meeting shall be necessary. Notice of all meetings shall specify the time and place of holding the meeting and unless otherwise stated any and all business may be transacted at any such meeting. Notice of the time, place and purpose of any meeting may be waived in writing either before or after the holding thereof. Section 5 - Quorum: At all meetings of the Board of Directors a majority of the Board then in office shall constitute a quorum but a majority of the Directors present may convene and adjourn any such meeting from time to time until a quorum shall be present; provided, that if the Board shall consist of ten (10) and not more than fifteen (15), then five (5) members shall constitute a quorum; and if the Board shall consist of more than fifteen (15), then seven (7) members shall constitute a quorum. Section 6 - Voting: All questions coming before any meeting of the Board of Directors for action shall be decided by a majority vote of the Directors present at such meeting, unless otherwise provided by law, the Articles of Incorporation of the Company or by these Bylaws. Section 7 - Participation by Communications Equipment: A Director or a member of a Committee designated by the Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 8 - Action Without Meeting: Any action required or permitted to be taken pursuant to authorization voted at a meeting of the Board of Directors or a Committee thereof, may be taken without a meeting if, before or after the action, all members of the Board or of the Committee consent thereto in writing. The written consents shall be filed with the minutes of the proceedings of the Board or Committee, and the consents shall have the same effect as a vote of the Board or Committee for all purposes. ARTICLE VII: EXECUTIVE AND OTHER COMMITTEES Section 1 - Number and Qualifications: By resolution passed by a majority of the whole Board, the Board of Directors may from time to time designate one or more of their number to constitute an Executive or any other Committee of the Board, as the Board of Directors may from time to time determine to be desirable, and may fix the number of and designate the Chairman of each such Committee. Except as otherwise provided by law, the powers of each such Committee shall be as defined in the resolution or resolutions of the Board of Directors relating to the authorizations of such Committee, and may include, if such resolution or resolutions so provide, the power and authority to declare a dividend or to authorize issuance of shares of stock of the Company. Section 2 - Appointment: The appointment of members of each such Committee, or other action respecting any Committee, may take place at any meeting of the Directors. Section 3 - Term of Office: The members of each Committee shall hold office at the pleasure of the Board of Directors. Section 4 - Vacancies: Any vacancy or vacancies in any such Committee arising from any cause shall be filled by resolution passed by a majority of the whole Board of Directors. By like vote the Board may designate one or more Directors to serve as alternate members of a Committee, who may replace an absent or disqualified member at a meeting of a Committee; provided, however, in the absence or disqualification of a member of a Committee, the members of the Committee present at a meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act in the place of the absent or disqualified member. Section 5 - Minutes: Except as provided in Section 2 of Article X hereof or as otherwise determined by the Board of Directors, each such Committee shall make a written report or recommendation following its meetings or keep minutes of all its meetings. Section 6 - Quorum: At all meetings of any duly authorized Committee of the Board of Directors, a majority of the members of such Committee shall constitute a quorum but a majority of the members present may convene and adjourn any such meeting from time to time until a quorum shall be present; provided, that with respect to any Committee of the Board other than the Executive Committee, if the membership of such Committee is four (4) or less, then two (2) members of such Committee shall constitute a quorum and one member may convene and adjourn any such meeting from time to time until a quorum shall be present. ARTICLE VIII: OFFICERS Section 1 - Election: The officers shall be chosen by the Board of Directors. The Company shall have a Chairman of the Board, a President, a Secretary and a Treasurer, and such other officers as the Board of Directors may from time to time determine, who shall have respectively such duties and authority as may be provided by these Bylaws or as may be provided by resolution of the Board of Directors not inconsistent herewith. Any two (2) or more of such offices may be held by the same person but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, by the Articles of Incorporation of the Company or by these Bylaws to be executed, acknowledged or verified by two (2) or more officers. Section 2 - Qualifications: The Chairman of the Board and Vice Chairman, if any, shall be chosen from among the Board of Directors, but the other officers need not be members of the Board. Section 3 - Vacancies: Any vacancy or vacancies among the officers arising from any cause shall be filled by the Board of Directors. In case of the absence of any officer of the Company or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may delegate, for the time being, the powers or duties, or any of them, of any officer to any other officer or to any Director. Section 4 - Term of Office: Each officer of the Company shall hold office until the officer's successor is chosen and qualified, or until the officer's resignation or removal. Any officer appointed by the Board of Directors may be removed at any time by the Board of Directors with or without cause. Section 5 - Compensation: The compensation of the officers shall be fixed by the Board of Directors. ARTICLE IX: AGENTS Section 1 - Resident Agent: The Company shall have and continuously maintain a resident agent, which may be either an individual resident in the State of Michigan whose business office is identical with the Company's registered office or a Michigan corporation or a foreign corporation authorized to transact business in Michigan and having a business office identical with the Company's registered office. The Board of Directors shall appoint the resident agent. Section 2 - Other Agents: The Board of Directors may appoint such other agents as may in their judgment be necessary for the proper conduct of the business of the Company. ARTICLE X: POWERS AND DUTIES Section 1 - Directors: The business and affairs of the Company shall be managed by the Board of Directors which shall have and exercise all of the powers and authority of the Company except as otherwise provided by law, by the Articles of Incorporation of the Company or by these Bylaws. Section 2 - Executive Committee: In the interim between meetings of the Board of Directors the Executive Committee shall have and exercise all the powers and authority of the Board of Directors except as otherwise provided by law. The Executive Committee shall meet from time to time on the call of the Chairman of the Board or the Chairman of the Committee. The Secretary shall keep minutes in sufficient detail to advise fully the Board of Directors of the actions taken by the Committee and shall submit copies of such minutes to the Board of Directors for its approval or other action at its next meeting. Section 3 - Chairman of the Board: The Chairman of the Board shall preside at all meetings of Directors and shareholders; shall perform and do all acts and things incident to the position of Chairman of the Board; and shall perform such other duties as may be assigned from time to time by the Board of Directors or the Executive Committee. Unless otherwise provided by the Board or the Executive Committee, the Chairman of the Board shall have full power and authority on behalf of the Company to execute any shareholders' consents and to attend and act and to vote in person or by proxy at any meetings of shareholders of any corporation in which the Company may own stock and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Company might have possessed and exercised if present. If the Chairman of the Board shall not exercise such powers, or in the absence or inability to act of the Chairman, the President may exercise such powers. In the absence or inability to act of the President, a Vice Chairman, if any, may exercise such powers. In the absence or inability to act of a Vice Chairman, any Vice President may exercise such powers. The Board of Directors or Executive Committee by resolution from time to time may confer like powers upon any other person or persons. Section 4 - President: The President shall be the chief executive officer of the Company and, subject to the supervision of the Board of Directors and of the Executive Committee, shall have general charge of the business and affairs of the Company; shall perform and do all acts and things incident to such position; and shall perform such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee or the Chairman of the Board. In the absence of the Chairman of the Board and a Vice Chairman, the President shall preside at meetings of Directors. In the absence of the Chairman of the Board, the President shall preside at meetings of shareholders. Section 5 - Vice Chairman: The Vice Chairman, if any, shall perform such of the duties of the Chairman of the Board or the President on behalf of the Company as may be respectively assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President. In the absence of the Chairman of the Board, the Vice Chairman shall preside at meetings of Directors. In the absence of the Chairman of the Board and the President, the Vice Chairman shall preside at meetings of shareholders. Section 6 - Vice Presidents: Vice Presidents, if any, shall perform such of the duties of the Chairman of the Board or the President or the Vice Chairman, if any, on behalf of the Company as may be respectively assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President or a Vice Chairman. The Board of Directors or Executive Committee may designate one or more of the Vice Presidents as Executive Vice President or Senior Vice President. Section 7 - Controller: Subject to the Board of Directors, the Executive Committee, the Chairman of the Board, the President and the Vice President having general charge of accounting, the Controller, if any, shall have charge of the supervision of the accounting system of the Company, including the preparation and filing of all tax returns and financial reports required by law to be made to any and all public authorities and officials; and shall perform such other duties as may be assigned, from time to time, by the Board of Directors, the Executive Committee, the Chairman of the Board, the President, a Vice Chairman, if any, or Vice President having general charge of accounting. Section 8 - Treasurer: It shall be the duty of the Treasurer to have the care and custody of all the funds and securities, including the investment thereof, of the Company which may come into the Treasurer's hands, and to endorse checks, drafts and other instruments for the payment of money for deposit or collection when necessary or proper and to deposit the same to the credit of the Company in such bank or banks or depository as the Treasurer may designate, and the Treasurer may endorse all commercial documents requiring endorsements for or on behalf of the Company. The Treasurer may sign all receipts and vouchers for the payments made to the Company; shall render an account of transactions to the Board of Directors or the Executive Committee as often as the Board or the Committee shall require; and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and a Vice Chairman, if any. Section 9 - Secretary: The Secretary shall act as custodian of and record the minutes of all meetings of the Board of Directors, of the Executive Committee, of the shareholders and of any Committees of the Board of Directors which keep formal minutes; shall attend to the giving and serving of all notices of the Company; shall prepare or cause to be prepared the list of shareholders required to be produced at any meeting; shall attest the seal of the Company upon all contracts and instruments executed under such seal and shall affix or cause to be affixed the seal of the Company thereto and to all certificates of shares of the capital stock; shall have charge of the stock records of the Company and such other books and papers as the Board of Directors, the Executive Committee, the Chairman of the Board, the President or a Vice Chairman, if any, may direct; and shall, in general, perform all the duties of Secretary, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and a Vice Chairman, if any. Section 10 - General Counsel: The General Counsel, if any, shall have charge of all matters of a legal nature involving the Company. Section 11 - Assistant Controllers, Assistant Secretaries and Assistant Treasurers: An Assistant Controller, an Assistant Secretary or an Assistant Treasurer, if any, shall, in the absence or inability to act or at the request of the Controller, Secretary or Treasurer, respectively, perform the duties of the Controller or Secretary or Treasurer, respectively, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Chairman of the Board, the President or a Vice Chairman, if any. The performance of any such duty shall be conclusive evidence of their right to act. Section 12 - Principal Financial Officer and Principal Accounting Officer: The Board of Directors or the Executive Committee may from time to time designate officers of the Company to be the Principal Financial Officer and the Principal Accounting Officer of the Company. ARTICLE XI: STOCK Section 1 - Stock Certificates: The shares of stock of the Company shall be represented by certificates which shall be numbered and shall be entered on the stock records of the Company and registered as they are issued. Each certificate shall state on its face that the Company is formed under the laws of Michigan, the name of the person or persons to whom issued, the number and class of shares and the designation of the series the certificate represents, and the par value of each share represented by the certificate; shall be signed by the Chairman of the Board or a Vice Chairman or the President or one of the Vice Presidents and also may be signed by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary; and shall be sealed with the seal of the Company or a facsimile thereof. When such certificates are countersigned by a transfer agent or registered by a registrar, the signatures of any such Chairman of the Board, Vice Chairman, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. In case any officer, who shall have signed or whose facsimile signature shall have been placed on any such certificate, shall cease to be such officer of the Company before such certificate shall have been issued by the Company, such certificate may nevertheless be issued by the Company with the same effect as if the person, who signed such certificate or whose facsimile signature shall have been placed thereon, were such officer of the Company at the date of issue. Each certificate shall set forth on its face or back or state that the Company will furnish to a shareholder upon request and without charge a full statement of the designations, relative rights, preferences and limitations of the shares of stock of each class authorized to be issued and of each series so far as the same have been prescribed and the authority of the Board of Directors to designate and prescribe the relative rights, preferences and limitations of other series. Section 2 - Stock Records: The shares of stock of the Company shall be transferable on the stock records of the Company in person or by proxy duly authorized and upon surrender and cancellation of the old certificates therefor. The Board of Directors may fix a date preceding the date fixed for any meeting of the shareholders or any dividend payment date or the date for the allotment of rights or the date when any change, conversion or exchange of stock shall go into effect or the date for any other action, as the record date for the determination of the shareholders entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights in respect of any such change, conversion or exchange of stock or to take such other action, as the case may be, notwithstanding any transfer of shares on the records of the Company or otherwise after any such record date fixed as aforesaid. The record date so fixed by the Board shall not be more than sixty (60) nor less than ten (10) days before the date of the meeting of the shareholders, nor more than sixty (60) days before any other action. If the Board of Directors does not fix a date of record, as aforesaid, the record date shall be as provided by law. Section 3 - Stock - Preferred, Class A Preferred, Preference and Common: The Preferred Stock, Class A Preferred Stock, Preference Stock and Common Stock of the Company shall consist of shares having a par value of $100, no par value, $1 and $10 per share, respectively. The designations, relative rights, preferences, limitations and voting powers, or restrictions, or qualifications of the shares of Preferred Stock, Class A Preferred Stock, Preference Stock and Common Stock shall be as set forth in the Articles of Incorporation of the Company. Section 4 - Replacing Certificates: In case of the alleged loss, theft or destruction of any certificate of shares of stock and the submission of proper proof thereof, a new certificate may be issued in lieu thereof upon delivery to the Company by the owner or the owner's legal representative of a bond of indemnity against any claim that may be made against the Company on account of such alleged lost, stolen or destroyed certificate or such issuance of a new certificate. ARTICLE XII: AUTHORIZED SIGNATURES Section 1 - Authorized Signatures: All checks, drafts and other negotiable instruments issued by the Company shall be made in the name of the Company and shall be signed manually or signed by facsimile signature by such one of the officers of the Company or such other person as the Chairman of the Board may from time to time designate. ARTICLE XIII: INSURANCE Section 1 - Insurance: The Company may purchase and maintain liability insurance, to the full extent permitted by law, on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity. ARTICLE XIV: AMENDMENTS OF BYLAWS Section 1 - Amendments, How Effected: These Bylaws may be amended or repealed, or new Bylaws may be adopted, either by the majority vote of the votes cast by the shareholders entitled to vote thereon or by the majority vote of the Directors then in office at any meeting of the Directors. December 2, 1994 EX-21 6 CMS ENERGY SUBSIDIARIES EXHIBIT (21)(a) Exhibit (21)(a) SUBSIDIARIES OF CMS ENERGY CORPORATION at December 31, 1994 Percent Voting Stock Owned by CMS Energy Incorporated -------------- ------------ Consumers Power Company ("CPCo") 100 Michigan Michigan Gas Storage Company 0 Michigan (100% Owned by CPCo)* CMS Enterprises Company 100 Michigan * Subject to regulation by FERC EX-21 7 CONSUMERS SUBSIDIARIES EXHIBIT (21)(b) Exhibit (21)(b) SUBSIDIARIES OF CONSUMERS POWER COMPANY at December 31, 1994 Percent Voting Stock Owned by Consumers Power Company Incorporated -------------- ------------ Michigan Gas Storage Company* 100 Michigan * Subject to regulation by FERC EX-23 8 CONSENT OF ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into CMS Energy Corporation's previously filed Registration Statements No. 33-9732, No. 33-29681, No. 33-47629, No. 33-64044, No. 33-51877, No. 33-55805 and No. 33-57719. ARTHUR ANDERSEN LLP Detroit, Michigan, March 14, 1995. EX-24 9 CMS ENERGY POWERS OF ATTORNEY EXHIBIT (24)(a) Exhibit (24)(a) February 24, 1995 Mr. Alan M. Wright and Mr. Thomas A. McNish Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, MI 48126 CMS Energy Corporation is required to file an Annual Report on Form 10-K for the year ended December 31, 1994 with the Securities and Exchange Commission within 90 days after the end of the year. We hereby make, constitute and appoint each of you our true and lawful attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission said Annual Report with any necessary exhibits, and any amendments thereto that may be required. Very truly yours, /s/ William T. McCormick, Jr. /s/ W.U. Parfet - ---------------------------------- -------------------------------- William T. McCormick, Jr. William U. Parfet /s/ James J. Duderstadt /s/ Percy A. Pierre - ---------------------------------- -------------------------------- James J. Duderstadt Percy A. Pierre /s/ K R Flaherty /s/ S. Kinnie Smith, Jr. - ---------------------------------- -------------------------------- Kathleen R. Flaherty S. Kinnie Smith, Jr. /s/ Victor J. Fryling /s/ Robert D. Tuttle - ---------------------------------- -------------------------------- Victor J. Fryling Robert D. Tuttle /s/ Earl D. Holton /s/ Kenneth Whipple - ---------------------------------- -------------------------------- Earl D. Holton Kenneth Whipple /s/ Lois A. Lund /s/ John B. Yasinksy - ---------------------------------- -------------------------------- Lois A. Lund John B. Yasinsky /s/ Frank H. Merlotti - ---------------------------------- Frank H. Merlotti EX-24 10 CONSUMERS POWERS OF ATTORNEY EXHIBIT (24)(b) Exhibit (24)(b) February 24, 1995 Mr. Alan M. Wright and Mr. Thomas A. McNish 212 West Michigan Avenue Jackson, MI 49201 Consumers Power Company is required to file an Annual Report on Form 10-K for the year ended December 31, 1994 with the Securities and Exchange Commission within 90 days after the end of the year. We hereby make, constitute and appoint each of you our true and lawful attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission said Annual Report with any necessary exhibits, and any amendments thereto that may be required. Very truly yours, /s/ William T. McCormick, Jr. /s/ W.U. Parfet - ---------------------------------- -------------------------------- William T. McCormick, Jr. William U. Parfet /s/ James J. Duderstadt /s/ Percy A. Pierre - ---------------------------------- -------------------------------- James J. Duderstadt Percy A. Pierre /s/ K R Flaherty /s/ S. Kinnie Smith, Jr. - ---------------------------------- -------------------------------- Kathleen R. Flaherty S. Kinnie Smith, Jr. /s/ Victor J. Fryling /s/ Robert D. Tuttle - ---------------------------------- -------------------------------- Victor J. Fryling Robert D. Tuttle /s/ Earl D. Holton /s/ Kenneth Whipple - ---------------------------------- -------------------------------- Earl D. Holton Kenneth Whipple /s/ Lois A. Lund /s/ John B. Yasinksy - ---------------------------------- -------------------------------- Lois A. Lund John B. Yasinsky /s/ Frank H. Merlotti - ---------------------------------- Frank H. Merlotti EX-27 11 CMS ENERGY FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 12-MOS DEC-31-1993 JAN-01-1994 DEC-31-1994 PER-BOOK 4,285 1,040 830 1,229 0 7,384 1 1,701 (595) 1,107 0 356 2,001 339 708 0 21 0 108 43 2,701 7,384 3,619 92 3,115 3,219 400 (4) 408 229 203 24 179 67 113 612 2.09 0
EX-27 12 CONSUMERS FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000201533 CONSUMERS POWER COMPANY 1,000,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 PER-BOOK 4,285 644 717 1,163 0 6,809 841 491 80 1,427 0 356 1,549 339 404 0 9 0 108 36 2,596 6,809 3,356 107 2,873 2,993 363 1 377 151 226 24 202 176 113 598 0 0
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