-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Br7r7i6egYT0+JYp8Iteu9Z/89Q3bLohnkBIEZZ39Gt8NflWHvx80iuIJoO1o0tc Ic0vuni8YWXJjG4waaH55g== 0000201533-95-000128.txt : 19951119 0000201533-95-000128.hdr.sgml : 19951119 ACCESSION NUMBER: 0000201533-95-000128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05611 FILM NUMBER: 95589397 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 517-788-0550 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 95589398 BUSINESS ADDRESS: STREET 1: FAIRLANE PLZ SOUTH STE 1100 STREET 2: 330 TOWN CENTER DR CITY: DEARBORN STATE: MI ZIP: 48126 BUSINESS PHONE: 313-436-9200 MAIL ADDRESS: STREET 1: FAIRLANE PLAZA SOUTH, SUITE 1100 STREET 2: 330 TOWN CENTER DRIVE CITY: DEARBORN STATE: MI ZIP: 48126 10-Q 1 BODY OF 10-Q DOCUMENT FOR CMS ENERGY & CONSUMERS 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-9513 CMS ENERGY CORPORATION 38-2726431 (A Michigan Corporation) Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 (313)436-9200 1-5611 CONSUMERS POWER COMPANY 38-0442310 (A Michigan Corporation) 212 West Michigan Avenue Jackson, Michigan 49201 (517)788-0550 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of each of the issuer's classes of common stock at October 31, 1995: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 91,130,675 CMS Energy Class G Common Stock, no par value 7,586,724 Consumers Power Company, $10 par value, privately held by CMS Energy 84,108,789 2 CMS Energy Corporation and Consumers Power Company Quarterly reports on Form 10-Q to the Securities and Exchange Commission for the Quarter Ended September 30, 1995 This combined Form 10-Q 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 Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 PART I: CMS Energy Corporation Report of Independent Public Accountants. . . . . . . . . . . . . . . 6 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 7 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 8 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 9 Consolidated Statements of Common Stockholders' Equity. . . . . . . . 11 Condensed Notes to Consolidated Financial Statements. . . . . . . . . 12 Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 24 Consumers Power Company Report of Independent Public Accountants. . . . . . . . . . . . . . . 40 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 41 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 42 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 43 Consolidated Statements of Common Stockholder's Equity. . . . . . . . 45 Condensed Notes to Consolidated Financial Statements. . . . . . . . . 46 Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 55 PART II: Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 66 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 69 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3 GLOSSARY Certain terms used in the text and financial statements are defined below. ABATE . . . . . . . . . . . . . . . Association of Businesses Advocating Tariff Equity ALJ . . . . . . . . . . . . . . . . Administrative Law Judge Antrim. . . . . . . . . . . . . . . Antrim Limited Partnership Attorney General. . . . . . . . . . The Michigan Attorney General bcf . . . . . . . . . . . . . . . . Billion cubic feet Board of Directors. . . . . . . . . Board of Directors of CMS Energy Class G Common Stock. . . . . . . . One of two classes of common stock of CMS Energy, no par value, which reflects the separate performance of the Consumers Gas Group Clean Air Act . . . . . . . . . . . Federal Clean Air Act as amended on November 15, 1990 CMS Energy. . . . . . . . . . . . . CMS Energy Corporation CMS Energy Common Stock . . . . . . One of two classes of common stock of CMS Energy, par value $.01 per share CMS Gas 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 wholly owned subsidiary of Enterprises CMS NOMECO Common Stock . . . . . . Common Stock of CMS NOMECO Common Stock. . . . . . . . . . . . Common Stock of CMS Energy, including CMS Energy Common Stock and Class G Common Stock Consumers . . . . . . . . . . . . . Consumers Power Company, a subsidiary of CMS Energy Consumers Gas Group . . . . . . . . The gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Court of Appeals. . . . . . . . . . Michigan Court of Appeals Credit Facility . . . . . . . . . . $400 million unsecured revolving credit and letter of credit facility dated as of July 29, 1994 Detroit Edison. . . . . . . . . . . The Detroit Edison Company DNR . . . . . . . . . . . . . . . . Michigan Department of Natural Resources DSM . . . . . . . . . . . . . . . . Demand-side management Enterprises . . . . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy Environmental Response Act. . . . . Michigan Environmental Response Act FASB. . . . . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . . . . Gas cost recovery HYDRA-CO. . . . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary of CMS Generation and former independent power production subsidiary of Niagara Mohawk Power Corporation kWh . . . . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison MCV . . . . . . . . . . . . . . . . Midland Cogeneration Venture MCV Facility. . . . . . . . . . . . A natural gas-fueled, combined cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . . . . Midland Cogeneration Venture Limited Partnership MD&A. . . . . . . . . . . . . . . . Management's Discussion and Analysis MichCon . . . . . . . . . . . . . . Michigan Consolidated Gas Company Michigan Gas Storage. . . . . . . . Michigan Gas Storage Company, a subsidiary of Consumers MMcf/d. . . . . . . . . . . . . . . Million cubic feet per day MMCG. . . . . . . . . . . . . . . . Michigan Municipal Cooperative Group MPSC. . . . . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . . . . Megawatts NEIL. . . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd. NML . . . . . . . . . . . . . . . . Nuclear Mutual Ltd. NOPR. . . . . . . . . . . . . . . . Notice of proposed rulemaking North Michigan. . . . . . . . . . . North Michigan Land & Oil NRC . . . . . . . . . . . . . . . . Nuclear Regulatory Commission O&M . . . . . . . . . . . . . . . . Other operation and maintenance expense Palisades . . . . . . . . . . . . . Palisades nuclear plant, owned by Consumers PPA . . . . . . . . . . . . . . . . The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990 Preferred Stock . . . . . . . . . . CMS Energy preferred stock PSCR. . . . . . . . . . . . . . . . Power supply cost recovery PUHCA . . . . . . . . . . . . . . . Public Utility Holding Company Act of 1935 Restated Articles of Incorporation. . . . . . . . . . . CMS Energy's restated Articles of Incorporation as filed with the Michigan Department of Commerce June 6, 1995 authorizing the Class G Common Stock and increasing the authorized capital stock Retained Interest Shares. . . . . . The interest in the businesses attributed to the Consumers Gas Group that is not held by the holders of the outstanding shares of Class G Common Stock SEC . . . . . . . . . . . . . . . . Securities and Exchange Commission 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 SGP Partnership . . . . . . . . . . Specialty gas processors limited partnership composed of CMS Gas Transmission and Nitrotec Helium Corporation SFAS. . . . . . . . . . . . . . . . Statement of Financial Accounting Standards Superfund . . . . . . . . . . . . . Comprehensive Environmental Response, Compensation and Liability Act Terra . . . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas exploration and production company located in Traverse City, Michigan TGN . . . . . . . . . . . . . . . . CMS Gas Transmission's 25 percent ownership in Argentina's Transportadora de Gas del Norte S. A. Walter. . . . . . . . . . . . . . . Walter International, Inc., an oil and gas exploration and production company located in Houston, Texas 6 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have reviewed the accompanying consolidated balance sheets of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 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 June 9, 1995), we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, November 9, 1995 7 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1995 1994 1995 1994 1995 1994 In Millions, Except Per Share Amounts OPERATING REVENUE Electric utility $ 640 $ 573 $1,723 $1,667 $2,246 $2,188 Gas utility 122 126 801 837 1,116 1,188 Oil and gas exploration and production 26 25 82 59 101 76 Independent power production 25 13 71 30 87 37 Natural gas transmission, storage and marketing 52 28 133 106 171 143 Other 4 1 11 2 13 3 --------------------------------------------------------- Total operating revenue 869 766 2,821 2,701 3,734 3,635 --------------------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 74 80 208 230 284 299 Purchased power - related parties 124 119 369 359 492 482 Purchased and interchange power 72 37 154 134 182 177 Cost of gas sold 93 71 536 566 755 803 Other 168 163 491 456 656 632 --------------------------------------------------------- Total operation 531 470 1,758 1,745 2,369 2,393 Maintenance 48 46 139 138 192 193 Depreciation, depletion and amortization 96 85 302 272 410 372 General taxes 45 40 143 138 189 182 --------------------------------------------------------- Total operating expenses 720 641 2,342 2,293 3,160 3,140 --------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) Electric utility 125 107 295 281 346 335 Gas utility 2 4 110 106 139 156 Oil and gas exploration and production 5 7 27 11 24 6 Independent power production 13 8 40 13 48 13 Natural gas transmission, storage and marketing 4 2 9 8 10 9 Other - (3) (2) (11) 7 (24) --------------------------------------------------------- Total pretax operating income 149 125 479 408 574 495 --------------------------------------------------------- INCOME TAXES 32 26 111 97 118 100 --------------------------------------------------------- NET OPERATING INCOME 117 99 368 311 456 395 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Accretion income 3 3 9 10 12 13 Accretion expense (Note 2) (7) (8) (23) (27) (32) (36) Other income taxes, net 3 3 8 9 10 7 Other, net (1) 2 6 9 17 18 --------------------------------------------------------- Total other income (deductions) (2) - - 1 7 2 --------------------------------------------------------- FIXED CHARGES Interest on long-term debt 55 49 168 142 218 191 Other interest 8 5 17 10 25 18 Capitalized interest (2) (2) (4) (5) (5) (6) Preferred dividends 7 7 21 17 28 19 --------------------------------------------------------- Net fixed charges 68 59 202 164 266 222 --------------------------------------------------------- NET INCOME $ 47 $ 40 $ 166 $ 148 $ 197 $ 175 ========================================================= NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 48 $ 40 $ 167 $ 148 $ 198 $ 175 ========================================================= CLASS G $ (1) $ - $ (1) $ - $ (1) $ - ========================================================= AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 89 86 88 86 88 85 ========================================================= CLASS G 7 - 7 - 7 - ========================================================= EARNINGS (LOSS) PER AVERAGE COMMON SHARE CMS ENERGY $ .54 $ .46 $ 1.90 $ 1.73 $ 2.26 $ 2.05 ========================================================= CLASS G $ (.17) $ - $ (.17) $ - $ (.17) $ - ========================================================= DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ .24 $ .21 $ .66 $ .57 $ .87 $ .75 ========================================================= CLASS G $ .28 $ - $ .28 $ - $ .28 $ - ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1995 1994 1995 1994 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 166 $ 148 $ 197 $ 175 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $38, $37, $51 and $48, respectively) 302 272 410 372 Capital lease and other amortization 26 25 37 34 Debt discount amortization 24 28 33 38 Deferred income taxes and investment tax credit 65 61 60 40 Accretion expense 23 27 32 36 Accretion income - abandoned Midland project (9) (10) (12) (13) MCV power purchases - settlement (Note 2) (102) (71) (118) (90) Other (35) (13) (46) (15) Changes in other assets and liabilities (71) (43) (16) 85 ------ ------ ------ ------ Net cash provided by operating activities 389 424 577 662 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (527) (415) (687) (584) Investments in partnerships and unconsolidated subsidiaries (174) (40) (187) (66) Investments in nuclear decommissioning trust funds (38) (37) (51) (48) Cost to retire property, net (28) (25) (41) (33) Deferred demand-side management costs (7) (5) (11) (15) Proceeds from sale of property 1 10 11 10 Reduction of investments in MCV Bonds - - - 309 Other (7) (5) (6) (8) ------ ------ ------ ------ Net cash used in investing activities (780) (517) (972) (435) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans, notes and bonds 211 178 733 186 Issuance of common stock 148 24 154 148 Increase (decrease) in notes payable, net 135 142 74 (163) Payment of common stock dividends (60) (49) (78) (64) Retirement of bonds and other long-term debt (44) (228) (95) (228) Payment of capital lease obligations (26) (24) (37) (31) Repayment of bank loans (14) (143) (344) (278) Retirement of common stock (1) (2) (1) (2) Issuance of preferred stock - 193 - 193 ------ ------ ------ ------ Net cash provided by (used in) financing activities 349 91 406 (239) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (42) (2) 11 (12) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 79 28 26 38 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 37 $ 26 $ 37 $ 26 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9 CMS Energy Corporation Consolidated Balance Sheets
September 30 September 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions ASSETS PLANT AND PROPERTY (At Cost) Electric $6,007 $5,771 $5,671 Gas 2,180 2,102 2,052 Oil and gas properties (full-cost method) 1,074 934 925 Other 56 61 69 ----------------------------------- 9,317 8,868 8,717 Less accumulated depreciation, depletion and amortization 4,578 4,299 4,240 ----------------------------------- 4,739 4,569 4,477 Construction work-in-progress 222 245 279 ----------------------------------- 4,961 4,814 4,756 ----------------------------------- INVESTMENTS Independent power production 277 152 131 First Midland Limited Partnership (Note 2) 222 218 216 Natural gas transmission, storage and marketing 186 40 36 Midland Cogeneration Venture Limited Partnership (Note 2) 98 74 71 Other 21 16 14 ----------------------------------- 804 500 468 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 37 79 26 Accounts receivable and accrued revenue, less allowances of $4, $5 and $4, respectively (Note 7) 202 156 112 Inventories at average cost Gas in underground storage 263 235 271 Materials and supplies 77 75 79 Generating plant fuel stock 28 37 33 Trunkline settlement 30 30 30 Deferred income taxes 18 34 20 Prepayments and other 87 186 99 ----------------------------------- 742 832 670 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 472 484 490 Nuclear decommissioning trust funds 283 213 204 Abandoned Midland project (Note 3) 135 147 151 Trunkline settlement 33 55 63 Other 426 339 363 ----------------------------------- 1,349 1,238 1,271 ----------------------------------- TOTAL ASSETS $7,856 $7,384 $7,165 ===================================
10
September 30 September 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION (Note 7) Common stockholders' equity $1,439 $1,107 $1,087 Preferred stock of subsidiary 356 356 356 Long-term debt 2,763 2,709 2,378 Non-current portion of capital leases 101 108 118 ----------------------------------- 4,659 4,280 3,939 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 207 64 238 Notes payable 474 339 401 Accounts payable 214 194 152 Accrued taxes 106 216 102 MCV power purchases - settlement (Note 2) 95 95 82 Accounts payable - related parties 49 50 46 Accrued interest 32 40 29 Accrued refunds 31 25 37 Other 172 198 189 ----------------------------------- 1,380 1,221 1,276 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 628 582 567 Postretirement benefits 553 550 556 MCV power purchases - settlement (Note 2) 244 324 345 Deferred investment tax credit 173 181 184 Regulatory liabilities for income taxes, net 38 16 20 Trunkline settlement 33 55 63 Other 148 175 215 ----------------------------------- 1,817 1,883 1,950 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,856 $7,384 $7,165 =================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11 CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1995 1994 1995 1994 1995 1994 In Millions COMMON STOCK At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 ------- ------- ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 1,740 1,688 1,701 1,672 1,694 1,548 Common stock reacquired (1) (1) (1) (2) (1) (2) Common stock issued 195 7 234 24 240 148 Common stock reissued 1 - 1 - 2 - ------- ------- ------- ------- ------- ------- At end of period 1,935 1,694 1,935 1,694 1,935 1,694 ------- ------- ------- ------- ------- ------- REVALUATION CAPITAL At beginning of period 1 - - - - - SFAS 115 - unrealized loss, net of tax (9) - (8) - (8) - ------- ------- ------- ------- ------- ------- At end of period (8) - (8) - (8) - ------- ------- ------- ------- ------- ------- RETAINED EARNINGS (DEFICIT) At beginning of period (513) (630) (595) (707) (608) (719) Net income 47 40 166 148 197 175 Common stock dividends declared CMS Energy (21) (18) (58) (49) (76) (64) Class G (2) - (2) - (2) - ------- ------- ------- ------- ------- ------- At end of period (489) (608) (489) (608) (489) (608) ------- ------- ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $1,439 $1,087 $1,439 $1,087 $1,439 $1,087 ======= ======= ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
12 CMS Energy Corporation Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the 1994 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure and Basis of Presentation 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 domestic and international energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) electric and gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas. CMS Energy uses the equity method of accounting for investments in companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating income. For the three, nine and twelve month periods ended September 30, 1995, equity earnings were $19 million, $47 million and $60 million, respectively and $10 million, $21 million and $25 million for the three, nine and twelve month periods ended September 30, 1994. 2: The Midland Cogeneration Venture The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. At September 30, 1995, 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' annual obligation for purchase of contract capacity from the MCV Partnership under the PPA increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs but 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 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 a loss for the present value of the 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. 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 of its future after-tax cash underrecoveries, and possible losses for 1995 and the next four years are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $ 5 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including the recovery of MCV capacity above the MPSC's currently authorized level. For further information regarding this proposed settlement, see Note 3. At September 30, 1995 and December 31, 1994, the after-tax present value of the Settlement Order liability totaled $220 million and $272 million, respectively. The reduction in the liability since December 31, 1994, reflects after-tax cash underrecoveries of $66 million, partially offset by after-tax accretion expense of $14 million. The undiscounted after-tax amount associated with the liability totaled $623 million at September 30, 1995. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In 1994, Consumers paid $30 million to terminate a power purchase agreement with a proposed 65 MW coal-fired cogeneration facility. Additionally, in 1995, Consumers paid $15 million to terminate a power purchase agreement with a proposed 44 MW wood and chipped-tire facility. Consumers plans to seek MPSC approval to utilize less-expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. Cost recovery for this contract capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. This proposal represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for the canceled facilities. As a result, Consumers has recorded a regulatory asset of $45 million, which it believes will ultimately be recoverable in rates. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of the 65 MW of MCV capacity as part of the five year forecast included in the plan case. Although recovery of the costs relating to the MCV capacity was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for the MCV capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. If the MPSC adopts the ALJ's recommendation, the status of the regulatory asset will be reviewed for recoverability. 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. The MPSC confirmed the recovery of certain MCV-related costs 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. As part of its decision in the 1993 PSCR reconciliation case issued February 23, 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV, and instead allocated those costs to non- jurisdictional customers and reduced recovery from PSCR customers. Consumers believes this is contrary to the terms of the Settlement Order and has appealed the February 23 order on this issue. 3: Rate Matters Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. In late 1994, Consumers filed a request with the MPSC which could further increase its retail electric rates as much as $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 13 percent from the current 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 requested that the MPSC eliminate subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 (see Electric DSM) and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 4). In response to Consumers' requested rate increase, the MPSC staff initially recommended a final annual increase of $45 million to Consumers' base rates and suggested several options for cost recovery of 325 MW of MCV capacity. However, on motions filed by ABATE and the Attorney General, the ALJ struck portions of the MPSC staff's testimony relating to the cost of this capacity. In May 1995, the MPSC affirmed the ALJ's decision to strike the MPSC staff's testimony and stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. Consumers has filed a petition for rehearing of this order with the MPSC. The MPSC staff subsequently recommended a $43 million increase in Consumers' base rates. This position reflects a different sales forecast than Consumers', as well as a 12- percent return on equity and a lower equity ratio than that included in Consumers' proposed capital structure. The MPSC staff also recommends the elimination of all rate subsidization by industrial and large commercial customers. In August 1995, the ALJ issued a proposal for decision in this case that recommends a $46 million rate increase. The ALJ generally adopted the MPSC staff's position with adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ also recommended the elimination of rate subsidization. In August 1995, Consumers filed exceptions to the ALJ's proposal. If Consumers' revised position on all issues is adopted, retail electric rates would increase by $88 million. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers (see Special Rates discussion in the MD&A). 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 for ratemaking purposes. For further information, see Electric Rate Case discussion in the MD&A. In September 1995, Consumers and the MPSC staff reached a settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in separate proceedings. Specifically, the agreement would: resolve the current electric rate case and provide for a $50 million annual increase in revenue; substantially reduce rate subsidization by large industrial customers; provide for cost recovery of the 325 MW of uncommitted MCV capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; enable Consumers to negotiate rates for certain large industrial customers; and accelerate recovery of nuclear plant investment. The MPSC subsequently issued an order requiring Consumers to publish a new notice of hearing regarding the proposed settlement. The order also established a prehearing conference for late November 1995. Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of the abandoned Midland project and Consumers began collecting $35 million pretax annually for the next 10 years. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. In October 1995, the Michigan Supreme Court denied all parties leave to appeal the Court of Appeals' decision. Electric DSM: In June 1995, the MPSC authorized Consumers to collect an $11 million incentive for past DSM program performance. As part of the same order, the MPSC authorized Consumers to discontinue future DSM program expenditures and cease all new programs. During 1994, Consumers recognized the $11 million in revenue. Consumers is deferring and amortizing past program 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 $69 million at September 30, 1995. Gas Rates: In 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. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. The MPSC staff's recommendation included a lower rate base, a lower return on common equity, a revised capital structure and a lower operating cost forecast than Consumers had projected. In November 1995, the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position and recommended a $12 million rate decrease. Consumers expects an MPSC decision in early 1996. GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced. As a result, Consumers was not allowed to recover $13 million of costs. Consumers accrued a loss prior to 1993 in excess of the disallowed amount. In March 1995, management concluded that the intrastate producers' pending appeals of the MPSC order would not be successful and accordingly reversed $23 million (pretax) of the previously accrued loss, which represented the portion in excess of the disallowed amount. In June 1995, the Court of Appeals affirmed the MPSC's prior decision. The producers filed a motion for rehearing with the Court of Appeals. That motion was denied and the producers have petitioned the Michigan Supreme Court for review. In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a $44 million (excluding any interest) gas supply contract pricing dispute with certain intrastate producers. The ALJ found that the market-based pricing provisions required specific MPSC approval before Consumers could apply those prices to purchases under the contracts and found that such approval had not previously been given. Consumers did not agree with the ALJ's findings and filed exceptions with the MPSC. In October 1995, the MPSC issued an order stating that Consumers was not obligated to seek prior approval of price reductions that were implemented under the contracts in question. The producers will undoubtedly continue to pursue companion civil litigation for amounts owed under the producers' theories for previously purchased gas. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. 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 Consumers' financial position or results of operations. 4: 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 allows for continued operation of the plant through the end of its FERC license. 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) to the state of Michigan and the Great Lakes Fishery Trust, 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 definitive settlement documents have been completed and were filed with the appropriate Michigan courts and state and federal agencies. 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. In the other lawsuit, 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 for the significant sites will average less than 4 percent of the estimated total site remediation costs, and such liability is expected to be less than $9 million. At September 30, 1995, Consumers has accrued a liability for its estimated losses. Consumers and CMS Energy believe 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. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. 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. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites and the Michigan Department of Environmental Quality (formerly the DNR) has approved three of four plans 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, since 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 September 30, 1995, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and 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 properly 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 several other similar Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. 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 emissions monitoring. 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. 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 limits applicable to 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 estimated capital expenditures, including investment in unconsolidated subsidiaries and new lease commitments, of $1,067 million for 1995, $766 million for 1996 and $729 million for 1997. Capital expenditures for 1995 include approximately $201 million for acquisitions which commenced in 1994 but did not close until 1995. Guarantees and Letters of Credit: As of September 30, 1995 CMS Energy and Enterprises have guaranteed up to $143.1 million in contingent obligations of unconsolidated affiliates of Enterprises' subsidiaries. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. 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 could 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. The SEC has not taken action on this matter. In June 1995, the SEC released a staff report that recommended three legislative options to Congress in regards to PUHCA. For further information, see the Public Utility Holding Company Act Exemption discussion in the MD&A. Other: Consumers has experienced a 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 September 30, 1995, Consumers had 43 separate stray voltage lawsuits awaiting trial court action. Consumers and CMS Energy do not expect the ultimate resolution of these lawsuits to have a material impact on its financial position or results of operations. 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. 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 CMS Energy's financial position or results of operations. 5: Nuclear Matters In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. In January 1995, the U.S. Sixth Circuit Court of Appeals 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. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. As of September 30, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades. In 1996, 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 confirmed 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 Consumers has been storing low- level waste at its nuclear plant sites. Recently, a site in South Carolina became available for accepting low-level waste. Consumers began shipping its low-level waste to this site during the third quarter of 1995. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs for the major portion of prolonged accidental outages for 12 months after a 21 week exclusion with reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $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. 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. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. In April 1995, Consumers received a Safety Evaluation Report from the NRC concurring with this evaluation and requesting submittal of an action plan to provide for operation of the plant beyond 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as part of the development plans will support Consumers' proposal to anneal. 6: 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 periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1995 1994 1995 1994 ---- ---- ---- ---- Cash transactions Interest paid (net of amounts capitalized) $159 $126 $195 $163 Income taxes paid (net of refunds) 25 24 37 19 Non-cash transactions Nuclear fuel placed under capital lease $ 24 $ 18 $ 27 $ 24 Other assets placed under capital leases 3 11 7 12 Common Stock issued to acquire companies 86 - 86 - Assumption of Debt 15 - 15 - 7: Capitalization and Other CMS Energy On March 21, 1995, CMS Energy received shareholders' approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy, designated Class G Common Stock which reflects the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, will be attributed to the "Consumers Gas Group"). The existing CMS Energy Common Stock continues to be outstanding and is intended to 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 the outstanding shares of the Class G Common Stock. Prior to the approval of the amendment to the Articles of Incorporation on March 21, 1995, CMS Energy was permitted to issue up to 250 million shares of common stock, $.01 par value and up to 5 million shares of preferred stock, $.01 par value. The filing of the Restated Articles of Incorporation with the Michigan Department of Commerce increased the number of authorized shares of capital stock from 255 million shares to 320 million shares, consisting of 250 million shares of CMS Energy Common Stock, par value $.01 per share, 60 million shares of Class G Common Stock, no par value, and 10 million shares of Preferred Stock, par value $.01 per share. CMS Energy filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock of CMS Energy (including Class G Common Stock), Preferred Stock of CMS Energy or of a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually evaluates the capital markets and may offer such securities from time to time, at terms to be determined at or prior to the time of the sale. In the third quarter 1995, CMS Energy received net proceeds of approximately $123 million from the issuance of 7.52 million shares of Class G Common Stock at a price to the public of $17.75 per share initially representing 23.5% of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds will be invested in the businesses and used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness under the Credit Facility, none of which is attributable to the Consumers Gas Group. The issuance of additional shares, during the third quarter, increased the common stockholder's equity value attributed to the Consumers Gas Group, represented by the outstanding shares of Class G Common Stock, to 23.6% as of September 30, 1995. Consumers Power Debt Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. At September 30, 1995, Consumers had an unsecured $425 million facility and unsecured, committed lines of credit aggregating $135 million that are used to finance seasonal working capital requirements. At September 30, 1995 and 1994, Consumers had a total of $474 million and $401 million outstanding under these facilities, respectively. Other Consumers has an established $500-million trade receivables purchase and sale program. At September 30, 1995 and 1994, receivables sold under the agreement totaled $210 million. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In April 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. In November 1995, Consumers filed a registration statement with the SEC for the possible future sale of $100 million of Trust Originated Preferred Securities through a business trust affiliated with Consumers. The trust was formed for the sole purpose of issuing preferred securities and investing the proceeds in subordinated notes which will be unsecured obligations of Consumers. The payment of dividends and redemption of the preferred securities are guaranteed by Consumers. In September 1995, Consumers extended its nuclear fuel leasing arrangement an additional year to November 1997. At September 30, 1995, $67 million of nuclear fuel was under lease. CMS NOMECO In February 1995, CMS Energy acquired Walter International, Inc., a Houston-based independent oil company, for approximately $46 million subject to post-closing adjustments. Walter was merged with a wholly- owned subsidiary of CMS NOMECO. In connection with the acquisition, CMS Energy delivered $24 million of CMS Energy Common Stock and CMS NOMECO assumed $12 million of project financing debt and incurred $7 million of intercompany debt to CMS Energy. In August 1995, CMS Energy acquired 100% of the common stock of Terra Energy Ltd., a gas exploration company, located in Traverse City, Michigan for $63.6 million. Terra has become a wholly owned subsidiary of CMS Nomeco. In connection with the acquisition, CMS Energy has delivered $62.3 million of CMS Energy Common Stock and is expected to deliver an additional $1.3 million of CMS Energy Common Stock, subject to post- closing adjustments. CMS NOMECO's existing revolving bank credit line, which converts to term loans maturing from November 1996 through November 1999, was increased from $110 million at December 31, 1994 to $130 million at September 30, 1995. $113 million of revolving credit debt was outstanding at a weighted average interest rate of 7.20 percent at September 30, 1995. Senior serial notes amounting to $28 million, with a weighted average interest rate of 9.40 percent, were repaid in full on August 10, 1995. In connection with this early extinguishment of debt, CMS NOMECO incurred a $1.5 million prepayment penalty. The notes were retired with available proceeds from the bank credit line. In October 1995, CMS NOMECO filed a registration statement with the SEC covering the issuance of not more than 20 percent of CMS NOMECO Common Stock. Proceeds from the issuance and sale would be used to improve CMS NOMECO's capital structure by reducing existing debt. CMS Generation In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility with an outstanding amount of $110 million as of September 30, 1995, for the acquisition of HYDRA-CO. CMS Energy is currently evaluating permanent financing options which are expected to be in place by the end of 1995. 8: Earnings Per Share and Dividends Earnings (Loss) per share attributable to CMS Energy Common Stock and Class G Common Stock, for the three, nine and twelve month periods ended September 30, 1995 reflect the initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock participates in earnings and dividends from the issue date. The allocation of earnings (loss) attributable to each class of common stock and the related amounts per share are computed by considering the weighted average number of shares outstanding. Earnings (Loss) attributable to outstanding Class G Common Stock is equal to Consumers Gas Group net income (loss) multiplied by a fraction, the numerator of which is the weighted average number of shares of Class G Common Stock outstanding during the period and the denominator of which represents the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The seasonal (loss) attributable to Class G Common Stock on a per share basis, for the periods ended September 30, 1995, is determined based on 23.17 percent of the (loss) of the Consumers Gas Group. Earnings per share for Class G Common Stock are omitted from the statements of income for the periods reported prior to the periods ended September 30, 1995, since the Class G Common Stock was not part of the equity structure of CMS Energy. For purpose of analysis, following are pro forma data for the nine months ended September 30, 1995 and 1994 and the year ended December 31, 1994 which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.5% of the equity attributable to the Consumers Gas Group) as if the sale of all these shares had occurred on January 1, 1994. In Millions, Except Per Share Amounts Pro Forma Pro Forma Nine Months Ended Year Ended September 30 December 31 1995 1994 1994 ----- ----- ----- Net Income $ 166 $ 148 $ 179 Net Income attributable to CMS Energy Common Stock $ 156 $ 137 $ 167 Net Income attributable to outstanding Class G Common Stock $ 10 $ 11 $ 12 Average shares outstanding: CMS Energy Common Stock 88.021 85.742 85.888 Class G Common Stock 7.521 7.520 7.520 Earnings per share attributable to CMS Energy Common Stock $1.76 $1.60 $1.94 Earnings per share attributable to outstanding Class G Common Stock $1.38 $1.41 $1.66 Holders of Class G Common Stock have no direct rights in the equity or assets of the Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of its Board of Directors, dividends may be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. The Board of Directors has stated its intentions to declare and pay dividends on the CMS Energy Common Stock based primarily on the earnings and financial condition of CMS Energy. Dividends on the Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of the Consumers Gas Group, and to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current intention that the declaration or payment of dividends with respect to the Class G Common Stock will not be reduced, suspended or eliminated as a result of factors arising out of or relating to the electric utility business or the non-utility businesses of CMS Energy unless such factors also require, in the Board of Directors' sole discretion, the omission of the declaration or reduction in payment of dividends on both the CMS Energy Common Stock and the Class G Common Stock. Dividends declared in July, 1995, of 24 cents per share and 28 cents per share on CMS Energy Common Stock and Class G Common Stock respectively, were paid in August, 1995. In October 1995, the Board of Directors declared a quarterly dividend of 24 cents per share and 28 cents per share on CMS Energy Common Stock and Class G Common Stock respectively. 24 CMS Energy Corporation Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1994 Form 10-K of CMS Energy. 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 domestic and international non- utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) electric and 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. In the third quarter 1995, CMS Energy received net proceeds of approximately $123 million from the issuance of 7.52 million shares of Class G Common Stock at a price to the public of $17.75 per share, initially representing 23.5% of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds will be invested in the businesses and used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness under the Credit Facility, none of which is attributable to the Consumers Gas Group. For further information, see Note 7. Consolidated earnings for the quarters ended September 30, 1995 and 1994 Consolidated net income totaled $47 million comprised of $48 million of net income attributable to CMS Energy Common Stock and $(1) million net loss attributable to Class G Common Stock for the third quarter of 1995 compared to $40 million or $.46 per share for the third quarter of 1994. Earnings per share, for the third quarter of 1995 are $.54 per share attributable to CMS Energy Common Stock and $(.17) per share attributable to Class G Common Stock. The increase in net income reflects an increase in electric utility sales and gas utility deliveries, increased revenue from the May 1994 electric rate increase and the growth of the non-utility businesses. This increase was offset, however, by reduced gas revenue in 1995 compared to 1994, and higher depreciation and general tax expenses during 1995. For further information, see the Electric and Gas Utility and the individual non-utility Results of Operations sections. Consolidated earnings for the nine months ended September 30, 1995 and 1994 Consolidated net income totaled $166 million comprised of $167 million of net income attributable to CMS Energy Common Stock and $(1) million net loss attributable to Class G Common Stock for the nine months ended September 30, 1995, compared to $148 million or $1.73 per share for the nine months ended September 30, 1994. Earnings per share, for the nine months ended September 30, 1995 are $1.90 per share attributable to CMS Energy Common Stock and $(.17) per share attributable to Class G Common Stock. The increase in net income primarily reflects increased electric utility sales, an electric rate increase, reversal of losses previously recorded for gas contingencies (see Note 3), and additional earnings reflecting improved operating results from Consumers' interest in the MCV Facility, and the growth of the non-utility businesses. Partially offsetting these increases were a decrease in gas utility deliveries, higher operating expenses during the 1995 period, and DSM incentive revenue recorded in the second quarter of 1994. For further information, see the Electric and Gas Utility and the individual non- utility Results of Operations sections. Consolidated earnings for the 12 months ended September 30, 1995 and 1994 Consolidated net income totaled $197 million comprised of $198 million of net income attributable to CMS Energy Common Stock and $(1) million net loss attributable to Class G Common Stock for the 12 months ended September 30, 1995, compared to $175 million or $2.05 per share for the 12 months ended September 30, 1994. Earnings per share, for the 12 months ended September 30, 1995 are $2.26 per share attributable to CMS Energy Common Stock and $(.17) per share attributable to Class G Common Stock. The increase in net income reflects higher electric kWh sales, an electric rate increase, and the reversal of losses previously recorded for gas contingencies and the growth of the non-utility business, partially offset by lower gas utility deliveries during 1995, DSM incentive revenue recorded in the 1994 period, and higher operating expenses during 1995. For further information, see the Electric and Gas Utility and the individual non-utility Results of Operations sections. Cash Position, Financing and Investing CMS Energy's primary ongoing source of operating cash is dividends from its principal subsidiaries. CMS Energy's consolidated operating cash requirements are met by its operating and financing activities. CMS Energy's consolidated cash from operations continues to primarily reflect Consumers' sale and transportation of natural gas and the generation, sale and transmission of electricity and CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations for the first nine months of 1995 primarily reflects Consumers' increased electric sales and increased electric rates which were approved by the MPSC in mid-1994, offset by Consumers' greater underrecoveries for power costs, primarily associated with the increased 108 MW of contractual capacity purchased from the MCV. Financing and Investing Activities: Capital expenditures, including assets placed under capital lease, deferred DSM costs and investment in unconsolidated subsidiaries totaled $735 million for the first nine months of 1995 compared with $489 million for the first nine months of 1994. These amounts primarily represent CMS Energy's continued expansion of the non-utility business segments, and capital investments in the electric and gas utility business units. Capital expenditures for 1995 include approximately $201 million for acquisitions which commenced in 1994 but did not close until 1995. CMS Energy's expenditures for the first nine months of 1995 for its utility and non-utility businesses were $312 million and $423 million, respectively. In the third quarter of 1995, CMS Energy received net proceeds of approximately $123 million from the issuance of 7.52 million shares of Class G Common Stock (see Note 7). In January, May and August 1995, CMS Energy paid $18 million, $19 million and $21 million, respectively, in cash dividends to holders of CMS Energy Common Stock. In August 1995, CMS Energy paid $2 million in cash dividends to holders of Class G Common Stock. In the second quarter of 1995, CMS Energy received a $70 million common dividend from Consumers. In October 1995, the Board of Directors declared a quarterly dividend of 28 cents per share on Class G Common Stock and a quarterly dividend of 24 cents per share on CMS Energy Common Stock. In October 1995, CMS NOMECO filed a registration statement with the SEC for an initial public offering of not more than 20 percent of CMS NOMECO Common Stock. Proceeds from the issuance and sale would be used by CMS NOMECO to improve its capital structure by reducing existing debt. Financing and Investing Outlook: CMS Energy estimates that capital expenditures, including new lease commitments, will total approximately $2.6 billion for the years 1995 through 1997. Cash generated by operations is expected to satisfy a substantial portion of capital expenditures. Additionally, CMS Energy will continue to evaluate capital markets in 1995 as a potential source of financing its subsidiaries' investing activities. In Millions Years Ended December 31 1995 1996 1997 ------ ------ ------ Electric utility $ 333 $ 295 $ 252 Gas utility 128 119 101 Oil and gas exploration and production (a) 188 120 135 Independent power production (b) 236 165 173 Natural gas pipeline, storage and marketing (c) 176 67 68 ------ ------ ------ $1,061 $ 766 $ 729 ====== ====== ====== (a)(b) 1995 capital expenditures include requirements of approximately (a)$46 million and (b)$155 million for acquisitions which commenced in 1994 but did not close until 1995. (c) 1995 capital expenditures include requirements of approximately $136 million for the acquisition of TGN. At September 30, 1995, Consumers had several available sources of credit including unsecured, committed lines of credit totaling $135 million and a $425 million unsecured working capital facility. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing a $470 million facility, which expired by its own terms. 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, gas in storage 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. Consumers is continuing efforts toward its goal of increasing the equity portion of its capital structure. In November 1995, Consumers filed a registration statement with the SEC for the possible future sale of $100 million of Trust Originated Preferred Securities (see Note 7). In August 1995, in response to an MPSC staff proposal, Consumers temporarily suspended its common dividends to CMS Energy in lieu of CMS Energy making a direct equity infusion of cash into Consumers. Any reduction in cash dividends from Consumers as a result of this action will be offset by a reduction in the cash outflows for potential equity infusions from CMS Energy to Consumers. Electric Utility Results of Operations Electric Pretax Operating Income for the quarters ended September 30, 1995 and 1994: During the third quarter of 1995, electric pretax operating income increased $18 million from the 1994 level. This increase resulted primarily from higher electric kWh sales (see Electric Sales section). The increased load was due to a combination of hot weather and the resulting increased usage of air conditioning equipment and continued economic growth. The increase was partially offset by higher depreciation, general taxes and operation and maintenance expenses during 1995. Electric Pretax Operating Income for the nine months ended September 30, 1995 and 1994: Electric pretax operating income for the nine months ended September 30, 1995 increased $14 million from the comparable 1994 period. This increase primarily reflects higher electric kWh sales (see Electric Sales section) and the impact of the May 1994 electric rate increase, which included the recovery of higher postretirement benefit costs. The increase was partially offset by higher operating expenses during 1995, which included $10 million of additional postretirement benefit costs, along with the impact of 1994 DSM incentive revenue. Electric Pretax Operating Income for the 12 months ended September 30, 1995 and 1994: The $11 million improvement in electric pretax operating income for the 12 months ended September 30, 1995 compared with the corresponding 1994 level is primarily the result of the impact of increased electric kWh sales (see Electric Sales section), and the May 1994 electric rate increase, which included the recovery of the higher postretirement benefit costs. The increases were partially offset by higher operating expenses during 1995, which included $20 million of additional postretirement benefit costs, along with the impact of 1994 DSM incentive revenue. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Sales $ 34 $43 $41 Rate increases and other regulatory issues 0 5 16 O&M, general taxes and depreciation (16) (34) (46) ----- ----- ----- Total change $18 $14 $11 ===== ===== ===== Electric Sales: Electric sales during the third quarter of 1995 totaled 9.5 billion kWh, a 5.5 percent increase from 1994 levels. During the third quarter of 1995, residential, commercial, and industrial sales increased 15.1 percent, 8.7 percent and 1.9 percent, respectively. Consumers' electric sales have benefited from warmer-than-normal temperatures in July and August and a continuing strong Michigan economy. August 1995 was the third warmest August on record. Electric sales during the nine months ended September 30, 1995 totaled 26.7 billion kWh, a 3.3 percent increase from 1994 levels. This increase reflects continued strength in the industrial and commercial sectors, and warmer weather. During the nine months ended 1995 period, residential, commercial and industrial sales increased 4.6 percent, 5.3 percent and 3.4 percent respectively. Electric sales during the 12 months ended September 30, 1995 totaled 35.3 billion kWh, a 3.6 percent increase from 1994 levels. During the 12 months ended 1995 period, residential, commercial and industrial sales increased 3.0 percent, 4.7 percent and 3.7 percent respectively. The chemicals and transportation equipment segments accounted for the largest share of the growth in industrial kWh sales. Power Costs: Power costs for the three month period ended September 30, 1995 totaled $270 million, an increase of $34 million from the corresponding 1994 period. This increase primarily reflects higher purchased power costs resulting from the warmer temperatures in July and August 1995. Power costs for the nine month period ended September 30, 1995 totaled $731 million, an $8 million increase from the corresponding 1994 period. Power costs for the 12 month period ended September 30, 1995 totaled $958 million, unchanged from the corresponding 1994 period as increased volumes of both generated and purchased power were offset by lower prices. Combined, the average cost of power per kWh for system sales requirements decreased to 2.52 cents from 2.60 cents. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership increased to 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed 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 a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. 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 $66 million for the first nine months of 1995. Estimated future after-tax cash underrecoveries, and possible losses for 1995 and the next four years are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $ 5 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including the recovery of MCV capacity above the MPSC's currently authorized level. For further information regarding the settlement, see Note 3. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In July 1994 and February 1995, Consumers terminated power purchase agreements with a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. Consumers plans to seek MPSC approval to utilize 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of 65 MW of MCV capacity as part of the five year forecast included in the plan case. Although recovery of the costs relating to the MCV capacity was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for the MCV capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. For further information, see Note 2. Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. Consumers filed a request with the MPSC in late 1994, to further increase its retail electric rates. As part of this case, in May 1995, the MPSC stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. This ruling is subject to rehearing. In August 1995, the ALJ recommended a final annual rate increase of $46 million. Consumers' currently seeks an increase of $88 million. For further information regarding Consumers' request and the staff's recommendation, see Note 3. 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 for ratemaking purposes. In April 1995, the MPSC staff's filing did not support Consumers' requested increase in depreciation expense, but instead proposed a decrease of $24 million. In addition, the MPSC staff also did not support the reallocation of plant investment as proposed by Consumers but suggested several alternatives which could partially address this issue. In September 1995, the ALJ issued a proposal for decision that essentially supported the MPSC staff's position regarding depreciation expense and recommended that the MPSC reject both Consumers' and the MPSC staff's positions regarding the reallocation of Consumers' depreciation reserve and plant investment. A final order is expected in late 1995. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues, including Consumers' current electric rate case, depreciation case, special rate case (discussed below) and cost recovery of 325 MW of uncommitted MCV capacity. The MPSC subsequently issued an order requiring Consumers to publish a new notice of hearing regarding the proposed settlement. The order also established a prehearing conference for late November 1995. For more information regarding the settlement, see Note 3. 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 that 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. In May 1995, the MPSC issued an order stating that it has legal authority to approve a range of rates under which Consumers could negotiate prices with customers that have competitive energy alternatives. However, the MPSC dismissed from consideration, in this proceeding, the issues related to Consumers' proposed use of the additional 325 MW of MCV contract capacity to serve these customers. In June 1995, Consumers filed a petition for rehearing of this decision with the MPSC. As of September 30, 1995, all parties have filed briefs and reply briefs in these proceedings. Electric Conservation Efforts: In June 1995, the MPSC issued an order that authorized Consumers to collect an $11 million incentive related to Consumers' achievement of certain DSM program objectives. The MPSC also authorized Consumers to discontinue future DSM program expenditures and cease all new programs. Consumers recognized the $11 million in revenue during 1994. For further information, see Note 3. Electric Capital Expenditures: CMS Energy estimates capital expenditures, including new lease commitments, related to Consumers' electric utility operations of $333 million for 1995, $295 million for 1996 and $252 million for 1997. These amounts include an attributed portion of 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. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions are properly recoverable in rates. 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. For further information regarding electric environmental matters, see Note 4. 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 increased 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. In an effort to meet the challenge of competition, Consumers signed a sales contract in mid-October 1995 with its largest customer, General Motors Corporation, which provides that Consumers will be the sole provider of approximately 450 MW of electricity for 19 manufacturing facilities currently located in Michigan. Under the contract, Consumers will serve certain facilities at least five years and other facilities at least 10 years in exchange for competitively discounted electric rates. Certain facilities will have the option of taking retail wheeling service (if available) during the first five years of the contract. The contract was approved by the MPSC in late October 1995. 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, or approximately 6 percent, per year. Consumers is committed to holding operation and maintenance expenses 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 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 June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers and ABATE sought rehearing regarding a number of issues included in the order. In September 1995, the MPSC denied the rehearing requests. Consumers, ABATE and the Dow Chemical Company have filed claims of appeal of the MPSC's retail wheeling orders. Consumers anticipates that these appeals will be consolidated with appeals previously filed by Detroit Edison and the Attorney General. Consumers does not expect this short- term experiment to have a material impact on its financial position or results of operations. In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose changes in the wholesale electric industry. Among the most significant proposals, is a requirement that utilities provide open access to the domestic interstate transmission grid. Under the FERC's proposal, all utilities would be required to use these tariffs for their own wholesale sales of electric energy, and the utilities would be allowed the opportunity to recover wholesale stranded costs (including those applicable to municipalization situations). Consumers is unable to predict what (if any) final rules that may be issued by the FERC related to this proposal. However, management believes that Consumers is well- positioned to conform to open access as it has been voluntarily providing this transmission service since 1992. Nuclear Matters: In July 1995, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report recognized improved performance at the plant, specifically in the areas of Engineering and Plant Operations. In the report, the NRC noted areas which continue to require management's attention, but also recognized the development and implementation of plans for corrective action designed to address previously identified weak areas. The report noted that performance in the areas of Maintenance and Plant Support was good and remained unchanged. Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. 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. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. 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 Consumers has been storing low- level waste at its nuclear plant sites. Recently, a site in South Carolina became available for accepting low-level waste. Consumers began shipping its low-level waste to this site during the third quarter of 1995. 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. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as a part of the development plans will support Consumers' proposal to anneal. Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At September 30, 1995, Consumers had 43 separate stray voltage lawsuits awaiting trial court action. 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 4. Consumers Gas Group Results of Operations Gas Pretax Operating Income for the quarters ended September 30, 1995 and 1994: During the third quarter of 1995, gas pretax operating income decreased $2 million from the 1994 level. The decreased operating income reflects lower gas revenue in 1995 compared to 1994 as a result of a cumulative revenue adjustment recorded in 1994 which increased revenues for that year, and higher depreciation expense during 1995. Partially offsetting this decrease was an 11.4 percent increase in gas deliveries (see Gas Deliveries section), and lower operation, maintenance and general tax expenses during 1995. Gas Pretax Operating Income for the nine months ended September 30, 1995 and 1994: The $4 million increase in gas pretax operating income for the nine months ended September 30, 1995 compared with the same 1994 period reflects the reversal of losses previously recorded for gas contingencies (see Note 3) and lower general tax and gas operation and maintenance expenses. Partially offsetting this increase were lower gas deliveries (see Gas Deliveries section) and higher depreciation. Gas Pretax Operating Income for the 12 months ended September 30, 1995 and 1994: The $17 million decrease in 1995 gas pretax operating income compared with 1994 reflects lower gas deliveries (see Gas Deliveries section) and higher depreciation and general taxes, partially offset by the reversal of losses previously recorded for gas contingencies and lower operation and maintenance expenses. The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Deliveries $ 1 $(13) $(29) Recovery of gas costs and other regulatory issues (9) 17 14 O&M, general taxes and depreciation 6 - (2) ---- ---- ---- Total change $ (2) $ 4 $(17) ==== ==== ==== Gas Deliveries: During the third quarter of 1995, gas sales and gas transported, excluding transport to the MCV and off-system transportation, totaled 31.9 bcf, an 11.4 percent increase from the corresponding 1994 level. Gas sales and gas transported increased 1.0 bcf and 2.2 bcf, respectively, with the majority of the change attributable to increased usage. For the nine months ended September 30, 1995, gas sales and gas transported for all customer classes totaled 273.1 bcf, an 8.5 percent decrease from the corresponding 1994 level. Gas sales decreased 8.6 bcf while transport deliveries increased 4.7 bcf. The decrease in firm sales occurred primarily due to warmer temperatures. For the 12 months ended September 30, 1995, gas sales and gas transported for all customer classes totaled 383.7 bcf, a 9.5 percent decrease from the corresponding 1994 level, reflecting record cold winter weather during the 12 months ended September 30, 1994 and significantly warmer weather during the 12 months ended September 30, 1995 period. Cost of Gas Sold: The utility cost of gas sold for the third quarter of 1995 increased $5 million from the 1994 level. The utility cost of gas sold for the nine months ended September 30, 1995 decreased $40 million from the 1994 level as a result of reduced deliveries and the reversal of a gas supplier loss contingency. The utility cost of gas sold for the 12 months ended September 30, 1995 decreased $58 million from the corresponding 1994 level which was also the result of reduced gas deliveries and the gas supplier loss contingency reversal. Consumers Gas Group 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. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. In November 1995 the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position and recommended a $12 million rate decrease. A final order from the MPSC is expected in early 1996. For further information regarding Consumers' current gas rate case, see Note 3. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to by-pass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Issues: In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a $44 million (excluding any interest) gas supply contract pricing dispute with certain intrastate producers. The ALJ found that the market-based pricing provisions required specific MPSC approval before Consumers could apply those prices to purchases under the contracts and found that such approval had not previously been given. Consumers did not agree with the ALJ's findings and filed exceptions with the MPSC. In October 1995, the MPSC issued an order stating that Consumers was not obligated to seek prior approval of price reductions that were implemented under the contracts in question. The producers will undoubtedly continue to pursue companion civil litigation for amounts owed under the producers' theories for previously purchased gas. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. Gas Capital Expenditures: CMS Energy estimates capital expenditures, including new lease commitments, related to Consumers' gas utility operations of $128 million for 1995, $119 million for 1996 and $101 million for 1997. These amounts include an attributed portion of anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Gas Environmental Matters: The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $112 million. These estimates are based on undiscounted 1994 costs. At September 30, 1995, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and 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 several other Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. 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 4. Consumers Gas Group Outlook Consumers currently anticipates gas deliveries to grow approximately 2.0 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 increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. New technologies being developed on a national level, such as the emerging use of natural gas vehicles, 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 and other processes to natural gas. Low Income Home Energy Assistance Program funding currently provides approximately $71 million in heating assistance to approximately 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. However, recent actions by the U. S. House of Representatives Committee on Appropriations has put restoration of funding for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to maintain this funding. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three months ended September 30, 1995 decreased $2 million from the same period in 1994, reflecting a $2 million U.S. cost center write-down due to low gas and oil prices recorded in the third quarter of 1995 and the recognition of a $4.8 million gain from the disposition of a gas sales contract in the third quarter of 1994. The comparison of the quarter's results also reflects higher oil and gas sales volumes, partially offset by lower average market prices for gas. Pretax operating income for the nine and twelve months ended September 30, 1995 increased $16 million and $18 million, respectively, over the comparable 1994 periods primarily due to gains from the assignment of gas supply contracts ($9.9 million in March 1995 and $4.8 million in July 1994) and higher sales volumes and oil sales prices, partially offset by lower average market prices for gas. Capital Expenditures: In February 1995, CMS NOMECO closed on the acquisition of Walter International, Inc. for approximately $46 million, consisting of approximately $24 million of CMS Energy Common Stock and $22 million in both cash and assumed debt. Post-closing adjustments may result in the issuance of approximately $3 million of additional CMS Energy Common Stock. CMS NOMECO's acquisition of Walter added net production of 5,500 barrels per day in 1995 and proven reserves of approximately 20 million barrels of oil. In August 1995, CMS NOMECO acquired Terra Energy Ltd. with $62.3 million of CMS Energy Common Stock. Post-closing adjustments may result in the issuance of approximately $1.3 million of additional CMS Energy Common Stock. Terra Energy Ltd added about 92 bcf of proven gas reserves. Other capital expenditures for the nine months ended September 30, 1995 approximated $48 million, primarily for development of existing oil and gas reserves. These expenditures were made both domestically ($16 million) and internationally ($32 million), including $12 million in Ecuador development drilling and facilities construction. CMS Energy currently plans to invest $443 million, including the Walter and Terra acquisitions, from 1995 to 1997 relating to its oil and gas exploration and production operations. These capital expenditures will be concentrated in North and South America and offshore west Africa. Independent Power Production Pretax Operating Income: Pretax operating income for the three months ended September 30, 1995 increased $5 million over the comparable 1994 period, primarily reflecting higher capacity sales from the MCV partnership, as well as additional equity earnings by CMS Generation subsidiaries primarily due to additional electric generating capacity. Pretax operating income increased $27 million and $35 million for the nine and twelve months ended September 30, 1995, respectively, as compared to the comparable 1994 periods, primarily reflecting additional electric generating capacity and improved equity earnings and operating efficiencies. Capital Expenditures: In January 1995, CMS Generation completed its acquisition of HYDRA-CO. CMS Generation purchased 100 percent of HYDRA- CO's stock for $207 million, including approximately $52 million of current assets. With the acquisition, CMS Generation assumed ownership in 735 MW of gross capacity and 224 MW 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 MW diesel-fueled plant which has begun in Jamaica. The plant is scheduled to go into service in the third quarter of 1996. CMS Generation partially financed the acquisition with a one year $118 million bridge credit facility supplied by a consortium of four banks led by Union Bank of California, of which $110 million remains outstanding as of September 30, 1995. CMS Energy is currently evaluating permanent financing options which are expected to be in place by the end of 1995. The Moroccan government has selected a consortium of CMS Generation and Asea Brown Boveri Energy Ventures to exclusively negotiate a definitive agreement for the privatization and expansion of a Moroccan power plant. The privatization of the coal-fired Jorf Lasfar plant, Southwest of Casablanca, includes the transfer of possession and the right to operate two 330 MW generating units which are nearing completion, and the construction and operation of another two 330 MW units. The output of the plants will be sold to the Moroccan national utility. The operations of the existing facilities acquired are expected to partially finance the construction of the two additional units. Initial capital expenditures will approximate $300 million. In April 1995, CMS Generation signed a letter of intent to divest its interest in the Argentine thermal electric generation plant, Centrales Termicas San Nicolas. The divestiture was completed in July 1995, under which CMS Generation received securities, which contain an option to put, exercisable in fifteen years and was repaid for funds CMS Generation previously loaned to the plant. In August 1995, CMS Generation and Empresa de Energia y Vapor reached an agreement with YPF S.A., Argentina's largest oil company, to supply YPF with electricity and steam from a 150 MW natural gas fueled plant to be built at YPF's La Plata oil refinery in Buenos Aires Province, Argentina. CMS Generation holds a 39 percent ownership interest in the project and will serve as plant operator. Financing for the project is expected to be complete in early 1996, with a two year construction period to begin shortly thereafter. In August 1995, CMS Generation increased its interest in Hidroelectrica El Chocon, a 1,320 MW hydroelectric plant in Neuquen Province, Argentina, from 14.75% to 17.23%. CMS Energy currently plans to invest $574 million (including the HYDRA-CO acquisition) relating to its independent power production operations from 1995 to 1997. CMS Generation will pursue acquisitions and development of electric generating plants in the United States, Latin America, southern Asia and the Pacific Rim region. Natural Gas Transmission, Storage and Marketing Pretax Operating Income: Pretax operating income for the three months ended September 30, 1995 increased $2 million and for the nine and twelve months ended September 30, 1995 increased $1 million, respectively, over the same periods for 1994, reflecting earnings growth from existing and new gas pipeline and storage projects and gas marketed to end-users. Capital Expenditures: Effective January 1, 1995, CMS Gas Transmission increased its ownership of the Antrim facilities to 100 percent by acquiring the remaining 40 percent. Under a new agreement with MichCon, CMS Gas Transmission will provide a gas treating service for up to 260 MMcf/d of Antrim gas. A 70 MMcf/d facility is currently under construction with an expected in-service date of January 1996. In July 1995, CMS Gas Transmission was the successful bidder in acquiring a 25 percent ownership interest in TGN, an Argentine natural gas transporter, for $136 million. TGN, which has current annual revenues of approximately $150 million, owns and operates 2,600 miles of pipelines that provide natural gas transmission service to the northern and central parts of Argentina, with almost one bcf per day of existing pipeline capacity. Also in July 1995, CMS Gas Transmission received final regulatory approval to construct, at a cost of $3 million, a 3.1 mile pipeline from its natural gas transmission system to an interconnection with an existing pipeline at the St. Clair River, south of Port Huron, Michigan. Construction has commenced and an in-service date of December 1995 is expected. The pipeline will provide significantly increased gas supply flexibilities in the U.S. and Canada. CMS Gas Transmission, through its 50 percent ownership in the SGP Partnership, currently has two helium recovery plants under construction and scheduled to be in service no later than the first quarter of 1996. The total estimated capital cost for these two plants, located in Colorado and Kansas, is $8.2 million. One helium recovery plant was placed in service in October 1995. The partnership has also started construction on a $5.2 million nitrogen facility in Texas. CMS Energy currently plans to invest $311 million from 1995 to 1997 relating to its non-utility gas operations, continuing to pursue development of natural gas storage and gathering and pipeline operations both domestically and internationally. CMS Energy also plans to work toward the development of a Midwest "market center" for natural gas through strategic alliances and asset acquisition and development. Other Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. In April 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. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. The SEC has not taken action on this matter. In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) a repeal of PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. In October, a bill was introduced in the U. S. Senate to transfer oversight of public utility holding companies from the SEC to FERC. New Accounting Standards: In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996 financial statements, requires that an asset be reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable. The statement also requires that a loss be recognized whenever a regulator excludes a portion of an asset's cost from a company's rate base. CMS Energy does not expect the application of this statement to have a material impact on its financial position or results of operations. In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation, effective for 1996. This new standard encourages companies to apply the fair-value method of accounting for stock compensation, but permits continued use of the intrinsic-value method, with disclosure of pro-forma net income and earnings per share as if the fair-value method had been applied. CMS Energy does not believe that changing to the fair- value method would have a material impact on its financial position or results of operations. (This page intentionally left blank) 40 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To Consumers Power Company: We have reviewed the accompanying consolidated balance sheets of CONSUMERS POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Power Company and subsidiaries as of December 31, 1994, and the related consolidated statements of income, common stockholder's equity and cash flows for the year then ended (not presented herein), and, in our report dated January 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), we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, November 9, 1995 41 Consumers Power Company Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1995 1994 1995 1994 1995 1994 In Millions OPERATING REVENUE Electric $ 640 $ 573 $1,723 $1,667 $2,246 $2,188 Gas 122 126 801 837 1,116 1,188 Other 10 6 30 9 36 11 --------------------------------------------------------- Total operating revenue 772 705 2,554 2,513 3,398 3,387 --------------------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 74 80 208 230 284 299 Purchased power - related parties 124 119 369 359 492 482 Purchased and interchange power 72 37 154 134 182 177 Cost of gas sold 53 48 435 475 622 680 Other 142 145 419 408 573 556 --------------------------------------------------------- Total operation 465 429 1,585 1,606 2,153 2,194 Maintenance 47 45 136 136 188 190 Depreciation, depletion and amortization 81 75 262 243 354 327 General taxes 43 39 138 133 183 176 --------------------------------------------------------- Total operating expenses 636 588 2,121 2,118 2,878 2,887 --------------------------------------------------------- PRETAX OPERATING INCOME Electric 125 107 295 281 346 335 Gas 2 4 110 106 139 156 Other 9 6 28 8 35 9 --------------------------------------------------------- Total pretax operating income 136 117 433 395 520 500 INCOME TAXES 36 30 121 109 132 126 --------------------------------------------------------- NET OPERATING INCOME 100 87 312 286 388 374 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Dividends from affiliates 4 4 13 12 17 17 Accretion income 3 3 9 10 12 13 Accretion expense (Note 2) (7) (8) (23) (27) (32) (36) Other income taxes, net 3 3 9 10 11 10 Other, net 1 1 2 1 11 7 --------------------------------------------------------- Total other income 4 3 10 6 19 11 --------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 35 34 106 101 140 138 Other interest 7 4 16 9 24 16 Capitalized interest (1) - (2) (1) (2) (1) --------------------------------------------------------- Net interest charges 41 38 120 109 162 153 --------------------------------------------------------- Net Income 63 52 202 183 245 232 Preferred Stock Dividends 7 7 21 17 28 19 --------------------------------------------------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 56 $ 45 $ 181 $ 166 $ 217 $ 213 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
42 Consumers Power Company Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1995 1994 1995 1994 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 202 $ 183 $ 245 $ 232 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $38, $37, $51 and $48, respectively) 262 243 354 327 Capital lease and other amortization 27 24 38 33 Deferred income taxes and investment tax credit 52 56 52 42 Accretion expense 23 27 32 36 Accretion income - abandoned Midland project (9) (10) (12) (13) MCV power purchases - settlement (Note 2) (102) (71) (118) (90) Other (24) (8) (31) (8) Changes in other assets and liabilities (113) (95) 6 47 ------ ------ ------ ------ Net cash provided by operating activities 318 349 566 606 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (278) (313) (411) (443) Investments in nuclear decommissioning trust funds (38) (37) (51) (48) Cost to retire property, net (28) (25) (41) (33) Deferred demand-side management costs (7) (5) (11) (15) Proceeds from sale of property 1 10 4 10 Other (5) 2 (5) 1 Proceeds from Midland-related assets - - - 309 ------ ------ ------ ------ Net cash used in investing activities (355) (368) (515) (219) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable, net 135 142 74 (164) Payment of common stock dividends (70) (113) (133) (167) Payment of capital lease obligations (26) (23) (37) (30) Payment of preferred stock dividends (21) (12) (28) (15) Retirement of bonds and other long-term debt (1) (133) (1) (133) Repayment of bank loans - (141) (328) (172) Proceeds from preferred stock - 193 - 193 Contribution from stockholder - 100 - 100 Proceeds from bank loans - - 400 - ------ ------ ------ ------ Net cash provided by (used in) financing activities 17 13 (53) (388) ------ ------ ------ ------ NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (20) (6) (2) (1) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 13 7 8 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 5 $ 7 $ 5 $ 7 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
43 Consumers Power Company Consolidated Balance Sheets
September 30 September 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions ASSETS PLANT (At original cost) Electric $6,007 $5,771 $5,671 Gas 2,132 2,064 2,014 Other 30 30 26 ----------------------------------- 8,169 7,865 7,711 Less accumulated depreciation, depletion and amortization 4,041 3,794 3,747 ----------------------------------- 4,128 4,071 3,964 Construction work-in-progress 217 241 279 ----------------------------------- 4,345 4,312 4,243 ----------------------------------- INVESTMENTS Stock of affiliates 326 317 313 First Midland Limited Partnership (Note 2) 222 218 216 Midland Cogeneration Venture Limited Partnership (Note 2) 98 74 71 Other 8 8 8 ----------------------------------- 654 617 608 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 5 25 7 Accounts receivable and accrued revenue, less allowances of $3, $4 and $4, respectively (Note 7) 78 100 72 Accounts receivable - related parties 49 12 65 Inventories at average cost Gas in underground storage 263 235 271 Materials and supplies 73 75 79 Generating plant fuel stock 28 37 33 Trunkline settlement 30 30 30 Postretirement benefits 25 25 25 Deferred income taxes 20 35 22 Prepayments and other 47 143 56 ----------------------------------- 618 717 660 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 466 478 484 Nuclear decommissioning trust funds 283 213 204 Abandoned Midland Project (Note 3) 135 147 151 Trunkline settlement 33 55 63 Other 283 270 309 ----------------------------------- 1,200 1,163 1,211 ----------------------------------- TOTAL ASSETS $6,817 $6,809 $6,722 ===================================
44
September 30 September 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 491 491 491 Revaluation capital 22 15 14 Retained earnings since December 31, 1992 191 80 107 ----------------------------------- 1,545 1,427 1,453 Preferred stock 356 356 356 Long-term debt 1,921 1,953 1,701 Non-current portion of capital leases 101 108 109 ----------------------------------- 3,923 3,844 3,619 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 88 45 226 Notes payable 474 339 401 Accounts payable 133 165 137 MCV power purchases - settlement (Note 2) 95 95 82 Accrued taxes 73 173 77 Accounts payable - related parties 53 51 47 Accrued refunds 31 25 37 Accrued interest 26 37 27 Other 161 187 180 ----------------------------------- 1,134 1,117 1,214 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 593 568 546 Postretirement benefits 534 532 538 MCV power purchases - settlement (Note 2) 244 324 345 Deferred investment tax credit 172 179 182 Regulatory liabilities for income taxes, net 38 16 20 Trunkline settlement 33 55 63 Other (Note 4) 146 174 195 ----------------------------------- 1,760 1,848 1,889 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,817 $6,809 $6,722 =================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
45 Consumers Power Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1995 1994 1995 1994 1995 1994 In Millions COMMON STOCK At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841 --------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 491 491 491 391 491 391 Stockholder's contribution - - - 100 - 100 --------------------------------------------------------- At end of period 491 491 491 491 491 491 --------------------------------------------------------- REVALUATION CAPITAL At beginning of period 19 12 15 - 14 - Implementation of SFAS 115 - January 1, 1994 - - - 20 - 20 Change in unrealized gain (loss), net of tax 3 2 7 (6) 8 (6) --------------------------------------------------------- At end of period 22 14 22 14 22 14 --------------------------------------------------------- RETAINED EARNINGS At beginning of period 135 93 80 54 107 61 Net income 63 52 202 183 245 232 Common stock dividends declared - (31) (70) (113) (133) (167) Preferred stock dividends declared (7) (7) (21) (17) (28) (19) --------------------------------------------------------- At end of period 191 107 191 107 191 107 --------------------------------------------------------- TOTAL COMMON STOCKHOLDER'S EQUITY $1,545 $1,453 $1,545 $1,453 $1,545 $1,453 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
46 Consumers Power Company Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the 1994 Form 10-K of Consumers Power Company that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure 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: 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 September 30, 1995, 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' annual obligation for purchase of contract capacity from the MCV Partnership under the PPA increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs but 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 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 a loss for the present value of the 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. 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 of its future after-tax cash underrecoveries, and possible losses for 1995 and the next four years are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $ 5 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including the recovery of MCV capacity above the MPSC's currently authorized level. For further information regarding this proposed settlement, see Note 3. At September 30, 1995 and December 31, 1994, the after-tax present value of the Settlement Order liability totaled $220 million and $272 million, respectively. The reduction in the liability since December 31, 1994, reflects after-tax cash underrecoveries of $66 million, partially offset by after-tax accretion expense of $14 million. The undiscounted after-tax amount associated with the liability totaled $623 million at September 30, 1995. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In 1994, Consumers paid $30 million to terminate a power purchase agreement with a proposed 65 MW coal-fired cogeneration facility. Additionally, in 1995, Consumers paid $15 million to terminate a power purchase agreement with a proposed 44 MW wood and chipped-tire facility. Consumers plans to seek MPSC approval to utilize less-expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. Cost recovery for this contract capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. This proposal represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for the canceled facilities. As a result, Consumers has recorded a regulatory asset of $45 million, which it believes will ultimately be recoverable in rates. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of the 65 MW of MCV capacity as part of the five year forecast included in the plan case. Although recovery of the costs relating to the MCV capacity was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for the MCV capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. If the MPSC adopts the ALJ's recommendation, the status of the regulatory asset will be reviewed for recoverability. 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. The MPSC confirmed the recovery of certain MCV-related costs 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. As part of its decision in the 1993 PSCR reconciliation case issued February 23, 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV, and instead allocated those costs to non- jurisdictional customers and reduced recovery from PSCR customers. Consumers believes this is contrary to the terms of the Settlement Order and has appealed the February 23 order on this issue. 3: Rate Matters Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. In late 1994, Consumers filed a request with the MPSC which could further increase its retail electric rates as much as $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 13 percent from the current 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 requested that the MPSC eliminate subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 (see Electric DSM) and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 4). In response to Consumers' requested rate increase, the MPSC staff initially recommended a final annual increase of $45 million to Consumers' base rates and suggested several options for cost recovery of 325 MW of MCV capacity. However, on motions filed by ABATE and the Attorney General, the ALJ struck portions of the MPSC staff's testimony relating to the cost of this capacity. In May 1995, the MPSC affirmed the ALJ's decision to strike the MPSC staff's testimony and stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. Consumers has filed a petition for rehearing of this order with the MPSC. The MPSC staff subsequently recommended a $43 million increase in Consumers' base rates. This position reflects a different sales forecast than Consumers', as well as a 12- percent return on equity and a lower equity ratio than that included in Consumers' proposed capital structure. The MPSC staff also recommends the elimination of all rate subsidization by industrial and large commercial customers. In August 1995, the ALJ issued a proposal for decision in this case that recommends a $46 million rate increase. The ALJ generally adopted the MPSC staff's position with adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ also recommended the elimination of rate subsidization. In August 1995, Consumers filed exceptions to the ALJ's proposal. If Consumers' revised position on all issues is adopted, retail electric rates would increase by $88 million. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers (see Special Rates discussion in the MD&A). 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 for ratemaking purposes. For further information, see Electric Rate Case discussion in the MD&A. In September 1995, Consumers and the MPSC staff reached a settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in separate proceedings. Specifically, the agreement would: resolve the current electric rate case and provide for a $50 million annual increase in revenue; substantially reduce rate subsidization by large industrial customers; provide for cost recovery of the 325 MW of uncommitted MCV capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; enable Consumers to negotiate rates for certain large industrial customers; and accelerate recovery of nuclear plant investment. The MPSC subsequently issued an order requiring Consumers to publish a new notice of hearing regarding the proposed settlement. The order also established a prehearing conference for late November 1995. Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of the abandoned Midland project and Consumers began collecting $35 million pretax annually for the next 10 years. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. In October 1995, the Michigan Supreme Court denied all parties leave to appeal the Court of Appeals' decision. Electric DSM: In June 1995, the MPSC authorized Consumers to collect an $11 million incentive for past DSM program performance. As part of the same order, the MPSC authorized Consumers to discontinue future DSM program expenditures and cease all new programs. During 1994, Consumers recognized the $11 million in revenue. Consumers is deferring and amortizing past program 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 $69 million at September 30, 1995. Gas Rates: In 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. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. The MPSC staff's recommendation included a lower rate base, a lower return on common equity, a revised capital structure and a lower operating cost forecast than Consumers had projected. In November 1995, the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position and recommended a $12 million rate decrease. Consumers expects an MPSC decision in early 1996. GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced. As a result, Consumers was not allowed to recover $13 million of costs. Consumers accrued a loss prior to 1993 in excess of the disallowed amount. In March 1995, management concluded that the intrastate producers' pending appeals of the MPSC order would not be successful and accordingly reversed $23 million (pretax) of the previously accrued loss, which represented the portion in excess of the disallowed amount. In June 1995, the Court of Appeals affirmed the MPSC's prior decision. The producers filed a motion for rehearing with the Court of Appeals. That motion was denied and the producers have petitioned the Michigan Supreme Court for review. In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a $44 million (excluding any interest) gas supply contract pricing dispute with certain intrastate producers. The ALJ found that the market-based pricing provisions required specific MPSC approval before Consumers could apply those prices to purchases under the contracts and found that such approval had not previously been given. Consumers did not agree with the ALJ's findings and filed exceptions with the MPSC. In October 1995, the MPSC issued an order stating that Consumers was not obligated to seek prior approval of price reductions that were implemented under the contracts in question. The producers will undoubtedly continue to pursue companion civil litigation for amounts owed under the producers' theories for previously purchased gas. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. 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 Consumers' financial position or results of operations. 4: 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 allows for continued operation of the plant through the end of its FERC license. 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) to the state of Michigan and the Great Lakes Fishery Trust, 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 definitive settlement documents have been completed and were filed with the appropriate Michigan courts and state and federal agencies. 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. In the other lawsuit, 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 for the significant sites will average less than 4 percent of the estimated total site remediation costs, and such liability is expected to be less than $9 million. At September 30, 1995, 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. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. 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. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites and the Michigan Department of Environmental Quality (formerly the DNR) has approved three of four plans 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, since 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 September 30, 1995, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and 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 properly 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 several other similar Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. 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 emissions monitoring. 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. 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 limits applicable to 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 new lease commitments, of $461 million for 1995, $414 million for 1996 and $353 million for 1997. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. 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 could 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. The SEC has not taken action on this matter. In June 1995, the SEC released a staff report that recommended three legislative options to Congress in regards to PUHCA. For further information, see the Public Utility Holding Company Act Exemption discussion in the MD&A. Other: Consumers has experienced a 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 September 30, 1995, Consumers had 43 separate stray voltage lawsuits awaiting trial court action. Consumers does not expect the ultimate resolution of these lawsuits to have a material impact on its financial position or results of operations. 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. 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 Consumers' financial position or results of operations. 5: Nuclear Matters In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. In January 1995, the U.S. Sixth Circuit Court of Appeals 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. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. As of September 30, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades. In 1996, 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 confirmed 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 Consumers has been storing low- level waste at its nuclear plant sites. Recently, a site in South Carolina became available for accepting low-level waste. Consumers began shipping its low-level waste to this site during the third quarter of 1995. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs for the major portion of prolonged accidental outages for 12 months after a 21 week exclusion with reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $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. 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. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. In April 1995, Consumers received a Safety Evaluation Report from the NRC concurring with this evaluation and requesting submittal of an action plan to provide for operation of the plant beyond 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as part of the development plans will support Consumers' proposal to anneal. 6: 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 periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1995 1994 1995 1994 ---- ---- ---- ---- Cash transactions Interest paid (net of amounts capitalized) $125 $117 $155 $150 Income taxes paid (net of refunds) 72 64 41 30 Non-cash transactions Nuclear fuel placed under capital lease $ 24 $ 18 $ 27 $ 24 Other assets placed under capital leases 3 11 7 12 7: Short-term and Long-term Financings Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. At September 30, 1995, Consumers had an unsecured $425 million facility and unsecured, committed lines of credit aggregating $135 million that are used to finance seasonal working capital requirements. At September 30, 1995 and 1994, Consumers had a total of $474 million and $401 million outstanding under these facilities, respectively. Consumers has an established $500-million trade receivables purchase and sale program. At September 30, 1995 and 1994, receivables sold under the agreement totaled $210 million. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In April 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. In November 1995, Consumers filed a registration statement with the SEC for the possible future sale of $100 million of Trust Originated Preferred Securities through a business trust affiliated with Consumers. The trust was formed for the sole purpose of issuing preferred securities and investing the proceeds in subordinated notes which will be unsecured obligations of Consumers. The payment of dividends and redemption of the preferred securities are guaranteed by Consumers. In September 1995, Consumers extended its nuclear fuel leasing arrangement an additional year to November 1997. At September 30, 1995, $67 million of nuclear fuel was under lease. 55 Consumers Power Company Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1994 Form 10-K of Consumers. 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 for the quarters ended September 30, 1995 and 1994 Consolidated net income after dividends on preferred stock totaled $56 million for the third quarter of 1995 and $45 million for the third quarter of 1994. This net income increase reflects higher electric kWh sales and gas deliveries and improved operating results from Consumers' interest in the MCV Facility. Partially offsetting this increase was reduced gas revenue in 1995 compared to 1994, and higher depreciation and general tax expenses during 1995. For further information, see the Electric and Gas Utility Results of Operations sections. Consolidated earnings for the nine months ended September 30, 1995 and 1994 Consolidated net income after dividends on preferred stock totaled $181 million for the nine months ended September 30, 1995, compared with $166 million for the nine months ended September 30, 1994. The increase in net income primarily reflects increased electric sales, an electric rate increase, reversal of losses previously recorded for gas contingencies (see Note 3), and improved operating results from Consumers' interest in the MCV Facility. Partially offsetting these increases were a decrease in gas deliveries, higher operating expenses during the 1995 period, and DSM incentive revenue recorded in the second quarter of 1994. For further information, see the Electric and Gas Utility Results of Operations sections. Consolidated earnings for the 12 months ended September 30, 1995 and 1994 Consolidated net income after dividends on preferred stock totaled $217 million for the 12 months ended September 30, 1995, compared with $213 million for the 12 months ended September 30, 1994. The increase in net income reflects higher electric kWh sales, an electric rate increase, and the reversal of losses previously recorded for gas contingencies. Partially offsetting this increase, were lower gas deliveries during 1995, DSM incentive revenue recorded in the 1994 period, and higher operating expenses during 1995. For further information, see the Electric and Gas Utility Results of Operations sections. Cash Position, Financing and Investing Consumers' operating cash requirements are met by its operating and financing activities. Cash from operations continues to reflect Consumers' sale and transportation of natural gas and the generation, sale and transmission of electricity. Cash from operations for the first nine months of 1995 reflects increased electric sales and increased electric rates which were approved by the MPSC in mid-1994, offset by greater underrecoveries for power costs, primarily associated with the increased 108 MW of contractual capacity purchased from the MCV. Financing and Investing Activities: Capital expenditures, including assets placed under capital lease and deferred DSM costs, totaled $312 million for the first nine months of 1995 compared with $347 million for the first nine months of 1994. These amounts primarily represent capital investments in Consumers' electric and gas utility business units. In the second quarter of 1995, Consumers declared and paid a $70 million common dividend from its first quarter earnings. Financing and Investing Outlook: Consumers estimates that capital expenditures, including new lease commitments, related to its electric and gas utility operations will total approximately $1.2 billion over the next three years. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures. In Millions Years Ended December 31 1995 1996 1997 ---- ---- ---- Consumers Construction $425 $373 $343 Nuclear fuel lease 28 37 6 Capital leases other than nuclear fuel 5 2 2 Michigan Gas Storage 3 2 2 ---- ---- ---- $461 $414 $353 ==== ==== ==== At September 30, 1995, Consumers had several available sources of credit including unsecured, committed lines of credit totaling $135 million and a $425 million unsecured working capital facility. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing a $470 million facility, which expired by its own terms. 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, gas in storage 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 September 30, 1995, receivables sold under the agreement totaled $210 million. Consumers is continuing efforts toward its goal of increasing the equity portion of its capital structure. In November 1995, Consumers filed a registration statement with the SEC for the possible future sale of $100 million of Trust Originated Preferred Securities (see Note 7). In August 1995, in response to an MPSC staff proposal, Consumers temporarily suspended its common dividends in lieu of CMS Energy making a direct equity infusion of cash into Consumers. Any increases in Consumers' retained earnings as a result of this action will be offset by a reduction in potential equity infusions from CMS Energy. Electric Utility Results of Operations Electric Pretax Operating Income for the quarters ended September 30, 1995 and 1994: During the third quarter of 1995, electric pretax operating income increased $18 million from the 1994 level. This increase resulted primarily from higher electric kWh sales (see Electric Sales section). The increased load was due to a combination of hot weather and the resulting increased usage of air conditioning equipment and continued economic growth. The increase was partially offset by higher depreciation, general taxes and operation and maintenance expenses during 1995. Electric Pretax Operating Income for the nine months ended September 30, 1995 and 1994: Electric pretax operating income for the nine months ended September 30, 1995 increased $14 million from the comparable 1994 period. This increase primarily reflects higher electric kWh sales (see Electric Sales section) and the impact of the May 1994 electric rate increase, which included the recovery of higher postretirement benefit costs. The increase was partially offset by higher operating expenses during 1995, which included $10 million of additional postretirement benefit costs, along with the impact of 1994 DSM incentive revenue. Electric Pretax Operating Income for the 12 months ended September 30, 1995 and 1994: The $11 million improvement in electric pretax operating income for the 12 months ended September 30, 1995 compared with the corresponding 1994 level is primarily the result of the impact of increased electric kWh sales (see Electric Sales section), and the May 1994 electric rate increase, which included the recovery of the higher postretirement benefit costs. The increases were partially offset by higher operating expenses during 1995, which included $20 million of additional postretirement benefit costs, along with the impact of 1994 DSM incentive revenue. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Sales $ 34 $43 $41 Rate increases and other regulatory issues 0 5 16 O&M, general taxes and depreciation (16) (34) (46) ----- ----- ----- Total change $18 $14 $11 ===== ===== ===== Electric Sales: Electric sales during the third quarter of 1995 totaled 9.5 billion kWh, a 5.5 percent increase from 1994 levels. During the third quarter of 1995, residential, commercial, and industrial sales increased 15.1 percent, 8.7 percent and 1.9 percent, respectively. Consumers' electric sales have benefited from warmer-than-normal temperatures in July and August and a continuing strong Michigan economy. August 1995 was the third warmest August on record. Electric sales during the nine months ended September 30, 1995 totaled 26.7 billion kWh, a 3.3 percent increase from 1994 levels. This increase reflects continued strength in the industrial and commercial sectors, and warmer weather. During the nine months ended 1995 period, residential, commercial and industrial sales increased 4.6 percent, 5.3 percent and 3.4 percent respectively. Electric sales during the 12 months ended September 30, 1995 totaled 35.3 billion kWh, a 3.6 percent increase from 1994 levels. During the 12 months ended 1995 period, residential, commercial and industrial sales increased 3.0 percent, 4.7 percent and 3.7 percent respectively. The chemicals and transportation equipment segments accounted for the largest share of the growth in industrial kWh sales. Power Costs: Power costs for the three month period ended September 30, 1995 totaled $270 million, an increase of $34 million from the corresponding 1994 period. This increase primarily reflects higher purchased power costs resulting from the warmer temperatures in July and August 1995. Power costs for the nine month period ended September 30, 1995 totaled $731 million, an $8 million increase from the corresponding 1994 period. Power costs for the 12 month period ended September 30, 1995 totaled $958 million, unchanged from the corresponding 1994 period as increased volumes of both generated and purchased power were offset by lower prices. Combined, the average cost of power per kWh for system sales requirements decreased to 2.52 cents from 2.60 cents. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership increased to 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed 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 a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. 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 $66 million for the first nine months of 1995. Estimated future after-tax cash underrecoveries, and possible losses for 1995 and the next four years are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $ 5 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including the recovery of MCV capacity above the MPSC's currently authorized level. For further information regarding the settlement, see Note 3. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In July 1994 and February 1995, Consumers terminated power purchase agreements with a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. Consumers plans to seek MPSC approval to utilize 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of 65 MW of MCV capacity as part of the five year forecast included in the plan case. Although recovery of the costs relating to the MCV capacity was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for the MCV capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. For further information, see Note 2. Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. Consumers filed a request with the MPSC in late 1994, to further increase its retail electric rates. As part of this case, in May 1995, the MPSC stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. This ruling is subject to rehearing. In August 1995, the ALJ recommended a final annual rate increase of $46 million. Consumers' currently seeks an increase of $88 million. For further information regarding Consumers' request and the staff's recommendation, see Note 3. 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 for ratemaking purposes. In April 1995, the MPSC staff's filing did not support Consumers' requested increase in depreciation expense, but instead proposed a decrease of $24 million. In addition, the MPSC staff also did not support the reallocation of plant investment as proposed by Consumers but suggested several alternatives which could partially address this issue. In September 1995, the ALJ issued a proposal for decision that essentially supported the MPSC staff's position regarding depreciation expense and recommended that the MPSC reject both Consumers' and the MPSC staff's positions regarding the reallocation of Consumers' depreciation reserve and plant investment. A final order is expected in late 1995. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues, including Consumers' current electric rate case, depreciation case, special rate case (discussed below) and cost recovery of 325 MW of uncommitted MCV capacity. The MPSC subsequently issued an order requiring Consumers to publish a new notice of hearing regarding the proposed settlement. The order also established a prehearing conference for late November 1995. For more information regarding the settlement, see Note 3. 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 that 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. In May 1995, the MPSC issued an order stating that it has legal authority to approve a range of rates under which Consumers could negotiate prices with customers that have competitive energy alternatives. However, the MPSC dismissed from consideration, in this proceeding, the issues related to Consumers' proposed use of the additional 325 MW of MCV contract capacity to serve these customers. In June 1995, Consumers filed a petition for rehearing of this decision with the MPSC. As of September 30, 1995, all parties have filed briefs and reply briefs in these proceedings. Electric Conservation Efforts: In June 1995, the MPSC issued an order that authorized Consumers to collect an $11 million incentive related to Consumers' achievement of certain DSM program objectives. The MPSC also authorized Consumers to discontinue future DSM program expenditures and cease all new programs. Consumers recognized the $11 million in revenue during 1994. For further information, see Note 3. Electric Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its electric utility operations of $333 million for 1995, $295 million for 1996 and $252 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. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions are properly recoverable in rates. 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. For further information regarding electric environmental matters, see Note 4. 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 increased 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. In an effort to meet the challenge of competition, Consumers signed a sales contract in mid-October 1995 with its largest customer, General Motors Corporation, which provides that Consumers will be the sole provider of approximately 450 MW of electricity for 19 manufacturing facilities currently located in Michigan. Under the contract, Consumers will serve certain facilities at least five years and other facilities at least 10 years in exchange for competitively discounted electric rates. Certain facilities will have the option of taking retail wheeling service (if available) during the first five years of the contract. The contract was approved by the MPSC in late October 1995. 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, or approximately 6 percent, per year. Consumers is committed to holding operation and maintenance expenses 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 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 June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers and ABATE sought rehearing regarding a number of issues included in the order. In September 1995, the MPSC denied the rehearing requests. Consumers, ABATE and the Dow Chemical Company have filed claims of appeal of the MPSC's retail wheeling orders. Consumers anticipates that these appeals will be consolidated with appeals previously filed by Detroit Edison and the Attorney General. Consumers does not expect this short- term experiment to have a material impact on its financial position or results of operations. In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose changes in the wholesale electric industry. Among the most significant proposals, is a requirement that utilities provide open access to the domestic interstate transmission grid. Under the FERC's proposal, all utilities would be required to use these tariffs for their own wholesale sales of electric energy, and the utilities would be allowed the opportunity to recover wholesale stranded costs (including those applicable to municipalization situations). Consumers is unable to predict what (if any) final rules that may be issued by the FERC related to this proposal. However, management believes that Consumers is well- positioned to conform to open access as it has been voluntarily providing this transmission service since 1992. Nuclear Matters: In July 1995, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report recognized improved performance at the plant, specifically in the areas of Engineering and Plant Operations. In the report, the NRC noted areas which continue to require management's attention, but also recognized the development and implementation of plans for corrective action designed to address previously identified weak areas. The report noted that performance in the areas of Maintenance and Plant Support was good and remained unchanged. Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. 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. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. 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 Consumers has been storing low- level waste at its nuclear plant sites. Recently, a site in South Carolina became available for accepting low-level waste. Consumers began shipping its low-level waste to this site during the third quarter of 1995. 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. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict whether the studies being conducted as a part of the development plans will support Consumers' proposal to anneal. Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At September 30, 1995, Consumers had 43 separate stray voltage lawsuits awaiting trial court action. 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 4. Gas Utility Results of Operations Gas Pretax Operating Income for the quarters ended September 30, 1995 and 1994: During the third quarter of 1995, gas pretax operating income decreased $2 million from the 1994 level. The decreased operating income reflects lower gas revenue in 1995 compared to 1994 as a result of a cumulative revenue adjustment recorded in 1994 which increased revenues for that year, and higher depreciation expense during 1995. Partially offsetting this decrease was an 11.4 percent increase in gas deliveries (see Gas Deliveries section), and lower operation, maintenance and general tax expenses during 1995. Gas Pretax Operating Income for the nine months ended September 30, 1995 and 1994: The $4 million increase in gas pretax operating income for the nine months ended September 30, 1995 compared with the same 1994 period reflects the reversal of losses previously recorded for gas contingencies (see Note 3) and lower general tax and gas operation and maintenance expenses. Partially offsetting this increase were lower gas deliveries (see Gas Deliveries section) and higher depreciation. Gas Pretax Operating Income for the 12 months ended September 30, 1995 and 1994: The $17 million decrease in 1995 gas pretax operating income compared with 1994 reflects lower gas deliveries (see Gas Deliveries section) and higher depreciation and general taxes, partially offset by the reversal of losses previously recorded for gas contingencies and lower operation and maintenance expenses. The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Deliveries $ 1 $(13) $(29) Recovery of gas costs and other regulatory issues (9) 17 14 O&M, general taxes and depreciation 6 - (2) ---- ---- ---- Total change $ (2) $ 4 $(17) ==== ==== ==== Gas Deliveries: During the third quarter of 1995, gas sales and gas transported, excluding transport to the MCV and off-system transportation, totaled 31.9 bcf, an 11.4 percent increase from the corresponding 1994 level. Gas sales and gas transported increased 1.0 bcf and 2.2 bcf, respectively, with the majority of the change attributable to increased usage. For the nine months ended September 30, 1995, gas sales and gas transported for all customer classes totaled 273.1 bcf, an 8.5 percent decrease from the corresponding 1994 level. Gas sales decreased 8.6 bcf while transport deliveries increased 4.7 bcf. The decrease in firm sales occurred primarily due to warmer temperatures. For the 12 months ended September 30, 1995, gas sales and gas transported for all customer classes totaled 383.7 bcf, a 9.5 percent decrease from the corresponding 1994 level, reflecting record cold winter weather during the 12 months ended September 30, 1994 and significantly warmer weather during the 12 months ended September 30, 1995 period. Cost of Gas Sold: The cost of gas sold for the third quarter of 1995 increased $5 million from the 1994 level. The cost of gas sold for the nine months ended September 30, 1995 decreased $40 million from the 1994 level as a result of reduced deliveries and the reversal of a gas supplier loss contingency. The cost of gas sold for the 12 months ended September 30, 1995 decreased $58 million from the corresponding 1994 level which was also the result of reduced gas deliveries and the gas supplier loss contingency reversal. 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. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. In November 1995 the ALJ issued a proposal for decision that essentially adopted the MPSC staff's position and recommended a $12 million rate decrease. A final order from the MPSC is expected in early 1996. For further information regarding Consumers' current gas rate case, see Note 3. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to by-pass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Issues: In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a $44 million (excluding any interest) gas supply contract pricing dispute with certain intrastate producers. The ALJ found that the market-based pricing provisions required specific MPSC approval before Consumers could apply those prices to purchases under the contracts and found that such approval had not previously been given. Consumers did not agree with the ALJ's findings and filed exceptions with the MPSC. In October 1995, the MPSC issued an order stating that Consumers was not obligated to seek prior approval of price reductions that were implemented under the contracts in question. The producers will undoubtedly continue to pursue companion civil litigation for amounts owed under the producers' theories for previously purchased gas. Consumers believes the MPSC order supports its position that the producers' theories are without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. Gas Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its gas utility operations of $128 million for 1995, $119 million for 1996 and $101 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: The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $112 million. These estimates are based on undiscounted 1994 costs. At September 30, 1995, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and 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 several other Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. 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 4. Gas Outlook Consumers currently anticipates gas deliveries to grow approximately 2.0 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 increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. New technologies being developed on a national level, such as the emerging use of natural gas vehicles, 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 and other processes to natural gas. Low Income Home Energy Assistance Program funding currently provides approximately $71 million in heating assistance to approximately 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. However, recent actions by the U. S. House of Representatives Committee on Appropriations has put restoration of funding for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to maintain this funding. Other Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. In April 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. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. The SEC has not taken action on this matter. In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) a repeal of PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. In October, a bill was introduced in the U. S. Senate to transfer oversight of public utility holding companies from the SEC to FERC. New Accounting Standards: In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996 financial statements, requires that an asset be reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable. The statement also requires that a loss be recognized whenever a regulator excludes a portion of an asset's cost from a company's rate base. Consumers does not expect the application of this statement to have a material impact on its financial position or results of operations. In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation, effective for 1996. This new standard encourages companies to apply the fair-value method of accounting for stock compensation, but permits continued use of the intrinsic-value method, with disclosure of pro-forma net income and earnings per share as if the fair-value method had been applied. Consumers does not believe that changing to the fair- value method would have a material impact on its financial position or results of operations. 66 PART II. OTHER INFORMATION Item 1. Legal Proceedings The discussion below is limited to an update of developments that have occurred in various judicial and administrative proceedings, many of which are more fully described in CMS Energy's and Consumers' 1994 Forms 10-K for the year ended December 31, 1994, and in Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995. 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. Rate Case Proceedings Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant Investment In 1984, Consumers abandoned construction of its unfinished nuclear power plant located in Midland, Michigan, and subsequently took a series of write-downs. In proceedings before the MPSC docketed as Case No. U-7830, Step 3B, Consumers sought to recover $2.1 billion of abandoned Midland assets from its retail electric customers over 15 years. In 1991, the MPSC issued a final order permitting Consumers to recover $760 million of its abandoned Midland investment over 10 years without a return. Consumers, the Attorney General and ABATE filed claims of appeal of the MPSC order with the Court of Appeals. In December 1994, the Court of Appeals issued an opinion affirming the MPSC's order in all respects. Consumers, ABATE and the Attorney General all filed applications for leave to appeal the Court of Appeals decision with the Michigan Supreme Court. In October 1995, the Michigan Supreme Court denied all applications for leave to appeal the Court of Appeals' decision relating to the Step 3B order. 1994 Electric Rate Case Filing In August 1995, Consumers filed exceptions to the ALJ's proposal for decision which, among other things, recommended a $46 million rate increase. In September 1995, Consumers and the MPSC staff reached a settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in three separate proceedings, one of which is the 1994 electric rate case. Specifically, the agreement would: resolve the current electric rate case and provide for approximately a $50 million annual increase in revenue; substantially reduce subsidization of residential customers by large industrial customers; provide for cost recovery of the remaining 325 MW of MCV capacity; implement provisions for incentive ratemaking; resolve the pending special competitive services and depreciation rate cases; implement a limited direct access program; enable Consumers to negotiate rates for certain large industrial customers; and accelerate recovery of nuclear plant investment. In mid-September, the MPSC issued an order creating a consolidated proceeding to consider the settlement and establishing an expedited hearing schedule. On October 6, 1995, Consumers filed amendments to its applications in each of the three cases to include a request that the settlement agreement be considered and approved by the MPSC. In late October, in response to a lawsuit filed by the Attorney General, the Circuit Court of Ingham County entered an order vacating the September 14th scheduling order of the MPSC and indicated that the MPSC should reconsider its procedural handling of the proposed settlement. The MPSC, in an order issued November 1, 1995, found that further proceedings should be held and ordered Consumers to publish a notice of hearing by November 12, 1995. The order also scheduled a pre-hearing conference for November 21, 1995 at which the MPSC will consider petitions for leave to intervene, hear arguments on motions regarding the consolidation of the three cases and objections to the amendments to the applications filed by Consumers in the three cases, and schedule subsequent proceedings and other preliminary matters. 1994 Gas Rate Case Filing In November 1995, the ALJ issued a proposal for decision essentially adopting the MPSC Staff's position and recommending a $12 million rate decrease. Under the MPSC rate case scheduling policies, a final order in this case is expected in early 1996. Stray Voltage Lawsuits Consumers has a number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. In September 1995, Consumers was contacted by counsel who purported to represent over 125 customers who believe they are owed additional payments as a result of a stray voltage claims settlement previously reached with Consumers in late 1992 to early 1993. If these parties are correct, then approximately $3.5 million in additional payments may be owed in satisfaction of the claims. In October 1995, counsel for the claimants commenced litigation and Consumers believes the claimants' position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this matter. In the meantime, a second lawyer has sought to negotiate a settlement on behalf of 33 of the potential claimants whom he claims are now his clients. Consumers is studying the matter. At September 30, 1995, Consumers had 43 other separate stray voltage cases awaiting action at the trial court level. MPSC Case No. U-10029 - Intrastate Gas Supply On February 8, 1993, the MPSC issued an order granting Consumers' request to lower the price to be paid North Michigan under its contract, and North Michigan filed an appeal with the Court of Appeals. The Court of Appeals affirmed the MPSC order and North Michigan's motion for reconsideration was denied in August 1995. In September 1995, North Michigan filed an application for leave to appeal the Court of Appeal's order with the Michigan Supreme Court. Request for Approval of a Competitive Tariff for Certain Industrial Customers As of September 30, 1995, all parties have filed briefs and reply briefs in this proceeding. See Item 1. Legal Proceedings - Rate Case Proceedings - 1994 Electric Rate Case Filings, for information concerning a proposed settlement agreement relating to this case. Retail Wheeling Proceedings In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. In September 1995, the MPSC denied Consumers' and ABATE's petitions for rehearing. Consumers, ABATE and Dow Chemical Company have filed claims of appeal of the MPSC's order with the Court of Appeals, joining Detroit Edison and the Attorney General who had previously appealed. Highland Township Franchise Proceeding MichCon obtained a revocable franchise in 1956 to provide natural gas service to Highland Township, Michigan. In 1962, Consumers secured an irrevocable 30 year franchise to provide natural gas service to Highland Township. Neither franchise was exclusive. MichCon's franchise expired in 1986, and was not renewed, however, MichCon continued service to Highland Township. Consumers secured a revocable renewal franchise in 1992. Thereafter, in 1992, Consumers filed suit to enjoin MichCon from expanding its gas service to new customers in Highland Township. The Circuit Court of Oakland County, Michigan denied MichCon's motion for summary disposition and granted Consumers' petition for an injunction. MichCon subsequently transferred its remaining rights and interest in Highland Township to Consumers, ceased doing business there and appealed the Circuit Court decision with the Court of Appeals. In August 1995, the Court of Appeals refused to decide the issue addressed by the Circuit Court (namely whether MichCon, as a holdover utility without any franchise, could continue to lawfully do business in a township) because the Court of Appeals concluded that the Consumers' 1992 revocable renewal franchise was invalid since it was not confirmed by a vote of the Highland Township electorate as the Court determined was required in the Public Utility Franchise Act. Prior to this decision, the commonly held interpretation of the Public Utility Franchise Act was that a vote of the electorate was only required for irrevocable franchises, not revocable franchises such as that held by Consumers in this case. The Michigan Court of Appeals reversed and remanded to the Circuit Court order for entry of summary disposition in MichCon's favor -- even though the only franchise MichCon had ever possessed was revocable, and thus under the Court's decision, invalid. Although the Court of Appeals specifically stated in its opinion that continuing to provide utility service without a valid franchise was not necessarily unlawful, Consumers currently has approximately 700 revocable franchises which could be affected should the Court of Appeals order remain in place. In September 1995, Consumers filed a motion for reconsideration and for a stay of the Court of Appeal's opinion pending final appellate resolution. Intrastate Gas Supplier Contract Pricing Dispute On April 18, 1995, the ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a gas supply contract pricing dispute. In the proposal for decision the ALJ agreed with Consumers that certain market based pricing provisions should, on a prospective basis, limit the price paid by Consumers under the three gas purchase agreements at issue. The ALJ also found that the market based pricing provisions required specific MPSC approval before Consumers could apply those prices to purchase under the agreements and found that such approval had not previously been given. On October 25, 1995, the MPSC issued an opinion and order finding that a pricing mechanism like the one at issue, that operates within definite ceiling and floor prices, is a definite pricing provision within the meaning of the state statutes and was properly implemented to reduce gas prices without the prior approval of the MPSC. Prior to the issuance of the ALJ's proposal for decision, the intrastate gas producers involved in this MPSC proceeding filed a complaint against Consumers in a local circuit alleging breach of contract. On Consumers' motion, the court dismissed the lawsuit. The gas suppliers subsequently filed a petition for rehearing with the court where the matter is still pending. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15)(a) - CMS Energy: Letter of Independent Public Accountant (15)(b) - Consumers: Letter of Independent Public Accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - Consumers: Financial Data Schedule (99) - CMS Energy: Consumers Gas Group Financials (b) Reports on Form 8-K Current Reports on Form 8-K dated September 11, 1995 (CMS Energy Corporation and Consumers Power Company) covering matters pursuant to "Item 5. Other Events." 70 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. CMS ENERGY CORPORATION (Registrant) Date: November 13, 1995 By A M Wright ------------------------ Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS POWER COMPANY (Registrant) Date: November 13, 1995 By A M Wright ------------------------ Alan M. Wright Senior Vice President and Chief Financial Officer EX-12 2 CMS ENERGY RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges (Millions of Dollars)
Nine Months Ended Years Ended December 31 Sept. 30, 1995 1994 1993 1992 1991 1990 (b) (c)(d) (e) Earnings as defined (a) Net income $ 166 $ 179 $ 155 $(297) $(262) $(494) Income taxes 103 92 75 (146) (94) 25 Exclude equity basis subsidiaries (30) (18) (6) 10 10 13 Fixed charges as defined, adjusted to exclude capitalized interest of $4, $6, $5, $3, $5, and $38 million for the nine months ended September 30, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively 209 237 245 228 364 317 ------ ------ ------ ------ ------ ------ Earnings as defined $ 448 $ 490 $ 469 $(205) $ 18 $(139) ====== ====== ====== ====== ====== ====== Fixed charges as defined (a) Interest on long-term debt $ 168 $ 193 $ 204 $ 169 $ 274 $ 293 Estimated interest portion of lease rental 7 9 11 16 17 18 Other interest charges 17 18 24 35 68 33 Preferred stock dividend 32 36 17 16 15 17 ------ ------ ------ ------ ------ ------ Fixed charges as defined $ 224 $ 256 $ 256 $ 236 $ 374 $ 361 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.00 1.91 1.83 - - - ====== ====== ====== ====== ====== ====== NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include a $520 million pretax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding these amounts. (c) Excludes an extraordinary after-tax loss of $14 million. (d) For the year ended December 31, 1991, fixed charges exceeded earnings by $356 million. Earnings as defined include pretax losses of $398 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant, $76 million for potential customer refunds and other reserves, and $51 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.45 excluding these amounts. (e) For the year ended December 31, 1990, fixed charges exceeded earnings by $500 million. Earnings as defined include pretax losses of $847 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant. The ratio of earnings to fixed charges would have been 1.96 excluding these amounts.
EX-15 3 CMS ENERGY LETTER FROM ACCOUNTANT ARTHUR ANDERSEN LLP Exhibit (15) To CMS Energy Corporation: We are aware that CMS Energy Corporation has incorporated by reference in its Registration Statements No. 33-51877, No. 33-55805, No. 33-29681, No. 33-47629, No. 33-57719, No. 33-57719-01, No. 33-64044, No. 33-60007 and No. 33-62573 its Form 10-Q for the quarter ended September 30, 1995, which includes our report dated November 9, 1995 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Arthur Andersen LLP Detroit, Michigan, November 9, 1995 EX-15 4 CONSUMERS LETTER FROM ACCOUNTANT ARTHUR ANDERSEN LLP Exhibit (15) To Consumers Power Company: We are aware that Consumers Power Company has incorporated by reference in its Registration Statements No. 33-63949 and No. 33-63949-01 its Form 10-Q for the quarter ended September 30, 1995, which includes our report dated November 9, 1995 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Arthur Andersen LLP Detroit, Michigan, November 9, 1995 EX-27 5 CMS ENERGY FDS
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 9-MOS DEC-31-1994 JAN-01-1995 SEP-30-1995 PER-BOOK 4,318 1,447 742 1,349 0 7,856 1 1,935 (489) 1,439 0 356 1,997 474 766 0 164 0 101 43 2,508 7,856 2,821 103 2,342 2,453 368 (8) 368 181 187 21 166 60 0 389 1.90 0
EX-27 6 CONSUMERS FDS
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 9-MOS DEC-31-1994 JAN-01-1995 SEP-30-1995 PER-BOOK 4,318 681 618 1,200 0 6,817 841 491 191 1,545 0 356 1,518 474 403 0 45 0 101 43 2,354 6,817 2,554 112 2,121 2,242 312 1 322 120 202 21 181 70 0 318 0 0
EX-99 7 CMS ENERGY: CONSUMERS GAS GROUP DATA 1 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP (representing a business unit of Consumers Power Company ("Consumers") and its wholly-owned subsidiary, Michigan Gas Storage Company) as of September 30, 1995 and 1994, and the related statements of income, common stockholders' equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Consumers Gas Group as of December 31, 1994, and the related statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3 and 6 to the financial statements as to which the date is June 9, 1995), we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, November 9, 1995 2 Consumers Gas Group Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1995 1994 1995 1994 1995 1994 In Millions OPERATING REVENUE $ 122 $ 126 $ 801 $ 837 $1,116 $1,188 --------------------------------------------------------- OPERATING EXPENSES Operation Cost of gas sold 53 48 435 475 622 680 Other 42 50 135 137 183 183 --------------------------------------------------------- Total operation 95 98 570 612 805 863 Maintenance 9 9 27 30 37 42 Depreciation, depletion and amortization 10 8 57 51 82 75 General taxes 6 7 37 38 53 52 --------------------------------------------------------- Total operating expenses 120 122 691 731 977 1,032 --------------------------------------------------------- PRETAX OPERATING INCOME 2 4 110 106 139 156 INCOME TAXES (1) (1) 35 32 44 44 --------------------------------------------------------- NET OPERATING INCOME 3 5 75 74 95 112 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) - - - (1) (1) (1) --------------------------------------------------------- FIXED CHARGES Interest on long-term debt 8 8 23 22 31 32 Other interest 2 1 4 3 6 5 Capitalized interest - - (1) - (1) - Preferred dividends 1 1 5 3 6 4 --------------------------------------------------------- Net fixed charges 11 10 31 28 42 41 --------------------------------------------------------- NET INCOME (LOSS) $ (8) $ (5) $ 44 $ 45 $ 52 $ 70 ========================================================= NET INCOME (LOSS) ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS THROUGH RETAINED INTEREST $ (7) $ (5) $ 45 $ 45 $ 53 $ 70 ========================================================= NET LOSS ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ (1) $ - $ (1) $ - $ (1) $ - ========================================================= AVERAGE CLASS G COMMON SHARES OUTSTANDING 7 - 7 - 7 - ========================================================= LOSS PER AVERAGE CLASS G COMMON SHARE $ (.17) $ - $ (.17) $ - $ (.17) $ - ========================================================= DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .28 $ - $ .28 $ - ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3 Consumers Gas Group Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1995 1994 1995 1994 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 44 $ 45 $ 52 $ 70 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 57 51 82 75 Capital lease and other amortization 3 3 4 6 Deferred income taxes and investment tax credit 19 6 17 10 Other 1 1 1 3 Changes in other assets and liabilities (59) 11 (53) 36 ------ ------ ------ ------ Net cash provided by operating activities 65 117 103 200 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (77) (82) (124) (128) Other (5) (5) (7) (6) ------ ------ ------ ------ Net cash used in investing activities (82) (87) (131) (134) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable, net 68 (2) 86 (37) Payment of common stock dividends (49) (30) (65) (55) Payment of capital lease obligations (2) (3) (3) (5) Retirement of bonds and other long-term debt (1) (29) (3) (152) Repayment of bank loans (1) (31) (76) (31) Proceeds from bank loans - - 88 1 Proceeds from preferred stock - 42 - 42 Contribution from stockholder - 22 - 22 Proceeds from bonds and other long-term debt - - - 149 ------ ------ ------ ------ Net cash provided by (used in) financing activities 15 (31) 27 (66) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) (1) (1) - CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 4 4 3 3 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 2 $ 3 $ 2 $ 3 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4 Consumers Gas Group Balance Sheets
September 30 September 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions ASSETS PLANT (At original cost) Plant $2,132 $2,064 $2,014 Less accumulated depreciation, depletion and amortization 1,164 1,117 1,103 ---------------------------------- 968 947 911 Construction work-in-progress 48 47 57 ---------------------------------- 1,016 994 968 ---------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 2 4 3 Accounts receivable and accrued revenue, less allowances of $2, $2 and $2, respectively (Note 6) 49 51 23 Inventories at average cost Gas in underground storage 263 235 271 Materials and supplies 10 9 10 Trunkline settlement 30 30 30 Deferred income taxes 1 16 11 Prepayments and other 22 48 23 ---------------------------------- 377 393 371 ---------------------------------- NON-CURRENT ASSETS Postretirement benefits 160 158 158 Trunkline settlement 33 55 63 Deferred income taxes 7 3 - Other 65 70 65 ---------------------------------- 265 286 286 ---------------------------------- TOTAL ASSETS $1,658 $1,673 $1,625 ==================================
5
September 30 September 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholders' equity $ 312 $ 317 $ 325 Preferred stock 78 78 78 Long-term debt 417 426 372 Non-current portion of capital leases 16 18 18 ---------------------------------- 823 839 793 ---------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 21 13 53 Notes payable 167 99 81 Accounts payable 56 68 69 Trunkline settlement 30 30 30 Accrued refunds 30 20 31 Accrued taxes 22 55 25 Accrued interest 7 8 7 Other 40 68 63 ---------------------------------- 373 361 359 ---------------------------------- NON-CURRENT LIABILITIES Postretirement benefits 177 172 176 Regulatory liabilities for income taxes, net 153 144 137 Trunkline settlement 33 55 63 Deferred investment tax credit 29 30 31 Other 70 72 66 ---------------------------------- 462 473 473 ---------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,658 $1,673 $1,625 ================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6 Consumers Gas Group Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1995 1994 1995 1994 1995 1994 In Millions COMMON STOCK At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184 ------- ------- ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 107 107 107 85 107 85 Stockholder's contribution - - - 22 - 22 ------- ------- ------- ------- ------- ------- At end of period 107 107 107 107 107 107 ------- ------- ------- ------- ------- ------- RETAINED EARNINGS At beginning of period 38 35 26 19 34 19 Net income (loss) (8) (5) 44 45 52 70 Common stock dividends declared (Note 2) (9) 4 (49) (30) (65) (55) ------- ------- ------- ------- ------- ------- At end of period 21 34 21 34 21 34 ------- ------- ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 312 $ 325 $ 312 $ 325 $ 312 $ 325 ======= ======= ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7 Consumers Gas Group Condensed Notes to Financial Statements In July and August 1995, CMS Energy issued a total of 7,520,000 shares of Class G Common Stock. This new class of Common Stock is intended to reflect the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). Accordingly, these financial statements and their related condensed notes should be read along with the financial statements and notes contained in the 1994 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants, and the financial statements and notes of CMS Energy and Consumers Gas Group in CMS Energy's Registration Statement on Form S-3 (Nos. 33-57719 and 33-57719-01) relating to the Class G Common Stock. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the business of CMS Energy, see Note 1 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. In March 1995, CMS Energy received shareholders' approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy, designated Class G Common Stock which reflects the separate performance of the Consumers Gas Group. For further information regarding the nature and issuance of the Class G Common Stock, see Note 7 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 2: Earnings (Loss) Per Share and Dividends The loss per share, for the three, nine and twelve month periods ended September 30, 1995, reflects the performance of the Consumers Gas Group since the initial issuance of the Class G Common Stock during the third quarter of 1995. The Class G Common Stock participates in earnings and dividends from the issue date. The earnings (loss) attributable to such common stock and the related amounts per share is computed by considering the weighted average number of common shares outstanding. The earnings (loss) attributable to outstanding Class G Common Stock is equal to Consumers Gas Group's net income (loss) multiplied by a fraction, the numerator of which is the weighted average number of shares of Class G Common Stock outstanding during the period and the denominator which represents the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The loss attributable to Class G Common Stock on a per share basis, for the periods ended September 30, 1995, is based on 23.17 percent of the loss of the Consumers Gas Group since the initial issuance. Earnings (loss) per share are omitted from the statements of income, for the periods ended September 30, 1994, since the Class G Common Stock was not part of the equity structure of CMS Energy. For purpose of analysis, the pro forma data provided below for the nine months ended September 30, 1995 and 1994 and the year ended December 31, 1994 gives effect to the original issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.5 percent of the equity attributable to the Consumers Gas Group) as if the sale occurred on January 1, 1994. In Millions, Except Per Share Amounts Pro Forma Pro Forma Nine Months Ended Year Ended September 30 December 31 1995 1994 1994 ----- ----- ----- Consumers Gas Group Net Income $ 44 $ 45 $ 53 Net Income attributable to CMS Energy Common Stock through Retained Interest $ 34 $ 34 $ 41 Net Income attributable to outstanding Class G Common Stock $ 10 $ 11 $ 12 Average shares outstanding of Class G Common Stock 7.521 7.520 7.520 Earnings per share attributable to outstanding Class G Common Stock $1.38 $1.41 $1.66 Holders of Class G Common Stock have no direct rights in the equity or assets of the Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of its Board of Directors, dividends may be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. Dividends on the Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of the Consumers Gas Group, and to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current intention that the declaration or payment of dividends with respect to the Class G Common Stock will not be reduced, suspended or eliminated as a result of factors arising out of or relating to the electric utility business or the non-utility businesses of CMS Energy unless such factors also require, in the Board of Directors' sole discretion, the omission of the declaration or reduction in payment of dividends on both the CMS Energy Common Stock and the Class G Common Stock. The portion of Consumers' common dividends attributed to the Consumers Gas Group, for periods prior to the July 1995 issuance of the Class G Common Stock, have been reflected in the financial statements. These dividend amounts were allocated based on the ratio of the Consumers Gas Group's net income (loss) to Consumers' consolidated net income after dividends on preferred stock. This ratio was then applied to Consumers' total dividend payments for these periods. Dividends declared on the Class G Common Stock following the issuance are also reflected on the financial statements. In July and October 1995, the Board of Directors declared quarterly dividends of 28 cents per share ($1.12 per share on an annual basis) on Class G Common Stock. 3: Rate Matters For information regarding rate matters directly affecting the Consumers Gas Group, see the "Gas Rates" and "GCR Issues," discussions in Note 3 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 4: Commitments and Contingencies Capital Expenditures: The Consumers Gas Group estimates capital expenditures, including new lease commitments, will be $128 million for 1995, $119 million for 1996 and $101 million for 1997. These estimates include an attributed portion of Consumers' anticipated capital expenditures for common plant and equipment of $23 million, $18 million and $15 million for 1995, 1996 and 1997, respectively. For further information regarding commitments and contingencies directly affecting the Consumers Gas Group (including those involving former manufactured gas plant sites), see the "Environmental Matters," "Public Utility Holding Company Act Exemption" and "Other" discussions in Note 4 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 5: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1995 1994 1995 1994 ---- ---- ---- ---- Cash transactions Interest paid (net of amounts capitalized) $ 26 $ 26 $ 33 $ 35 Income taxes paid (net of refunds) 31 30 40 27 Non-cash transactions Assets placed under capital leases $ 1 $ 3 $ 3 $ 4 6: Short-term and Long-term Financings Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. At September 30, 1995, Consumers had an unsecured $425 million facility and unsecured, committed lines of credit aggregating $135 million that are used to finance seasonal working capital requirements. At September 30, 1995 and 1994, Consumers had a total of $474 million and $401 million outstanding under these facilities, respectively. Consumers has an established $500-million trade receivables purchase and sale program. At September 30, 1995 and 1994, receivables sold under the agreement totaled $210 million. Consumers generally manages its short-term financings on a centralized consolidated basis. The portion of receivables sold attributable to the Consumers Gas Group at September 30, 1995 and 1994 is estimated by management to be $29 million and $32 million, respectively. Accounts receivable and accrued revenue in the balance sheets have been reduced to reflect receivables sold. The portions of short-term debt and receivables sold attributed to Consumers Gas Group reflect the high utilization of short-term borrowings to finance the purchase of gas for storage in the summer and fall periods. In April 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. In November 1995, Consumers filed a registration statement with the SEC for the possible future sale of $100 million of Trust Originated Preferred Securities through a business trust affiliated with Consumers. The trust was formed for the sole purpose of issuing certain securities and investing the proceeds in an equivalent principal amount of subordinated notes. The subordinated notes will be unsecured obligations of Consumers. A portion of any future issuance of debt or securities may be attributed to the Consumers Gas Group. 11 Consumers Gas Group Management's Discussion and Analysis In July and August 1995, CMS Energy issued a total of 7,520,000 shares of Class G Common Stock. This new class of Common Stock is intended to reflect the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). Accordingly, this MD&A should be read along with the MD&A in the 1994 Form 10-K of CMS Energy and the MD&As of CMS Energy and Consumers Gas Group in CMS Energy's Registration Statement on Form S-3 (Nos. 33-57719 and 33-57719-01) relating to the Class G Common Stock. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the businesses of CMS Energy, including the nature and issuance of the Class G Common Stock, see the MD&A of CMS Energy included and incorporated by reference herein. Earnings for the quarters ended September 30, 1995 and 1994 For the third quarter of 1995 the Consumers Gas Group experienced a net loss of $8 million compared to a $5 million net loss for the third quarter of 1994. Losses during the third quarter are not unexpected given the seasonality (approximately 75 percent of gas revenues are generated in the first and fourth quarters) of Consumers Gas Group's business. The additional $3 million loss for the current period reflects a cumulative revenue adjustment recorded in 1994 which increased revenue for that year. Partially offsetting this loss was an 11.4 percent increase in gas deliveries, and lower operation and general tax expenses during 1995. Earnings for the nine months ended September 30, 1995 and 1994 Net income for the Consumers Gas Group for the nine months ended September 30, 1995 totaled $44 million, compared with $45 million for the nine months ended September 30, 1994. Earnings in 1995 recognize the benefit of reversing losses previously recorded for gas contingencies and lower general tax and gas operation expenses, offset by lower gas deliveries, higher depreciation expense, and increased preferred dividend cost. Earnings for the 12 months ended September 30, 1995 and 1994 Net income for the Consumers Gas Group for the 12 months ended September 30, 1995 totaled $52 million, compared with $70 million for the 12 months ended September 30, 1994. The decrease in 1995 net income reflects lower gas deliveries and higher depreciation and general tax expenses, somewhat offset by the reversal of losses previously recorded for gas contingencies and lower operation and maintenance expenses during the 1995 period. Cash Position, Financing and Investing Consumers Gas Group's cash requirements are met by cash from operations and financing activities. In the first nine months of 1995 and 1994, Consumers Gas Group's cash inflow from operations was derived mainly from Consumers' sale and transportation of natural gas. Consumers Gas Group's primary use of cash continues to reflect its gas utility construction expenditures and improvements in the reliability of its gas utility transmission and distribution systems. It also has used its cash to retire portions of long-term securities and to pay common and preferred dividends. Financing and Investing Activities: Capital expenditures for the Consumers Gas Group (including assets placed under capital lease) totaled $78 million for the first nine months of 1995 compared with $85 million for the first nine months of 1994. Financing and Investing Outlook: CMS Energy estimates that capital expenditures for the Consumers Gas Group, including new lease commitments, will total approximately $348 million over the next three years. In Millions Years Ended December 31 1995 1996 1997 Gas Utility (a) $125 $117 $ 99 Michigan Gas Storage 3 2 2 ---- ---- ---- $128 $119 $101 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to both utility businesses. The Consumers Gas Group expects that cash from operations and the ability to access debt markets will provide necessary working capital and liquidity to fund future capital expenditures, required debt payments and other cash needs in the foreseeable future. In November 1995, Consumers filed a registration statement with the SEC for the possible future sale of $100 million of Trust Originated Preferred Securities. For further information, see Note 6 to the Financial Statements of Consumers Gas Group. Consumers generally manages its short-term financings on a centralized, consolidated basis. At September 30, 1995, Consumers' available sources of credit included unsecured, committed lines of credit totaling $135 million and a $425 million working capital facility. Consumers also 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 September 30, 1995, receivables sold totaled $210 million. Consumers Gas Group's attributed portion of such receivables sold totaled $29 million. Results of Operations For Consumers Gas Group's results of operations, see "Consumers Gas Group Results of Operations" in CMS Energy's MD&A included and incorporated by reference herein. Gas Issues For Consumers Gas Group's discussion of Gas Rates, GCR Issues and Environmental Matters, see "Consumers Gas Group Issues" in CMS Energy's MD&A included and incorporated by reference herein. Outlook For Consumers Gas Group's outlook discussion, see "Consumers Gas Group Outlook" in CMS Energy's MD&A included and incorporated by reference herein. Other For information regarding CMS Energy's exemption from registration under PUHCA and the effect of new accounting standards, see "Other" in CMS Energy's MD&A included and incorporated by reference herein. EX-99 8 EXHIBIT VOLUME COVER AND EXHIBIT INDEX ========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 CMS ENERGY CORPORATION AND CONSUMERS POWER COMPANY FORM 10-Q EXHIBITS FOR QUARTER ENDED SEPTEMBER 30, 1995 ========================================================================== EXHIBIT INDEX Exhibit Numbers Description - ------- ----------------------------------------------------------- (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15)(a) - CMS Energy: Letter of Independent Public Accountant (15)(b) - Consumers: Letter of Independent Public Accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - Consumers: Financial Data Schedule (99) - CMS Energy: Consumers Gas Group Financials -----END PRIVACY-ENHANCED MESSAGE-----