-----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, UFu916w8nZ7E1v5TvvnNQBjlVHydO/OXz17EClvtAog0DROITrvgaibuk58szeT4 5IsJfA/p/VOmQ8zafeZitw== 0000201533-96-000066.txt : 19960517 0000201533-96-000066.hdr.sgml : 19960517 ACCESSION NUMBER: 0000201533-96-000066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96565151 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: 96565152 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 March 31, 1996 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 April 30, 1996: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 91,999,879 CMS Energy Class G Common Stock, no par value 7,700,919 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 March 31, 1996 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. . . . . . . . . . . . . . . . . 21 Consumers Power Company Report of Independent Public Accountants. . . . . . . . . . . . . . . 34 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 35 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 36 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 37 Consolidated Statements of Common Stockholder's Equity. . . . . . . . 39 Condensed Notes to Consolidated Financial Statements. . . . . . . . . 40 Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 47 PART II: Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 57 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 59 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 3 GLOSSARY Certain terms used in the text and financial statements are defined below. ABATE . . . . . . . . . . . . . Association of Businesses Advocating Tariff Equity ABB . . . . . . . . . . . . . . Asea Brown Boveri Energy Ventures ALJ . . . . . . . . . . . . . . Administrative Law Judge Attorney General. . . . . . . . Michigan Attorney General bcf . . . . . . . . . . . . . . Billion cubic feet Big Rock. . . . . . . . . . . . Big Rock Point nuclear plant, owned by Consumers 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 Electric Marketing. . . . . CMS Electric Marketing Company, a subsidiary of Enterprises CMS Energy. . . . . . . . . . . CMS Energy Corporation CMS Energy Common Stock . . . . One of two classes of common stock of CMS Energy, par value $.01 per share CMS Gas and Electric. . . . . . CMS Gas and Electric Company, a subsidiary of Enterprises CMS Gas Marketing . . . . . . . CMS Gas Marketing Company, a subsidiary of Enterprises CMS Gas Transmission. . . . . . CMS Gas Transmission and Storage Company, a subsidiary of Enterprises CMS Generation. . . . . . . . . CMS Generation Co., a subsidiary of Enterprises CMS Holdings. . . . . . . . . . CMS Midland Holdings Company, a subsidiary of Consumers CMS Midland . . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers CMS NOMECO. . . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of Enterprises Common Stock. . . . . . . . . . CMS Energy Common Stock and Class G Common Stock Consumers . . . . . . . . . . . Consumers Power Company, a subsidiary of CMS Energy Consumers Power Company Financing I . . . . . . . . . A wholly-owned Delaware business trust of Consumers Consumers Gas Group . . . . . . The gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Court of Appeals. . . . . . . . Michigan Court of Appeals Detroit Edison. . . . . . . . . The Detroit Edison Company DNR . . . . . . . . . . . . . . Michigan Department of Natural Resources DSM . . . . . . . . . . . . . . Demand-side management EDEER S. A. . . . . . . . . . . Empresa Distribuidora de Electricidad de Entre Rios S. A., an electric distribution utility in northeastern Argentina Enterprises . . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy FERC. . . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . . Gas cost recovery General Motors. . . . . . . . . General Motors Corporation GTNs. . . . . . . . . . . . . . CMS Energy General Term Notes, $250 million Series A and $125 million Series B HYDRA-CO. . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary of CMS Generation kWh . . . . . . . . . . . . . . Kilowatt-hour mcf . . . . . . . . . . . . . . Thousand cubic feet MCV Facility. . . . . . . . . . A natural gas-fueled, combined cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . . Midland Cogeneration Venture Limited Partnership MD&A. . . . . . . . . . . . . . Management's Discussion and Analysis Michigan Gas Storage. . . . . . Michigan Gas Storage Company, a subsidiary of Consumers Michigan Natural Resources and Environmental Protection Act. . . . . . . . . . . . . . Michigan Natural Resources and Environmental Protection Act Part 201 MHP . . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P. MPSC. . . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . . Megawatts NEIL. . . . . . . . . . . . . . Nuclear Electric Insurance Ltd. NML . . . . . . . . . . . . . . Nuclear Mutual Ltd. NOPR. . . . . . . . . . . . . . Notice of Proposed Rulemaking NRC . . . . . . . . . . . . . . Nuclear Regulatory Commission Outstanding Shares. . . . . . . Outstanding shares of Class G Common Stock 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 PSCR. . . . . . . . . . . . . . Power supply cost recovery Retained Interest . . . . . . . The interest in the common stockholders' equity of the Consumers Gas Group that is retained by CMS Energy Retained Interest Shares. . . . Authorized but unissued shares of Class G Common Stock not held by holders of the Outstanding Shares and attributable to the Retained Interest SEC . . . . . . . . . . . . . . Securities and Exchange Commission Settlement Order. . . . . . . . MPSC Order issued March 31, 1993 in MPSC Case Nos. U-10127, U-8871 and others, and the rehearing order issued May 26, 1993 SFAS. . . . . . . . . . . . . . Statement of Financial Accounting Standards Superfund . . . . . . . . . . . Comprehensive Environmental Response, Compensation and Liability Act Terra . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas exploration and production company located in Traverse City, Michigan TGN . . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a natural gas pipeline located in Argentina 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 March 31, 1996 and 1995, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 26, 1996, 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, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 10, 1996. 7 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions, Except Per Share Amounts OPERATING REVENUE Electric utility $ 591 $ 540 $2,328 $2,185 Gas utility 546 482 1,259 1,105 Oil and gas exploration and production 31 32 107 94 Independent power production 21 23 94 60 Natural gas transmission, storage and marketing 83 38 241 140 Other 3 2 19 6 ------- ------- ------- ------- Total operating revenue 1,275 1,117 4,048 3,590 ------- ------- ------- ------- OPERATING EXPENSES Operation Fuel for electric generation 73 67 289 294 Purchased power - related parties 140 124 507 484 Purchased and interchange power 47 36 207 156 Cost of gas sold 410 308 923 721 Other 168 160 706 638 ------- ------- ------- ------- Total operation 838 695 2,632 2,293 Maintenance 40 46 180 194 Depreciation, depletion and amortization 124 114 426 390 General taxes 59 56 199 178 ------- ------- ------- ------- Total operating expenses 1,061 911 3,437 3,055 ------- ------- ------- ------- PRETAX OPERATING INCOME (LOSS) Electric utility 103 87 378 331 Gas utility 91 91 151 143 Oil and gas exploration and production 9 15 24 22 Independent power production 6 13 39 31 Natural gas transmission, storage and marketing 8 3 19 9 Other (3) (3) - (1) ------- ------- ------- ------- Total pretax operating income 214 206 611 535 ------- ------- ------- ------- INCOME TAXES 57 54 133 111 ------- ------- ------- ------- NET OPERATING INCOME 157 152 478 424 ------- ------- ------- ------- OTHER INCOME (DEDUCTIONS) Accretion income 3 3 11 12 Accretion expense (7) (8) (30) (34) Other income taxes, net 3 1 14 11 Other, net 2 5 7 19 ------- ------- ------- ------- Total other income 1 1 2 8 ------- ------- ------- ------- FIXED CHARGES Interest on long-term debt 57 56 225 203 Other interest 7 5 29 20 Capitalized interest (2) (1) (9) (6) Preferred stock dividends 7 7 28 28 Preferred securities distributions 1 - 1 - ------- ------- ------- ------- Net fixed charges 70 67 274 245 ------- ------- ------- ------- NET INCOME $ 88 $ 86 $ 206 $ 187 ======= ======= ======= ======= NET INCOME ATTRIBUTABLE TO COMMON STOCKS CMS Energy $ 76 $ 86 $ 191 $ 187 ======= ======= ======= ======= Class G $ 12 $ - $ 15 $ - ======= ======= ======= ======= AVERAGE COMMON SHARES OUTSTANDING CMS Energy 92 87 90 86 ======= ======= ======= ======= Class G 8 - 8 - ======= ======= ======= ======= EARNINGS PER AVERAGE COMMON SHARE CMS Energy $ .83 $ .99 $ 2.12 $ 2.17 ======= ======= ======= ======= Class G $ 1.50 $ - $ 1.90 $ - ======= ======= ======= ======= DIVIDENDS DECLARED PER COMMON SHARE CMS Energy $ .24 $ .21 $ .93 $ .81 ======= ======= ======= ======= Class G $ .28 $ - $ .84 $ - ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 88 $ 86 $ 206 $ 187 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $13, $13, $51 and $49, respectively) 124 114 426 390 Capital lease amortization 9 10 36 30 Debt discount amortization - 8 16 36 Deferred income taxes and investment tax credit 6 29 52 68 Accretion expense 7 8 30 34 Accretion income - abandoned Midland project (3) (3) (11) (12) Undistributed earnings of related parties (21) (12) (62) (33) MCV power purchases - settlement (Note 2) (12) (37) (112) (102) Other 7 - 14 4 Changes in other assets and liabilities 144 127 106 (45) ------ ------ ------ ------ Net cash provided by operating activities 349 330 701 557 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (110) (131) (514) (592) Investments in partnerships and unconsolidated subsidiaries (71) (11) (301) (41) Acquisition of companies, net of cash acquired (20) (156) (10) (156) Investments in nuclear decommissioning trust funds (13) (13) (51) (49) Cost to retire property, net (6) (9) (39) (41) Deferred demand-side management costs (2) (2) (10) (11) Other (3) (4) (12) (9) Proceeds from sale of property - - 22 20 ------ ------ ------ ------ Net cash used in investing activities (225) (326) (915) (879) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans, notes and bonds 339 208 464 869 Proceeds from preferred securities 97 - 97 - Issuance of common stock 8 9 159 26 Increase (decrease) in notes payable, net (303) (204) (97) 135 Repayment of bank loans (246) (9) (255) (427) Payment of common stock dividends (24) (18) (90) (70) Payment of capital lease obligations (9) (10) (36) (29) Retirement of bonds and other long-term debt - (11) (33) (181) Retirement of common stock - - (1) (1) ------ ------ ------ ------ Net cash provided by (used in) financing activities (138) (35) 208 322 ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (14) (31) (6) - CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 48 48 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 42 $ 48 $ 42 $ 48 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9 CMS Energy Corporation Consolidated Balance Sheets
March 31 March 31 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions ASSETS PLANT AND PROPERTY (At Cost) Electric $6,130 $6,103 $5,826 Gas 2,287 2,218 2,115 Oil and gas properties (full-cost method) 1,096 1,074 978 Other 86 105 55 ------ ------ ------ 9,599 9,500 8,974 Less accumulated depreciation, depletion and amortization 4,747 4,627 4,405 ------ ------ ------ 4,852 4,873 4,569 Construction work-in-progress 200 201 257 ------ ------ ------ 5,052 5,074 4,826 ------ ------ ------ INVESTMENTS Independent power production 297 275 262 Natural gas transmission, storage and marketing 231 193 41 First Midland Limited Partnership (Note 2) 226 225 219 Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83 Other 25 22 16 ------ ------ ------ 883 818 621 ------ ------ ------ CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 42 56 48 Accounts receivable and accrued revenue, less allowances of $3, $4 and $4, respectively (Note 7) 356 296 149 Inventories at average cost Gas in underground storage 39 184 80 Materials and supplies 85 83 79 Generating plant fuel stock 16 37 27 Deferred income taxes 22 24 37 Prepayments and other 190 230 178 ------ ------ ------ 750 910 598 ------ ------ ------ NON-CURRENT ASSETS Postretirement benefits 458 462 473 Nuclear decommissioning trust funds 323 304 236 Abandoned Midland project 126 131 143 Other 451 444 441 ------ ------ ------ 1,358 1,341 1,293 ------ ------ ------ TOTAL ASSETS $8,043 $8,143 $7,338 ====== ====== ======
10
March 31 March 31 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION (Note 7) Common stockholders' equity $1,541 $1,469 $1,209 Preferred stock of subsidiary 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 - - Long-term debt 3,110 2,906 2,787 Non-current portion of capital leases 108 106 103 ------ ------ ------ 5,215 4,837 4,455 ------ ------ ------ CURRENT LIABILITIES Current portion of long-term debt and capital leases 97 207 180 Notes payable 38 341 135 Accounts payable 267 304 160 Accrued taxes 223 256 172 Power purchases - settlement (Note 2) 90 90 95 Accounts payable - related parties 60 53 54 Accrued interest 49 45 30 Accrued refunds 28 22 35 Other 187 192 166 ------ ------ ------ 1,039 1,510 1,027 ------ ------ ------ NON-CURRENT LIABILITIES Deferred income taxes 638 640 604 Postretirement benefits 539 533 549 Power purchases - settlement (Note 2) 215 221 295 Deferred investment tax credits 168 171 178 Regulatory liabilities for income taxes, net 53 44 29 Other 176 187 201 ------ ------ ------ 1,789 1,796 1,856 ------ ------ ------ COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,043 $8,143 $7,338 ====== ====== ====== (a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers. 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 Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions COMMON STOCK At beginning and end of period $ 1 $ 1 $ 1 $ 1 ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 1,951 1,701 1,734 1,684 Common stock reacquired - - (1) (1) Common stock issued: CMS Energy 7 33 100 50 Class G 1 - 125 - Common stock reissued - - 1 1 ------- ------- ------- ------- At end of period 1,959 1,734 1,959 1,734 ------- ------- ------- ------- REVALUATION CAPITAL At beginning of period (8) - 1 1 Change in unrealized investment-gain (loss) - 1 (9) - ------- ------- ------- ------- At end of period (8) 1 (8) 1 ------- ------- ------- ------- RETAINED EARNINGS (DEFICIT) At beginning of period (475) (595) (527) (644) Net income 88 86 206 187 Common stock dividends declared: CMS Energy (22) (18) (84) (70) Class G (2) - (6) - ------- ------- ------- ------- At end of period (411) (527) (411) (527) ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $1,541 $1,209 $1,541 $1,209 ======= ======= ======= ======= 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 1995 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 segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses, including oil and gas exploration and production, development and operation of independent power production facilities, electric and gas marketing services to utility, commercial and industrial customers, and 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 and twelve month periods ended March 31, 1996, undistributed equity earnings were $21 million and $62 million, respectively and $12 million and $33 million for the three and twelve month periods ended March 31, 1995. 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. Consumers, through its subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the end of the PPA. 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. 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, the fixed energy charge and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all energy delivered on an economic basis above the availability limits to 915 MW, Consumers has been 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 1993 MPSC-authorized level, future additional after-tax losses and after- tax cash underrecoveries would be incurred. Consumers' estimates of its after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------- Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 ========================================================================== (a) If unable to sell any capacity above the MPSC's 1993 authorized level. Under the Settlement Order, capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs, but the MPSC will 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. The MCV Partnership did not object to the Settlement Order. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals and in March 1996, the Court of Appeals affirmed the Settlement Order. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including Consumers' electric rate case (see Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding this proposed settlement, see Note 3. At March 31, 1996 and December 31, 1995, the after-tax present value of the Settlement Order liability totaled $198 million and $202 million, respectively. The reduction in the liability since December 31, 1995, reflects after-tax cash underrecoveries of $8 million, partially offset by after-tax accretion expense of $4 million. The undiscounted after-tax amount associated with the liability totaled $593 million at March 31, 1996. In 1994 and 1995, Consumers paid $44 million to terminate power purchase agreements with the developers of two proposed independent power projects totaling 109 MW. As part of the proposed settlement reached with the MPSC staff (see Note 3), Consumers is seeking 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 1996. Even if Consumers is not allowed to substitute MCV Facility capacity for the capacity to be provided under the terminated agreements, Consumers believes that the MPSC would still approve recovery of the buyout costs due to the significant customer savings resulting from the terminated power purchase agreements. As a result, Consumers has recorded a regulatory asset of $44 million. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General appealed these plan case orders to the Court of Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 plan case. 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 Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believes this is contrary to the terms of the Settlement Order and has appealed the February 23 order on this issue. The MCV Partnership and ABATE have also filed separate appeals of this order. 3: Rate Matters Electric Rate Proceedings: In late 1994, Consumers filed a request with the MPSC to increase its retail electric rates. The request included provisions for ratemaking treatment of the 325 MW of MCV Facility contract capacity above 915 MW. Early in 1996, the MPSC issued a partial final order in this case, granting Consumers a $46 million annual increase in its electric retail rates. This order authorized a 12.25 percent return on common equity. However, it did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers. In addition, 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. For further information regarding these requests, see the Electric Rate Proceedings and Special Rates discussions in the Management's Discussion and Analysis. 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 currently before the MPSC in separate proceedings. Some of these issues were preliminarily addressed in February 1996 when the MPSC issued a partial final order in Consumers' electric rate case. If fully adopted, the settlement agreement would: provide for cost recovery of the entire 325 MW of uncommitted MCV Facility capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; and accelerate recovery of nuclear plant investment. Consumers expects a final order by mid-1996. Gas Rates: As part of an agreement approved by the MPSC, Consumers filed a gas rate case in December 1994 that incorporated cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites (see Note 4). In March 1996, the MPSC issued a final order in this case, authorizing recovery of costs related to postretirement benefits and former manufactured gas plant sites. Overall however, the order decreased Consumers' gas rates by $11.7 million annually and authorized an 11.6 percent return on common equity, a decrease from the 13.25 percent previously authorized. Consumers has filed a petition for rehearing with the MPSC, requesting, among other things, recovery of certain gas losses, as well as reconsideration of issues in the order that Consumers believes provide disincentives to competition. The relief requested in the petition for rehearing, if granted in its entirety, would result in a $5.5 million annual rate reduction compared with the $11.7 million reduction. GCR Matters: In 1993, the MPSC issued an order favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers. In early 1995, management concluded that the intrastate producers' pending appeals of the order would not be successful and accordingly, reversed a previously accrued contingency and recorded a $23 million (pretax) benefit. The MPSC order was affirmed by the Court of Appeals in June 1995. The producers have petitioned the Michigan Supreme Court for review. In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. 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. Resolution of the issues discussed in this note is not expected to have a material impact on CMS Energy's or Consumers' financial position or results of operations. 4: Commitments, Contingencies and Other Environmental Matters: Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Superfund liability is joint and several and 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 March 31, 1996, Consumers has accrued a liability for its estimated losses. The Michigan Natural Resources and Environmental Protection Act was substantially amended in June 1995. This Michigan law bears some similarities to the federal Superfund law. 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. Three of the four plans submitted by Consumers have been approved by the DNR or the Michigan Department of Environmental Quality. The findings for two remedial investigations indicate that the expenditures for remedial action at those sites are likely to be less than previously estimated; however, these findings may not be representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At March 31, 1996, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and legal and regulatory requirements, could effect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order issued in early 1996, Consumers is deferring environmental clean-up costs incurred at these sites and amortizing these costs over 10 years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs 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. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $965 million for 1996, $770 million for 1997 and $745 million for 1998. Other: As of March 31, 1996, CMS Energy or its subsidiaries have guaranteed up to $71 million in contingent obligations of unconsolidated affiliates and other parties. In August 1995 CMS Generation was served a complaint, which was filed in the U.S. District Court in Denver, alleging multiple claims relating to a business project in the Philippines. Plaintiffs have claimed approximately $85 million in direct damages, indirect damages in a like amount, plus punitive damages, interest, and attorney's fees. CMS Generation is vigorously contesting this action. 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 March 31, 1996, Consumers had 33 separate stray voltage lawsuits awaiting trial court action. 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 Consumers filed updated decommissioning information with the MPSC in 1995 which estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered that Consumers review and file estimated decommissioning costs with the MPSC in 1998. In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. 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. As of March 31, 1996, 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 the cask continues to safely store spent fuel and there is no requirement for its replacement, 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. Certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff is reviewing the petitions. 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: $30 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 a future decision 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 March 31 were: In Millions Three Months Ended Twelve Months Ended 1996 1995 1996 1995 - ------------------------------------------------------------------------- Cash transactions Interest paid (net of amounts capitalized) $ 56 $ 60 $ 203 $ 170 Income taxes paid (net of refunds) 2 - 36 39 Non-cash transactions Nuclear fuel placed under capital lease $ - $ 7 $ 20 $ 25 Other assets placed under capital leases 1 2 4 15 Common Stock issued to acquire companies - 24 66 24 Assumption of debt - 16 4 16 Capital leases refinanced - - 21 - ========================================================================== 7: Short-Term And Long-Term Financings, Capitalization and Other CMS Energy In the first quarter of 1996, CMS Energy filed a shelf-registration with the SEC for the issuance and sale of up to $125 million of GTNs, Series B, with net proceeds to be used for general corporate purposes. As of April 30, 1996, CMS Energy had issued and outstanding approximately $250 million of Series A and $30 million of Series B GTNs with a weighted-average interest rates of 7.7 and 8.0 percent, respectively. Consumers Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $145 million that are used to finance seasonal working capital requirements. At March 31, 1996, a total of $38 million was outstanding at a weighted-average interest rate of 6.2 percent, compared with $133 million outstanding at March 31, 1995, at a weighted-average interest rate of 7.0 percent. Consumers has an established $500 million trade receivables purchase and sale program. At March 31, 1996 and 1995, receivables sold under the agreement totaled $280 million and $300 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In January 1996, 4 million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through Consumers Power Company Financing I, a business trust wholly owned by Consumers. Net proceeds from the sale totaled $97 million. The business trust was formed for the sole purpose of issuing preferred securities and the primary asset of the trust is $103 million of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers. The obligations of Consumers with respect to the preferred securities under the notes that mature in 2015, the indenture under which the notes are issued, Consumers' guarantee of the preferred securities and the Declaration of Trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. CMS NOMECO In March 1996, CMS NOMECO refinanced its $140 million revolving credit agreement with a $225 million revolving credit agreement. As of March 31, 1996, $120 million remains outstanding, under the new agreement, with a weighted-average interest rate of 6.0 percent. CMS Generation In January 1996, CMS Generation refinanced a one year $118 million bridge credit facility for the HYDRA-CO acquisition with a $110 million, five- year term loan. As of March 31, 1996, $107 million remains outstanding with a weighted-average interest rate of 7.5 percent. 8: Earnings Per Share and Dividends Earnings per share attributable to Common Stock, for the twelve month period ended March 31, 1996 reflect the performance of the Consumers Gas Group since initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock participates in earnings and dividends from the issue date. The 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 are equal to the Consumers Gas Group net income (loss) multiplied by a fraction, the numerator is the weighted-average number of Outstanding Shares during the period and the denominator represents the weighted-average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis, for the three months ended March 31, 1996, are based on 23.72 percent of the income 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 three months ended March 31, 1995 and the year ended December 31, 1995 which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to the Consumers Gas Group) on January 1, 1994, and actual data for the three months ended March 31, 1996. In Millions, Except Per Share Amounts Actual Pro Forma Pro Forma Three Months Ended Three Months Ended Year Ended ------------------ ------------------ ---------- March 31 March 31 December 31 1996 1995 1995 - -------------------------------------------------------------------------- Net Income $ 88 $ 86 $ 204 Net Income attributable to CMS Energy Common Stock $ 76 $ 74 $ 189 Net Income attributable to outstanding Class G Common Stock $ 12 $ 12 $ 15 Average shares outstanding: CMS Energy Common Stock 91.664 86.918 88.810 Class G Common Stock 7.627 7.520 7.536 Earnings per share attributable to CMS Energy Common Stock $ 0.83 $ 0.86 $ 2.14 Earnings per share attributable to outstanding Class G Common Stock $ 1.50 $ 1.55 $ 1.93 ========================================================================== In April 1996, the Board of Directors declared quarterly dividends of $.24 per share on CMS Energy Common Stock and $.28 per share on Class G Common Stock. 21 CMS Energy Corporation Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1995 Form 10-K of CMS Energy. This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this Form 10-Q that are not historical facts, are forward-looking and, accordingly, involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking information. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this Form 10-Q, the Forward-Looking Information section of this MD&A indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses, including oil and gas exploration and production, development and operation of independent power production facilities, electric and gas marketing services to utility, commercial and industrial customers, and storage and transmission of natural gas. Consolidated earnings for the quarters ended March 31, 1996 and 1995 Consolidated net income totaled $88 million or $.83 per CMS Energy Common share for the first quarter of 1996, compared to net income of $86 million or $.99 per CMS Energy Common share for the first quarter of 1995. The $2 million increase reflects increased electric utility sales resulting from Michigan's continuing economic growth, the impact of a 1996 electric utility rate increase and higher gas utility deliveries due to increased growth and colder weather experienced in the first quarter of 1996. Partially offsetting this increase in net income was the reversal of a gas contract contingency which benefited the 1995 period (see Note 3). The decrease in earnings per share attributable to CMS Energy Common Stock for the first quarter of 1996 compared to the first quarter of 1995, primarily reflects comparatively lower net income (reflecting the above 1995 non- recurring item) and the net income attributable to Class G Common stock. Class G Common stock was issued in the third quarter of 1995. Consolidated earnings for the 12 months ended March 31, 1996 and 1995 Consolidated net income totaled $206 million or $2.12 per CMS Energy Common share for the 12 months ended March 31, 1996, compared to $187 million or $2.17 per CMS Energy Common share for the 12 months ended March 31, 1995. The $19 million increase reflects both higher electric utility sales and gas utility deliveries and the impact of increased electric utility rates which became effective in early 1996. Partially offsetting this increase was the recognition of DSM incentive revenue and the reversal of previously recorded gas contingencies (see Note 3) in the 1995 period, and increased operating expenses in the 1996 period. The decrease in CMS Energy Common Stock earnings per share for the 12 months ended March 31, 1996, compared to the corresponding period in the prior year, primarily reflects comparatively lower net income (reflecting the above 1995 non-recurring items) and the net income attributable to Class G Common stock. Class G Common stock was issued in the third quarter of 1995. Cash Position, Financing and Investing CMS Energy's primary ongoing source of operating cash is dividends from its subsidiaries. CMS Energy's consolidated operating cash requirements are met by its operating and financing activities. CMS Energy's consolidated cash from operations is derived mainly from Consumers' sale and transportation of natural gas, its generation, transmission, and sale of electricity and CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations totaled $349 million and $330 million for the first quarters of 1996 and 1995, respectively. Increased cash resulting from higher sales of utility electricity, improved gas utility deliveries, lower cash losses associated with the PPA, and CMS NOMECO's increased sale of oil and natural gas was partially offset by the timing of cash payments related to Consumers' operations. CMS Energy primarily uses its operating cash to expand its international businesses, maintain and expand its electric and gas utility systems, retire portions of its long-term debt and pay dividends. Financing Activities: Net cash used in financing activities totaled $138 million and $35 million for the first quarters of 1996 and 1995, respectively. The increase of $103 million reflects a decrease in notes payable and refinancing of bank loans offset by increased cash of $97 million from the sale of Trust Originated Preferred Securities through Consumers Power Company Financing I (see Note 7). 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. CMS Energy will continue to evaluate market conditions for a possible offering of CMS NOMECO common stock. In the first quarter of 1996, CMS Energy filed a shelf-registration statement with the SEC for the issuance and sale of up to $125 million of GTNs, Series B, with net proceeds to be used for general corporate purposes. As of April 30, 1996, CMS Energy had issued and outstanding approximately $250 million of GTNs, Series A and $30 million of GTNs, Series B with weighted-average interest rates of 7.7 percent and 8.0 percent, respectively. In the first quarter of 1996, CMS Generation refinanced its $118 million bridge credit facility for the acquisition of HYDRA-CO with a $110 million, five-year term loan. As of March 31, 1996, $107 million remains outstanding with a weighted-average interest rate of 7.5 percent. In the first quarter of 1996, CMS NOMECO refinanced its $140 million revolving credit agreement with a $225 million revolving credit agreement. As of March 31, 1996, $120 million remains outstanding, under the new agreement, with a weighted-average interest rate of 6.0 percent. In February 1996, CMS Energy paid $22 million in cash dividends to holders of CMS Energy Common Stock and $2 million in cash dividends to holders of Class G Common Stock. In April 1996, the Board of Directors declared quarterly dividends $.24 per share on CMS Energy Common Stock and $.28 per share on Class G Common Stock. In April 1996, Consumers declared a $75 million common dividend to be paid in May 1996. Consumers had temporarily suspended its common dividends in mid-1995 to improve the equity portion of its capital structure. Investing Activities: Net cash used in investing activities totaled $225 million and $326 million for the first quarters of 1996 and 1995, respectively. The decrease of $101 million primarily reflects the acquisition of HYDRA-CO in the first quarter of 1995 partially offset by an increase in 1996 in investments in partnerships and unconsolidated subsidiaries. CMS Energy's expenditures for its utility and international businesses were $86 million and $117 million, respectively. Financing and Investing Outlook: CMS Energy has available, unsecured, committed lines of credit totaling $105 million and a $450 million credit facility. At March 31, 1996, CMS Energy has utilized a total of $242 million under these facilities. CMS Energy will continue to evaluate the capital markets in 1996 as a source of financing its subsidiaries' investing activities and required debt retirements. Consumers has several available, unsecured, committed lines of credit totaling $145 million and a $425 million working capital facility. At March 31, 1996, Consumers had a total of $38 million outstanding under these facilities. 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 and 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 March 31, 1996 and 1995, receivables sold totaled $280 million and $300 million, respectively. Electric Utility Results of Operations In Millions Pretax Operating Income Quarter ended 12 months ended 1996 compared 1996 compared with 1995 with 1995 Sales $ 9 $ 66 Rate increases and other regulatory issues 9 8 Operations and maintenance 4 2 General taxes and depreciation (6) (29) ------- ------- Total change $16 $ 47 ======= ======= Electric Sales: Electric sales during the first quarter of 1996 were 9.0 billion kWh, a 4.0 percent increase from 1995 levels. The increase included a 2.6 percent increase in sales to Consumers' ultimate customers. Residential and commercial sales increased 7.3 percent and 5.6 percent, respectively, while industrial sales decreased 3.1 percent, compared with the corresponding period in 1995. Industrial sales were adversely impacted by the General Motors strike which was resolved in late March 1996. Electric sales during the 12 months ended March 31, 1996 were 35.9 billion kWh, a 3.7 percent increase from 1995 levels. The increase included a 4.6 percent increase in sales to Consumers' ultimate customers. During the period, residential, commercial and industrial sales increased 7.7 percent, 5.8 percent and .9 percent, respectively. Power Costs: Power costs totaled $260 million and $227 million for the three-month periods ending March 31, 1996 and 1995, respectively. The $33 million increase primarily reflects greater power purchases from outside sources to meet increased sales demand. Power costs totaled $1,003 million and $934 million during the 12-month periods ending March 31, 1996 and 1995, respectively. The $69 million increase primarily reflects greater power purchases from outside sources to meet increased sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the end of the PPA. 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. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals and in March 1996, the Court of Appeals affirmed the Settlement Order. 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. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $8 million for the first three months of 1996. Estimated after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 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 electric rate case (discussed below) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding the settlement, see Note 3. In 1994 and 1995, Consumers terminated power purchase agreements with the developers of a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. To replace this capacity, 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers would be used. For further information, see Note 2. Electric Rate Proceedings: Consumers filed a request with the MPSC in late 1994 to increase its retail electric rates. In early 1996, the MPSC granted Consumers authority to increase its annual electric retail rates by $46 million. This partial final order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. 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. One of these issues, Consumers' electric rate case, was addressed, in part, by the order discussed above. If fully adopted, the settlement agreement would resolve Consumers' depreciation and special competitive service cases (discussed below) and cost recovery of the entire 325 MW of uncommitted MCV Facility capacity. Consumers expects a final order by mid-1996. For more information regarding the electric rate order and the settlement, see Note 3. In 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 to the request are approved, the net result would be a decrease in electric depreciation expense of $7 million for ratemaking purposes. The ALJ issued a proposal for decision in this case that recommended the MPSC reject Consumers' position regarding the reallocation of Consumers' depreciation reserve and plant investment. This case is currently part of the proposed settlement. In the settlement proposal, Consumers requested that depreciation of certain plants (including nuclear plants) be accelerated while holding overall depreciation rates level. Special Rates: Consumers currently has a request before the MPSC that, would allow Consumers a certain level of rate-pricing flexibility to respond to customers' alternative energy options. This request has also been consolidated into the settlement proceeding discussed above. Electric Capital Expenditures: In April 1996, a seven company consortium in which CMS Gas and Electric holds a 40 percent interest, acquired a 90 percent ownership interest in EDSEER S.A., an electric distribution utility serving northeastern Argentina's Entre Rios Province for $161 million. EDEER S.A., with 1995 revenue of $105 million and electric sales of 1.1 billion kWh, serves over 200,000 customers, primarily residential and commercial, in a 55,000 square kilometer area. CMS Gas and Electric, as lead operator, anticipates taking over operation of the utility in May 1996. CMS Energy and Consumers estimate capital expenditures, including new lease commitments, related to electric utility operations of $380 million for 1996, $285 million for 1997 and $290 million for 1998. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses and CMS Energy's capital expenditures relating to its international energy distribution operations. 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. Final acid rain program nitrogen oxide regulations are expected to be issued in 1996. Management believes that Consumers' annual operating costs will not be materially affected. The Michigan Natural Resources and Environmental Protection Act was substantially amended in 1995 and bears some similarities to the Federal Superfund law. 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, liquidity or results of operations. For further information regarding electric environmental matters, see Note 7. Nuclear Matters: In 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. Consequently, Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. In 1996, Consumers plans to unload and replace one of the casks where a minor flaw has been detected. For further information, see Note 8. 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 a future decision to anneal. Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At March 31, 1996, Consumers had 33 separate stray voltage lawsuits awaiting trial court action. CMS Energy believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. Consumers Gas Group Results of Operations In Millions Pretax Operating Income Quarter ended 12 months ended 1996 compared 1996 compared with 1995 with 1995 Sales $ 22 $ 53 Reversal of gas contingencies (23) (34) Recovery of gas costs and other regulatory issues 2 6 Operations and maintenance 3 (6) General taxes and depreciation (4) (11) ----- ----- Total change $ - $ 8 ===== ===== Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126 bcf, a 15.7 percent increase from 1995 levels, and total system deliveries, excluding transport to the MCV Facility, increased 14.8 percent from 1995 levels. On a weather-adjusted basis, total system deliveries increased 8.5 percent, reflecting significant growth resulting from customer additions and conversions to natural gas from alternative fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf, a 19.0 percent increase from the corresponding period ended March 31, 1995, and total system deliveries, excluding transport to the MCV Facility, increased 17.8 percent. Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million for the first quarters of 1996 and 1995, respectively. The increase of $64 million was the result of increased sales. The increased costs also reflect the reversal of a $23 million gas supplier contingency during the first quarter of 1995. The cost of gas sold totaled $735 million and $608 million for the 12 months ended March 31, 1996 and 1995, respectively. The increase of $127 million was also the result of increased sales offset by the reversal of the gas supplier contingency of $23 million in the 1995 period. Consumers Gas Group Issues Gas Rate Proceedings: In early 1996, the MPSC issued a final order in Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million annually. The MPSC order authorized an 11.6 percent return on common equity. Consumers has filed a petition for rehearing with the MPSC, requesting, among other things, recovery of certain gas losses, as well as reconsideration of issues in the order that Consumers believes provide disincentives to competition. The relief requested in the petition, if granted in its entirety, would result in a $5.5 million annual rate reduction compared with the $11.7 million reduction. 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 Matters: In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. 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 $130 million for 1996, $110 million for 1997 and $105 million for 1998. 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: 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 $98 million. These estimates are based on undiscounted 1996 costs. At March 31, 1996, 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 effect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order, Consumers is deferring environmental clean-up costs and amortizing these costs over 10 years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 7. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three months ended March 31, 1996 decreased $6 million from the same period in 1995, primarily due to recognition of a gain from assignment and novation of a gas supply contract recorded in the first quarter of 1995 partially offset by higher oil and gas prices and volumes in the first quarter of 1996. Pretax operating income for the 12 months ended March 31, 1996 increased $2 million from the 12 months ended March 31, 1995, primarily due to higher sales volumes and oil prices partially offset by lower average market prices for gas and the gains from the assignment and novation of a gas supply contracts in 1995. Capital Expenditures: Capital expenditures for the three months ended March 31, 1996 totaled $27 million, primarily for development of existing oil and gas reserves. CMS Energy currently plans to invest $405 million from 1996 to 1998 in 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 March 31, 1996 decreased $7 million from 1995 levels, primarily reflecting lower capacity sales by the MCV Partnership. Pretax operating income for the 12 months ended March 31, 1996 increased $8 million from the 12 months ended March 31, 1995, primarily reflecting additional generating capacity and improved equity earnings. Capital Expenditures and Other: In April 1996, CMS Generation and ABB signed agreements with Morocco's national utility, Office National de l'Electricite, for the privatization, expansion and operation of the Jorf Lasfar coal-fueled power plant located southwest of Casablanca. The agreements cover purchase and operation of two existing 330 MW units and construction and operation of another two 330 MW units by CMS Generation and ABB. CMS Energy posted a $30 million conditional letter of credit to ensure performance under the agreements. CMS Generation and ABB each will hold 50 percent interest in the transaction. Financial closing is expected by year end, with construction of the second two units to begin shortly thereafter. In the first quarter of 1996, CMS Generation increased its ownership interest from 51 percent to 78 percent in its Centrales Termicas Mendoza electric generating plant in western Argentina's Mendoza Province. CMS Generation currently plans to invest $185 million in the Mendoza plant to refurbish and repower the facility resulting in an increase in its capacity from 260 MW to over 400 MW. Capital expenditures for the three months ended March 31, 1996 totaled $15 million related to expanding ownership in existing facilities. CMS Energy currently plans to invest $515 million relating to its independent power production operations from 1996 to 1998. CMS Generation will pursue acquisitions and development of electric generating plants in the United States, Latin America, southern Asia, the Pacific Rim region and North Africa. Natural Gas Transmission, Storage and Marketing Pretax Operating Income: Pretax operating income for the three and 12 months ended March 31, 1996 increased $5 million and $10 million, respectively, over the same periods ended March 31, 1995, primarily reflecting earnings from new pipeline investments and the continued growth of existing projects and gas marketed to end-users. Capital Expenditures and Other: In April 1996, CMS Gas Transmission signed a purchase agreement to sell its 50 percent ownership interest in Moss Bluff Gas Storage Systems, a partnership that owns a gas storage facility, to its partner, MHP, and MHP will sell its 50 percent ownership interest to CMS Gas Transmission in the Grands Lacs Limited Partnership, a marketing center for natural gas. CMS Gas Transmission will receive a net cash payment of approximately $26 million. The transaction is anticipated to close no later than June 30, 1996. In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company, a natural gas storage facility located in Forrest County, Mississippi. The salt dome storage cavern provides up to 3.2 bcf per day of 10-day storage service and has the capability of being refilled in 20 days. In February 1996, CMS Gas Transmission acquired an ownership interest in Nitrotec Corporation, a proprietary gas technology company. Nitrotec specializes in the development and commercialization of advanced carbon- based adsorption gas separation technologies. Nitrotec recently received approval of patent applications covering its helium removal process and nitrogen rejection process. Capital expenditures for the three months ended March 31, 1996 totaled $76 million for acquisitions, expansion of existing facilities and construction of new facilities. CMS Energy currently plans to invest $260 million from 1996 to 1998 relating to its non-utility gas operations, and will continue to pursue development of natural gas storage, gathering and pipeline operations both domestically and internationally. CMS Energy also plans to work toward the development of U.S. regional "market centers" for natural gas through strategic alliances and asset acquisition and development. Forward-Looking Information Capital Expenditures: CMS Energy estimates that capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total approximately $2.5 billion over the next three years. Cash generated by operations is expected to satisfy a substantial portion of capital expenditures. Additionally, CMS Energy will continue to evaluate capital markets in 1996 as a potential source of financing its subsidiaries' investing activities. In Millions Years Ended December 31 1996 1997 1998 ---- ---- ---- Electric utility $380 $285 $290 Gas utility 130 110 105 Oil and gas exploration and production 120 135 150 Independent power production 190 175 150 Natural gas transmission, storage and marketing 145 65 50 ---- ---- ---- $965 $770 $745 ==== ==== ==== These capital expenditures are estimates prepared for planning purposes and are subject to revision. For a breakdown of projected capital expenditures see the individual capital expenditures sections within this MD&A. Electric Outlook, Sales and Competition: Consumers currently expects approximately 2 percent average annual growth in electric system sales over the next five years. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions or the developing competitive market for electricity as discussed below. Consumers' retail service is affected by competition in several areas, including: 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. Consumers continues to work toward retaining its current retail service customers. In an effort to meet the challenge of competition, Consumers has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors 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) after the first three years of the contract. The MPSC approved this contract in 1995. This MPSC order and other MPSC orders approving special long-term sales contracts have been appealed by the Attorney General. As part of an order issued in early 1996, the MPSC significantly reduced the rate subsidization of residential customers by industrial and large commercial customers. In addition to offering electric rates that are competitive with other energy providers, Consumers is pursuing other strategies to retain its "at-risk" customers. These strategies include: minimizing outages for each customer, promptly responding to customer inquiries, and providing consulting services to help customers use energy efficiently. 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, ABATE and The Dow Chemical Company filed claims of appeal of the MPSC's retail wheeling orders. The Court of Appeals subsequently consolidated these appeals with those 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, liquidity or results of operations. In April 1996, the FERC issued two orders which require utilities to provide open access to the interstate transmission grid. The first order requires public utilities owning, controlling, or operating transmission lines in interstate commerce to file non-discriminatory open access tariffs that contain minimum terms and conditions of non-discriminatory service, allows utilities to charge their current conforming transmission rates or apply for new rates, and provides for the full recovery of stranded costs. The order also requires power pools to restructure their ongoing operations and open up to non-utility members. The second order requires utilities to establish electronic systems to share information about available transmission capacity and to separate their wholesale power marketing and transmission operations functions by implementing standards of conduct. These orders will become effective in July 1996. In addition, the FERC issued a NOPR on April 24, 1996, which proposes for consideration a new system for utilities to use in reserving capacity on their own and others' transmission lines. This would replace certain tariffs included in the first order with a capacity reservation tariff in which participants would reserve firm rights to transfer power between designated receipt and delivery points. Consumers is evaluating these developments and has not determined the impact of the FERC's Orders on its financial position, liquidity or results of operations. The Governor of the State of Michigan has requested that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry. The MPSC has directed Consumers (and Detroit Edison) to file applications by May 15, 1996, addressing the recommendation of the Michigan Jobs Commission to allow a choice of power suppliers for new industrial and commercial electric load. The Michigan Jobs Commission's recommendations also include related matters, such as the full recovery of utility stranded costs. No new legislation has been introduced. However, Consumers anticipates additional MPSC orders during 1996 which will further define a new electric and gas utility regulatory framework for Michigan. SFAS 71 allows the deferral of certain costs and the recording of regulatory assets. Management has evaluated Consumers' current regulatory position and believes it continues to support the recognition of Consumers' electric-related regulatory assets. If changes in the industry were to lead to Consumers discontinuing the application of SFAS 71, for all or part of its business, Consumers may be required to write off the portion of any regulatory asset for which no regulatory assurance of recovery continued to exist. Consumers does not believe that there is any current evidence that supports the write-off of any of its electric- related regulatory assets. Consumers Gas Group Outlook, Competition and Deliveries: Consumers currently anticipates gas deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off-system deliveries) over the next five years, assuming 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. The emerging use of natural gas vehicles also provides 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. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions and the level of natural gas consumption. In 1995, the Low Income Home Energy Assistance Program provided approximately $71 million in heating assistance to about 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. In late 1995, federal legislative approval provided Michigan residents with approximately $60 million of funding for 1996. Consumers cannot predict what level of funding will be approved for 1997. In January 1996, the MPSC issued a Notice of legislative-type hearings to be held in 1996, to assess whether it is appropriate to allow all natural gas customers access to gas transportation service. The MPSC notice designated all eight local distribution companies whose rates are regulated by the MPSC as parties to this proceeding. Consumers has filed its comments with the MPSC, indicating that the MPSC should only direct local distribution companies to file pilot programs designed to test the feasibility of expanded transportation service. Consumers also expressed its position that it is premature to expand transportation service to residential customers. Under SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its regulatory assets related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs. Other Forward-Looking Information: Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include prevailing governmental policies and regulatory actions both domestically and internationally (including those of the FERC and the MPSC) with respect to rates, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, natural gas pipeline and storage facilities, recovery of purchased power, decommissioning costs, and present or prospective wholesale and retail competition, among others. The business and profitability of CMS Energy is also influenced by economic and geographic factors including political and economic risks(particularly those associated with international development and operations, including currency fluctuation), changes in compliance with environmental laws and policies, weather conditions, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy from plants or facilities, inflation, capital market conditions, unanticipated development project delays or changes in project costs, and the ability to secure agreement concerning pending negotiations (particularly for projects in development), among other important factors. All such factors are difficult to predict, contain uncertainties which may materially affect actual results, and are beyond the control of CMS Energy. Forward-looking information is included throughout this Form 10-Q. CMS Energy's material contingencies are also described in the Condensed Notes to Consolidated Financial Statements and should be read accordingly. (This page intentionally left blank) 34 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 March 31, 1996 and 1995, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Power Company and subsidiaries as of December 31, 1995, and the related consolidated statements of income, common stockholder's equity and cash flows for the year then ended (not presented herein), and, in our report dated January 26, 1996, 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, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 10, 1996. 35 Consumers Power Company Consolidated Statements of Income (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions OPERATING REVENUE Electric $ 591 $ 540 $2,328 $2,185 Gas 546 482 1,259 1,105 Other 4 10 33 25 ---------------------------------------------- Total operating revenue 1,141 1,032 3,620 3,315 ---------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 73 67 289 294 Purchased power - related parties 140 124 507 484 Purchased and interchange power 47 36 207 156 Cost of gas sold 345 281 735 608 Other 136 137 591 573 ---------------------------------------------- Total operation 741 645 2,329 2,115 Maintenance 39 45 178 190 Depreciation, depletion and amortization 108 101 364 342 General taxes 56 54 191 172 ---------------------------------------------- Total operating expenses 944 845 3,062 2,819 ---------------------------------------------- PRETAX OPERATING INCOME Electric 103 87 378 331 Gas 91 91 151 143 Other 3 9 29 22 ---------------------------------------------- Total pretax operating income 197 187 558 496 INCOME TAXES 61 56 150 124 ---------------------------------------------- NET OPERATING INCOME 136 131 408 372 ---------------------------------------------- OTHER INCOME (DEDUCTIONS) Dividends from affiliates 4 4 16 17 Accretion income 3 3 11 12 Accretion expense (7) (8) (30) (34) Other income taxes, net 3 2 13 11 Other, net - 2 4 12 ---------------------------------------------- Total other income 3 3 14 18 ---------------------------------------------- INTEREST CHARGES Interest on long-term debt 35 35 140 137 Other interest 3 5 22 19 Capitalized interest (1) - (3) (1) ---------------------------------------------- Net interest charges 37 40 159 155 ---------------------------------------------- Net Income 102 94 263 235 Preferred Stock Dividends 7 7 28 28 Preferred Securities Distributions 1 - 1 - ---------------------------------------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 94 $ 87 $ 234 $ 207 ============================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36 Consumers Power Company Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 102 $ 94 $ 263 $ 235 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $13, $13, $51 and $49, respectively) 108 101 364 342 Capital lease and other amortization 9 11 36 29 Deferred income taxes and investment tax credit 3 23 37 65 Accretion expense 7 8 30 34 Accretion income - abandoned Midland project (3) (3) (11) (12) Undistributed earnings of related parties (4) (10) (30) (24) MCV power purchases - settlement (Note 2) (12) (37) (112) (102) Other 3 2 6 2 Changes in other assets and liabilities 95 120 58 (34) ------ ------ ------ ------ Net cash provided by operating activities 308 309 641 535 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (83) (74) (422) (438) Investments in nuclear decommissioning trust funds (13) (13) (51) (49) Cost to retire property, net (6) (9) (39) (41) Deferred demand-side management costs (2) (2) (10) (11) Other 1 (4) 1 (4) Proceeds from sale of property - - 1 13 ------ ------ ------ ------ Net cash used in investing activities (103) (102) (520) (530) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable, net (303) (204) (97) 135 Payment of capital lease obligations (9) (10) (36) (28) Payment of preferred stock dividends (7) (7) (28) (21) Retirement of bonds and other long-term debt (1) (1) (1) (27) Preferred securities distributions (1) - (1) - Proceeds from preferred securities 97 - 97 - Contribution from stockholder 13 - 13 100 Payment of common stock dividends - - (70) (160) Repayment of bank loans - - - (422) Proceeds from bank loans - - - 400 ------ ------ ------ ------ Net cash used in financing activities (211) (222) (123) (23) ------ ------ ------ ------ NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (6) (15) (2) (18) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 10 28 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 8 $ 10 $ 8 $ 10 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
37 Consumers Power Company Consolidated Balance Sheets
March 31 March 31 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions ASSETS PLANT (At original cost) Electric $6,130 $6,103 $5,826 Gas 2,207 2,169 2,078 Other 26 30 30 ----------------------------------- 8,363 8,302 7,934 Less accumulated depreciation, depletion and amortization 4,195 4,090 3,893 ----------------------------------- 4,168 4,212 4,041 Construction work-in-progress 199 190 249 ----------------------------------- 4,367 4,402 4,290 ----------------------------------- INVESTMENTS Stock of affiliates 336 337 318 First Midland Limited Partnership (Note 2) 226 225 219 Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83 Other 9 7 8 ----------------------------------- 675 672 628 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 8 14 10 Accounts receivable and accrued revenue, less allowances of $3, $3 and $4, respectively (Note 7) 173 137 63 Accounts receivable - related parties 12 10 11 Inventories at average cost Gas in underground storage 39 184 80 Materials and supplies 74 72 76 Generating plant fuel stock 16 37 27 Postretirement benefits 25 25 25 Deferred income taxes 23 26 39 Prepayments and other 143 181 133 ----------------------------------- 513 686 464 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 458 462 473 Nuclear decommissioning trust funds 323 304 236 Abandoned Midland Project 126 131 143 Other 309 297 322 ----------------------------------- 1,216 1,194 1,174 ----------------------------------- TOTAL ASSETS $6,771 $6,954 $6,556 ===================================
38
March 31 March 31 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 504 491 491 Revaluation capital 29 29 17 Retained earnings since December 31, 1992 331 237 167 ----------------------------------- 1,705 1,598 1,516 Preferred stock 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 - - Long-term debt 1,923 1,922 1,954 Non-current portion of capital leases 96 104 103 ----------------------------------- 4,180 3,980 3,929 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 89 90 48 Notes payable 38 341 135 Accrued taxes 201 225 134 Accounts payable 165 207 125 Power purchases - settlement (Note 2) 90 90 95 Accounts payable - related parties 64 56 56 Accrued refunds 28 22 35 Accrued interest 26 32 25 Other 166 178 153 ----------------------------------- 867 1,241 806 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 599 605 585 Postretirement benefits 520 517 537 Power purchases - settlement (Note 2) 215 221 295 Deferred investment tax credit 166 169 177 Regulatory liabilities for income taxes, net 53 44 29 Other (Note 4) 171 177 198 ----------------------------------- 1,724 1,733 1,821 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,771 $6,954 $6,556 =================================== (a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers. THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39 Consumers Power Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions COMMON STOCK At beginning and end of period $ 841 $ 841 $ 841 $ 841 --------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 491 491 491 391 Stockholder's contribution 13 - 13 100 --------------------------------------------------- At end of period 504 491 504 491 --------------------------------------------------- REVALUATION CAPITAL At beginning of period 29 15 17 15 Change in unrealized investment-gain - 2 12 2 --------------------------------------------------- At end of period 29 17 29 17 --------------------------------------------------- RETAINED EARNINGS At beginning of period 237 80 167 120 Net income 102 94 263 235 Common stock dividends declared - - (70) (160) Preferred stock dividends declared (7) (7) (28) (28) Preferred securities distributions (1) - (1) - --------------------------------------------------- At end of period 331 167 331 167 --------------------------------------------------- TOTAL COMMON STOCKHOLDER'S EQUITY $1,705 $1,516 $1,705 $1,516 =================================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
40 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 1995 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 segment 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. Consumers, through its subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the end of the PPA. 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. 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, the fixed energy charge and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all energy delivered on an economic basis above the availability limits to 915 MW, Consumers has been 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 1993 MPSC-authorized level, future additional after-tax losses and after- tax cash underrecoveries would be incurred. Consumers' estimates of its after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 authorized level. Under the Settlement Order, capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs, but the MPSC will 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. The MCV Partnership did not object to the Settlement Order. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals and in March 1996, the Court of Appeals affirmed the Settlement Order. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including Consumers' electric rate case (see Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding this proposed settlement, see Note 3. At March 31, 1996 and December 31, 1995, the after-tax present value of the Settlement Order liability totaled $198 million and $202 million, respectively. The reduction in the liability since December 31, 1995, reflects after-tax cash underrecoveries of $8 million, partially offset by after-tax accretion expense of $4 million. The undiscounted after-tax amount associated with the liability totaled $593 million at March 31, 1996. In 1994 and 1995, Consumers paid $44 million to terminate power purchase agreements with the developers of two proposed independent power projects totaling 109 MW. As part of the proposed settlement reached with the MPSC staff (see Note 3), Consumers is seeking 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 1996. Even if Consumers is not allowed to substitute MCV Facility capacity for the capacity to be provided under the terminated agreements, Consumers believes that the MPSC would still approve recovery of the buyout costs due to the significant customer savings resulting from the terminated power purchase agreements. As a result, Consumers has recorded a regulatory asset of $44 million. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General appealed these plan case orders to the Court of Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 plan case. 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 Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believes this is contrary to the terms of the Settlement Order and has appealed the February 23 order on this issue. The MCV Partnership and ABATE have also filed separate appeals of this order. 3: Rate Matters Electric Rate Proceedings: In late 1994, Consumers filed a request with the MPSC to increase its retail electric rates. The request included provisions for ratemaking treatment of the 325 MW of MCV Facility contract capacity above 915 MW. Early in 1996, the MPSC issued a partial final order in this case, granting Consumers a $46 million annual increase in its electric retail rates. This order authorized a 12.25 percent return on common equity. However, it did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers. In addition, 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. For further information regarding these requests, see the Electric Rate Proceedings and Special Rates discussions in the Management's Discussion and Analysis. 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 currently before the MPSC in separate proceedings. Some of these issues were preliminarily addressed in February 1996 when the MPSC issued a partial final order in Consumers' electric rate case. If fully adopted, the settlement agreement would: provide for cost recovery of the entire 325 MW of uncommitted MCV Facility capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; and accelerate recovery of nuclear plant investment. Consumers expects a final order by mid-1996. Gas Rates: As part of an agreement approved by the MPSC, Consumers filed a gas rate case in December 1994 that incorporated cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites (see Note 4). In March 1996, the MPSC issued a final order in this case, authorizing recovery of costs related to postretirement benefits and former manufactured gas plant sites. Overall however, the order decreased Consumers' gas rates by $11.7 million annually and authorized an 11.6 percent return on common equity, a decrease from the 13.25 percent previously authorized. Consumers has filed a petition for rehearing with the MPSC, requesting, among other things, recovery of certain gas losses, as well as reconsideration of issues in the order that Consumers believes provide disincentives to competition. The relief requested in the petition for rehearing, if granted in its entirety, would result in a $5.5 million annual rate reduction compared with the $11.7 million reduction. GCR Matters: In 1993, the MPSC issued an order favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers. In early 1995, management concluded that the intrastate producers' pending appeals of the order would not be successful and accordingly, reversed a previously accrued contingency and recorded a $23 million (pretax) benefit. The MPSC order was affirmed by the Court of Appeals in June 1995. The producers have petitioned the Michigan Supreme Court for review. In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. 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. Resolution of the issues discussed in this note is not expected to have a material impact on Consumers' financial position or results of operations. 4: Commitments and Contingencies Environmental Matters: Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Superfund liability is joint and several and 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 March 31, 1996, Consumers has accrued a liability for its estimated losses. The Michigan Natural Resources and Environmental Protection Act was substantially amended in June 1995. This Michigan law bears some similarities to the federal Superfund law. 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. Three of the four plans submitted by Consumers have been approved by the DNR or the Michigan Department of Environmental Quality. The findings for two remedial investigations indicate that the expenditures for remedial action at those sites are likely to be less than previously estimated; however, these findings may not be representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At March 31, 1996, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and legal and regulatory requirements, could effect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order issued in early 1996, Consumers is deferring environmental clean-up costs incurred at these sites and amortizing these costs over 10 years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs 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. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $445 million for 1996, $395 million for 1997 and $395 million for 1998. 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 March 31, 1996, Consumers had 33 separate stray voltage lawsuits awaiting trial court action. 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 Consumers filed updated decommissioning information with the MPSC in 1995 which estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered that Consumers review and file estimated decommissioning costs with the MPSC in 1998. In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. 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. As of March 31, 1996, 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 the cask continues to safely store spent fuel and there is no requirement for its replacement, 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. Certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff is reviewing the petitions. 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: $30 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 a future decision 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 March 31 were: In Millions Three Months Ended Twelve Months Ended 1996 1995 1996 1995 ---- ---- ---- ----- Cash transactions Interest paid (net of amounts capitalized) $ 41 $ 50 $149 $147 Income taxes paid (net of refunds) 5 - 48 31 Non-cash transactions Nuclear fuel placed under capital lease $ - $ 7 $ 20 $ 25 Other assets placed under capital leases 1 2 4 15 Capital leases refinanced - - 21 - 7: Short-Term and Long-Term Financings and Capitalization Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $145 million that are used to finance seasonal working capital requirements. At March 31, 1996, a total of $38 million was outstanding at a weighted-average interest rate of 6.2 percent, compared with $133 million outstanding at March 31, 1995, at a weighted-average interest rate of 7.0 percent. Consumers has an established $500 million trade receivables purchase and sale program. At March 31, 1996 and 1995, receivables sold under the agreement totaled $280 million and $300 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In January 1996, 4 million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through Consumers Power Company Financing I, a business trust wholly owned by Consumers. Net proceeds from the sale totaled $97 million. The business trust was formed for the sole purpose of issuing preferred securities and the primary asset of the trust is $103 million of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers. The obligations of Consumers with respect to the preferred securities under the notes that mature in 2015, the indenture under which the notes are issued, Consumers' guarantee of the preferred securities and the Declaration of Trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. In April 1996, Consumers declared a $75 million common dividend to be paid in May 1996. 47 Consumers Power Company Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1995 Form 10-K of Consumers. This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this Form 10-Q that are not historical facts, are forward-looking and, accordingly, involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking information. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this Form 10-Q, the Forward-Looking Information section of this MD&A indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Consolidated earnings for the quarters ended March 31, 1996 and 1995 Consolidated net income after dividends and distributions on preferred securities totaled $94 million and $87 million for the first quarters of 1996 and 1995, respectively. The $7 million increase reflects increased electric sales resulting from Michigan's continuing economic growth, the impact of a 1996 electric rate increase and higher gas deliveries due to increased growth and colder weather experienced in the first quarter of 1996. Partially offsetting this increase in net income was the reversal of a gas contract contingency which benefited the 1995 period (see Note 3). Consolidated earnings for the 12 months ended March 31, 1996 and 1995 Consolidated net income after dividends and distributions on preferred securities totaled $234 million and $207 million for the 12 months ended March 31, 1996 and March 31, 1995, respectively. The $27 million increase reflects both higher electric sales and gas deliveries and the impact of increased electric rates which became effective in early 1996. Partially offsetting this increase was the recognition of DSM incentive revenue and the reversal of previously recorded gas contingencies (see Note 3) in the 1995 period, and increased operating expenses in the 1996 period. Cash Position, Financing and Investing Cash from operations is derived from the sale and transportation of natural gas and the generation, transmission, and sale of electricity. Cash from operations totaled $308 million and $309 million for the first quarters of 1996 and 1995, respectively. Increased cash resulting from higher sales of electricity, improved gas deliveries and lower cash losses associated with the PPA, was essentially offset by the timing of cash payments related to Consumers' operations. Consumers primarily uses its operating cash to maintain and expand its electric and gas systems, retire portions of its long-term debt and pay dividends. Financing Activities: Net cash used in financing activities totaled $211 million and $222 million for the first quarters of 1996 and 1995, respectively. The decrease of $11 million reflects increased cash from a $13 million equity investment from CMS Energy and $97 million from the sale of Trust Originated Preferred Securities (see Note 7). During the first quarter of 1996, cash was used to reduce short-term borrowings by an additional $99 million, as compared to the 1995 period. In April 1996, Consumers declared a $75 million common dividend to be paid in May 1996. Consumers had temporarily suspended its common dividends in mid-1995 to improve the equity portion of its capital structure. Investing Activities: Net cash used in investing activities totaled $103 million and $102 million for the first quarters of 1996 and 1995, respectively. Cash used for increased capital expenditures was principally offset by the reduced costs to retire property. Financing and Investing Outlook: Consumers has several available, unsecured, committed lines of credit totaling $145 million and a $425 million working capital facility. At March 31, 1996, Consumers had a total of $38 million outstanding under these facilities. 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 and 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 March 31, 1996 and 1995, receivables sold totaled $280 million and $300 million, respectively. Electric Utility Results of Operations Electric Pretax Operating Income for the quarters ended March 31, 1996 and 1995: Electric pretax operating income totaled $103 million and $87 million for the first quarters of 1996 and 1995, respectively. The $16 million increase primarily resulted from increased electric sales, an increase in electric rates in early 1996, and lower operation and maintenance costs during the first quarter of 1996. Partially offsetting this increase were decreased revenue from special contract discounts given to large industrial customers and higher depreciation and general taxes in 1996. Electric Pretax Operating Income for the 12 months ended March 31, 1996 and 1995: Electric pretax operating income totaled $378 million and $331 million for the 12 months ended March 31, 1996 and 1995, respectively. The $47 million increase is primarily the result of increased electric sales and an increase in electric rates effective in early 1996. These increases were partially offset by higher electric depreciation and property tax expenses in the 1996 period, decreased revenue from special contract discounts given to large industrial customers, and the impact of recognizing DSM incentive revenue in the 1995 period. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended March 31: In Millions Impact on Pretax Operating Income Quarter ended 12 months ended 1996 compared 1996 compared with 1995 with 1995 --------- --------- Sales $ 9 $ 66 Rate increases and other regulatory issues 9 8 Operations and maintenance 4 2 General taxes and depreciation (6) (29) ---- ---- Total change $16 $ 47 ==== ==== Electric Sales: Electric sales during the first quarter of 1996 were 9.0 billion kWh, a 4.0 percent increase from 1995 levels. The increase included a 2.6 percent increase in sales to Consumers' ultimate customers. Residential and commercial sales increased 7.3 percent and 5.6 percent, respectively, while industrial sales decreased 3.1 percent, compared with the corresponding period in 1995. Industrial sales were adversely impacted by the General Motors strike which was resolved in late March 1996. Electric sales during the 12 months ended March 31, 1996 were 35.9 billion kWh, a 3.7 percent increase from 1995 levels. The increase included a 4.6 percent increase in sales to Consumers' ultimate customers. During the period, residential, commercial and industrial sales increased 7.7 percent, 5.8 percent and .9 percent, respectively. Power Costs: Power costs totaled $260 million and $227 million for the three-month periods ending March 31, 1996 and 1995, respectively. The $33 million increase primarily reflects greater power purchases from outside sources to meet increased sales demand. Power costs totaled $1,003 million and $934 million during the 12-month periods ending March 31, 1996 and 1995, respectively. The $69 million increase primarily reflects greater power purchases from outside sources to meet increased sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the end of the PPA. 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. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals and in March 1996, the Court of Appeals affirmed the Settlement Order. 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. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $8 million for the first three months of 1996. Estimated after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 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 electric rate case (discussed below) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding the settlement, see Note 3. In 1994 and 1995, Consumers terminated power purchase agreements with the developers of a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. To replace this capacity, 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers would be used. For further information, see Note 2. Electric Rate Proceedings: Consumers filed a request with the MPSC in late 1994 to increase its retail electric rates. In early 1996, the MPSC granted Consumers authority to increase its annual electric retail rates by $46 million. This partial final order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. 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. One of these issues, Consumers' electric rate case, was addressed, in part, by the order discussed above. If fully adopted, the settlement agreement would resolve Consumers' depreciation and special competitive service cases (discussed below) and cost recovery of the entire 325 MW of uncommitted MCV Facility capacity. Consumers expects a final order by mid-1996. For more information regarding the electric rate order and the settlement, see Note 3. In 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 to the request are approved, the net result would be a decrease in electric depreciation expense of $7 million for ratemaking purposes. The ALJ issued a proposal for decision in this case that recommended the MPSC reject Consumers' position regarding the reallocation of Consumers' depreciation reserve and plant investment. This case is currently part of the proposed settlement. In the settlement proposal, Consumers requested that depreciation of certain plants (including nuclear plants) be accelerated while holding overall depreciation rates level. Special Rates: Consumers currently has a request before the MPSC that, would allow Consumers a certain level of rate-pricing flexibility to respond to customers' alternative energy options. This request has also been consolidated into the settlement proceeding discussed above. Electric Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its electric utility operations of $315 million for 1996, $285 million for 1997 and $290 million for 1998. 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. Final acid rain program nitrogen oxide regulations are expected to be issued in 1996. Management believes that Consumers' annual operating costs will not be materially affected. The Michigan Natural Resources and Environmental Protection Act was substantially amended in 1995 and bears some similarities to the Federal Superfund law. 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, liquidity or results of operations. For further information regarding electric environmental matters, see Note 4. Nuclear Matters: In 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. Consequently, Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. In 1996, Consumers plans to unload and replace one of the casks where a minor flaw has been detected. For further information, see Note 5. 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 a future decision to anneal. Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At March 31, 1996, Consumers had 33 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. Gas Utility Results of Operations Gas Pretax Operating Income for the quarters ended March 31, 1996 and 1995: Gas pretax operating income totaled $91 million for both the first quarters of 1996 and 1995. Pretax operating income reflected a 15 percent increase in gas deliveries resulting from customer additions and load conversions to natural gas from alternative fuels and colder temperatures during the first quarter of 1996. However, when compared to 1995, the strong increases were offset by the benefit achieved in 1995 with the reversal of a previously recorded gas contract contingency (see Note 3) and higher depreciation and general taxes. Gas Pretax Operating Income for the 12 months ended March 31, 1996 and 1995: Gas pretax operating income totaled $151 million and $143 million for the 12 months ended March 31, 1996 and 1995, respectively. The $8 million increase reflects higher gas deliveries and higher operating expenses. However, the increase was partially offset by the reversal in the 1995 period, of previously recorded gas contingencies. The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended March 31: In Millions Impact on Pretax Operating Income Quarter ended 12 months ended 1996 compared 1996 compared with 1995 with 1995 --------- --------- Sales $ 22 $ 53 Reversal of gas contingencies (23) (34) Recovery of gas costs and other regulatory issues 2 6 Operations and maintenance 3 (6) General taxes and depreciation (4) (11) ----- ----- Total change $ - $ 8 ===== ===== Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126 bcf, a 15.7 percent increase from 1995 levels, and total system deliveries, excluding transport to the MCV Facility, increased 14.8 percent from 1995 levels. On a weather-adjusted basis, total system deliveries increased 8.5 percent, reflecting significant growth resulting from customer additions and conversions to natural gas from alternative fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf, a 19.0 percent increase from the corresponding period ended March 31, 1995, and total system deliveries, excluding transport to the MCV Facility, increased 17.8 percent. Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million for the first quarters of 1996 and 1995, respectively. The increase of $64 million was the result of increased sales. The increased costs also reflect the reversal of a $23 million gas supplier contingency during the first quarter of 1995. The cost of gas sold totaled $735 million and $608 million for the 12 months ended March 31, 1996 and 1995, respectively. The increase of $127 million was also the result of increased sales offset by the reversal of the gas supplier contingency of $23 million in the 1995 period. Gas Utility Issues Gas Rate Proceedings: In early 1996, the MPSC issued a final order in Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million annually. The MPSC order authorized an 11.6 percent return on common equity. Consumers has filed a petition for rehearing with the MPSC, requesting, among other things, recovery of certain gas losses, as well as reconsideration of issues in the order that Consumers believes provide disincentives to competition. The relief requested in the petition, if granted in its entirety, would result in a $5.5 million annual rate reduction compared with the $11.7 million reduction. 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 Matters: In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. 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 $130 million for 1996, $110 million for 1997 and $105 million for 1998. 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: 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 $98 million. These estimates are based on undiscounted 1996 costs. At March 31, 1996, 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 effect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order, Consumers is deferring environmental clean-up costs and amortizing these costs over 10 years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 4. Forward-Looking Information Capital Expenditures: 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. In Millions Years Ended December 31 1996 1997 1998 ---- ---- ---- Consumers Construction $396 $368 $335 Nuclear fuel lease 34 5 41 Capital leases other than nuclear fuel 6 19 16 Michigan Gas Storage 9 3 3 ---- ---- ---- $445 $395 $395 ==== ==== ==== These capital expenditures are estimates prepared for planning purposes and are subject to revision. For a breakdown of projected capital expenditures by electric and gas utility, see the Electric Capital Expenditures and Gas Capital Expenditures sections within this MD&A. Electric Outlook, Sales and Competition: Consumers currently expects approximately 2 percent average annual growth in electric system sales over the next five years. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions or the developing competitive market for electricity as discussed below. Consumers' retail service is affected by competition in several areas, including: 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. Consumers continues to work toward retaining its current retail service customers. In an effort to meet the challenge of competition, Consumers has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors 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) after the first three years of the contract. The MPSC approved this contract in 1995. This MPSC order and other MPSC orders approving special long-term sales contracts have been appealed by the Attorney General. As part of an order issued in early 1996, the MPSC significantly reduced the rate subsidization of residential customers by industrial and large commercial customers. In addition to offering electric rates that are competitive with other energy providers, Consumers is pursuing other strategies to retain its "at-risk" customers. These strategies include: minimizing outages for each customer, promptly responding to customer inquiries, and providing consulting services to help customers use energy efficiently. 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, ABATE and The Dow Chemical Company filed claims of appeal of the MPSC's retail wheeling orders. The Court of Appeals subsequently consolidated these appeals with those 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, liquidity or results of operations. In April 1996, the FERC issued two orders which require utilities to provide open access to the interstate transmission grid. The first order requires public utilities owning, controlling, or operating transmission lines in interstate commerce to file non-discriminatory open access tariffs that contain minimum terms and conditions of non-discriminatory service, allows utilities to charge their current conforming transmission rates or apply for new rates, and provides for the full recovery of stranded costs. The order also requires power pools to restructure their ongoing operations and open up to non-utility members. The second order requires utilities to establish electronic systems to share information about available transmission capacity and to separate their wholesale power marketing and transmission operations functions by implementing standards of conduct. These orders will become effective in July 1996. In addition, the FERC issued a NOPR on April 24, 1996, which proposes for consideration a new system for utilities to use in reserving capacity on their own and others' transmission lines. This would replace certain tariffs included in the first order with a capacity reservation tariff in which participants would reserve firm rights to transfer power between designated receipt and delivery points. Consumers is evaluating these developments and has not determined the impact of the FERC's Orders on its financial position, liquidity or results of operations. The Governor of the State of Michigan has requested that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry. The MPSC has directed Consumers (and Detroit Edison) to file applications by May 15, 1996, addressing the recommendation of the Michigan Jobs Commission to allow a choice of power suppliers for new industrial and commercial electric load. The Michigan Jobs Commission's recommendations also include related matters, such as the full recovery of utility stranded costs. No new legislation has been introduced. However, Consumers anticipates additional MPSC orders during 1996 which will further define a new electric and gas utility regulatory framework for Michigan. SFAS 71 allows the deferral of certain costs and the recording of regulatory assets. Management has evaluated Consumers' current regulatory position and believes it continues to support the recognition of Consumers' electric-related regulatory assets. If changes in the industry were to lead to Consumers discontinuing the application of SFAS 71, for all or part of its business, Consumers may be required to write off the portion of any regulatory asset for which no regulatory assurance of recovery continued to exist. Consumers does not believe that there is any current evidence that supports the write-off of any of its electric- related regulatory assets. Gas Outlook, Competition and Deliveries: Consumers currently anticipates gas deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off-system deliveries) over the next five years, assuming 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. The emerging use of natural gas vehicles also provides 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. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions and the level of natural gas consumption. In 1995, the Low Income Home Energy Assistance Program provided approximately $71 million in heating assistance to about 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. In late 1995, federal legislative approval provided Michigan residents with approximately $60 million of funding for 1996. Consumers cannot predict what level of funding will be approved for 1997. In January 1996, the MPSC issued a Notice of legislative-type hearings to be held in 1996, to assess whether it is appropriate to allow all natural gas customers access to gas transportation service. The MPSC notice designated all eight local distribution companies whose rates are regulated by the MPSC as parties to this proceeding. Consumers has filed its comments with the MPSC, indicating that the MPSC should only direct local distribution companies to file pilot programs designed to test the feasibility of expanded transportation service. Consumers also expressed its position that it is premature to expand transportation service to residential customers. Under SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its regulatory assets related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs. Other Forward-Looking Information: Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include prevailing governmental policies and regulatory actions (including those of the FERC and the MPSC) with respect to rates, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, natural gas pipeline and storage facilities, recovery of purchased power, decommissioning costs, and present or prospective wholesale and retail competition, among others. The business and profitability of Consumers is also influenced by economic and geographic factors including political and economic risks, changes in compliance with environmental laws and policies, weather conditions, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy from plants or facilities, inflation, capital market conditions, and the ability to secure agreement concerning pending negotiations (particularly for projects in development), among other important factors. All such factors are difficult to predict, contain uncertainties which may materially affect actual results, and are beyond the control of Consumers. Forward-looking information is included throughout this Form 10-Q. Consumers' material contingencies are also described in the Condensed Notes to Consolidated Financial Statements and should be read accordingly. 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' 1995 Forms 10-K for the year ended December 31, 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 proceedings before the MPSC docketed as Case No. U-7830, Step 3A, the MPSC reviewed Consumers' compliance with the financial stabilization order conditions. In 1991, the MPSC issued an order finding that Consumers was not in compliance with certain financial stabilization orders. Upon appeal by several parties, including the Attorney General, the Court of Appeals affirmed the MPSC determinations in Step 3A in an order issued in April 1995. In May 1995, ABATE filed an application for leave to appeal this decision with the Michigan Supreme Court, which was denied by that court in March 1996. This proceeding is now closed. 1994 Gas Rate Case Filing Consumers filed a general gas rate case in December 1994. Consumers' final position in this case requested an increase in its gas rates of $6.7 million annually and a 12.25 percent return on equity. The MPSC issued a final order in this case in March 1996. In this order, the MPSC reduced Consumers' general gas rates by $11.7 million annually based on a return on common equity of 11.6 percent. In April 1996, Consumers filed a petition for rehearing of this order with the MPSC. The Company cannot predict the outcome of this matter. MCV - RELATED PROCEEDINGS In March 1993, the MPSC approved, with modifications, a contested settlement agreement among Consumers, the MPSC staff and 10 independent cogenerators which resolved certain regulatory issues and allowed Consumers to recover from electric customers a substantial portion of the cost of 915 MW of contract capacity from the MCV Facility. After their requests for rehearing were denied by the MPSC, ABATE and the Attorney General appealed the orders approving the settlement to the Court of Appeals. In March 1996, the Court of Appeals affirmed the March 1993 MPSC order settling the electric rate issues involving Consumers and the MCV Facility, and rejected claims by ABATE and the Attorney General which contested the rates being charged electric customers since January 1993 for 915 MW of capacity and related energy being provided by the MCV Facility. This proceeding is now closed. 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. Several recent lawsuits allege personal injury as well as damage to livestock. Consumers believes these claims to be without merit and intends to vigorously oppose all claims the plaintiffs may raise but cannot predict the outcome of this matter. At March 31, 1996, Consumers had 33 separate stray voltage cases awaiting action at the trial court level. INDEPENDENT POWER PRODUCTION PROJECT LITIGATION In August 1995, William R. Williams and two of his corporations, Altresco Philippines, Inc. and WRW Corporation (formerly Altresco International, Inc.) filed a lawsuit against CMS Generation in the Denver County District Court, State of Colorado, in connection with a project to be developed in Bantangas, Philippines by Luzon Power Associates, Inc. in which CMS Generation purchased a 50% ownership interest. Luzon Power Associates, Inc. has an agreement to supply power to the Manila Electric Company. The complaint alleges, breach of a confidentiality agreement, breach of fiduciary duty, intentional interference with a contract, breach of implied covenant of good faith and fair dealing, and unfair competition. The claims primarily relate to a confidentiality agreement between the parties, and CMS Generation's alleged pursuit of another project to sell power directly to the Manila Electric Company, known as the Magellan project, in alleged violation of a restrictive covenant in the confidentiality agreement. The plaintiffs claim direct damages of approximately $85 million and indirect damages in a like amount from loss of future business, plus punitive damages, interest, and attorney's fees. CMS Generation removed the case to the United States District Court for the District of Colorado in September 1995, and in January 1996, that court denied CMS Generation's motion to dismiss the suit or to transfer the case based on improper venue. A trial date of July 1997 has been set by the court. CMS Generation believes the plaintiff's position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this matter. 59 Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits (4) CMS Energy: Second Supplemental Indenture dated as of March 19, 1996 between CMS Energy Corporation and The Chase Manhattan Bank (National Association), as Trustee (10) CMS Energy: Employment Agreement dated March 20, 1996 between CMS Energy Corporation and Preston D. Hopper (12) CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15) CMS Energy: 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 January 18, 1996 (Consumers), February 23, 1996 (CMS Energy) and April 23, 1996 (CMS Energy and Consumers) covering matters pursuant to "Item 5. Other Events." 60 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: May 15, 1996 By A M Wright ------------------------ Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS POWER COMPANY (Registrant) Date: May 15, 1996 By A M Wright ------------------------ Alan M. Wright Senior Vice President and Chief Financial Officer EX-4 2 SECOND SUPPLEMENTAL INDENTURE SECOND SUPPLEMENTAL INDENTURE dated as of March 19, 1996 ____________________ This Second Supplemental Indenture, dated as of the 19th day of March, 1996 between CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (hereinafter called the "Company") and having its principal office at Fairlane Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126, and The Chase Manhattan Bank (National Association), a national banking association organized and existing under the laws of the United States of America (hereinafter called the "Trustee") and having its principal Corporate Trust Office at 4 Chase MetroTech Center, Brooklyn, New York 11245, WITNESSETH: WHEREAS, the Company and the Trustee entered into an Indenture, dated as of January 15, 1994 (the "Original Indenture"), pursuant to which one or more series of debt securities of the Company (the "Securities") may be issued from time to time; and WHEREAS, Section 301 of the Original Indenture permits the terms of any series of Securities to be established in an indenture supplemental to the Original Indenture; and WHEREAS, Section 901(7) of the Original Indenture provides that a supplemental indenture may be entered into by the Company and the Trustee without the consent of any Holders of the Securities to establish the form and terms of the Securities of any series; and WHEREAS, the Company has requested the Trustee to join with it in the execution and delivery of this Second Supplemental Indenture in order to supplement and amend the Original Indenture by, among other things, establishing the form and terms of a series of Securities to be known as the Company's "General Term Notes (registered servicemark), Series B" (the "General Term Notes"), providing for the issuance of the General Term Notes and amending and adding certain provisions thereof for the benefit of the Holders of the General Term Notes; and WHEREAS, the Company and the Trustee desire to enter into this Second Supplemental Indenture for the purposes set forth in Sections 301 and 901(7) of the Original Indenture as referred to above; and WHEREAS, all things necessary to make this Second Supplemental Indenture a valid agreement of the Company and the Trustee and a valid supplement to the Original Indenture have been done, ___________________________ (Registered servicemark of J. W. Korth & Company) 3 NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the General Term Notes to be issued hereunder by holders thereof, the Company and the Trustee mutually covenant and agree, for the equal and proportionate benefit of the respective holders from time to time of the General Term Notes, as follows: ARTICLE I STANDARD PROVISIONS; DEFINITIONS SECTION 101. Standard Provisions. The Original Indenture together with this Second Supplemental Indenture and all indentures supplemental thereto entered into pursuant to the applicable terms thereof are hereinafter sometimes collectively referred to as the "Indenture." All of the terms, conditions, covenants and provisions contained in the Original Indenture as heretofore supplemented are incorporated herein by reference in their entirety and, except as specifically noted herein or unless the context otherwise requires, shall be deemed to be a part hereof to the same extent as if such provisions had been set forth in full herein. All capitalized terms which are used herein and not otherwise defined herein are defined in the Indenture and are used herein with the same meanings as in the Indenture. SECTION 102. Definitions. Section 101 of the Indenture is amended to insert the new definitions applicable to the General Term Notes, in the appropriate alphabetical sequence, as follows: "Amortization Expense" means, for any period, amounts recognized during such period as amortization of capital leases, depletion, nuclear fuel, goodwill and assets classified as intangible assets in accordance with generally accepted accounting principles. "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness and (y) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Lease Obligation" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligation shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty; and such obligation shall be deemed secured by a Lien on any property or assets to which such lease relates. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock or Letter Stock. "Change in Control" means an event or series of events by which (i) the Company ceases to own beneficially, directly or indirectly, at least 80% of the total voting power of all classes of Capital Stock then outstanding of Consumers (whether arising from issuance of securities of the Company or Consumers, any direct or indirect transfer of securities by the Company or Consumers, any merger, consolidation, liquidation or dissolution of the Company or Consumers or otherwise); (ii) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all shares that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 30% of the Voting Stock of the Company; or (iii) the Company consolidates with or merges into another corporation or directly or indirectly conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates with or merges into the Company, in either event pursuant to a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities, or other property, other than any such transaction in which (A) the outstanding Voting Stock of the Company is changed into or exchanged for Voting Stock of the surviving corporation and (B) the holders of the Voting Stock of the Company immediately prior to such transaction retain, directly or indirectly, substantially proportionate ownership of the Voting Stock of the surviving corporation immediately after such transaction. "Consolidated Assets" means, at any date of determination, the aggregate assets of the Company and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Capital" means, at any date of determination, the sum of (a) Consolidated Indebtedness, (b) consolidated equity of the common stockholders of the Company and the Consolidated Subsidiaries, (c) consolidated equity of the preference stockholders of the Company and the Consolidated Subsidiaries and (d) consolidated equity of the preferred stockholders of the Company and the Consolidated Subsidiaries, in each case determined at such date in accordance with generally accepted accounting principles. "Consolidated Coverage Ratio" with respect to any period means the ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii) the aggregate amount of Consolidated Interest Expense for such period. "Consolidated Indebtedness" means, at any date of determination, the aggregate Indebtedness of the Company and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means, for any period, the total interest expense in respect of Indebtedness of the Company and its Consolidated Subsidiaries, including, without duplication, (i) interest expense attributable to capital leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv) cash and noncash interest payments, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs under Interest Rate Protection Agreements (including amortization of discount) and (vii) interest expense in respect of obligations of other Persons deemed to be Indebtedness of the Company or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of Indebtedness, provided, however, that Consolidated Interest Expense shall exclude any costs otherwise included in interest expense recognized on early retirement of debt. "Consolidated Leverage Ratio" means, at any date of determination, the ratio of Consolidated Indebtedness to Consolidated Capital. "Consolidated Net Income" means, for any period, the net income of the Company and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person if such Person is not a Subsidiary, except that (A) the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Consolidated Subsidiary as a dividend or other distribution and (B) the Company's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; and (iii) any gain or loss realized upon the sale or other disposition of any property, plant or equipment of the Company or its Consolidated Subsidiaries which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person. "Consolidated Net Worth" of any Person means the total of the amounts shown on the consolidated balance sheet of such Person and its consolidated subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, as of any date selected by such Person not more than 90 days prior to the taking of any action for the purpose of which the determination is being made (and adjusted for any material events since such date), as (i) the par or stated value of all outstanding Capital Stock plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit, (B) any amounts attributable to Redeemable Stock and (C) any amounts attributable to Exchangeable Stock. "Consolidated Subsidiary" means, any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Company in accordance with generally accepted accounting principles. "Consumers" means Consumers Power Company, a Michigan corporation, all of whose common stock is on the date hereof owned by the Company. "Credit Agreement" means the Credit Agreement dated as of November 21, 1995, as amended from time to time, among the Company, the banks named therein, Citibank, N.A., and Union Bank, as Co-Agents, Citibank, N.A., as Documentation Agent, and Union Bank, as Operational Agent. "Duff & Phelps" shall mean Duff & Phelps Credit Rating Co., and any successor thereto which is a nationally recognized statistical rating organization, or if such entity shall cease to rate the General Term Notes or shall cease to exist and there shall be no such successor thereto, any other nationally recognized statistical rating organization selected by the Company which is acceptable to the Trustee. "Enterprises" means CMS Enterprises Company, a Michigan corporation. "Event of Default" with respect to the General Term Notes has the meaning specified in Article VI of this Second Supplemental Indenture. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchangeable Stock" means any Capital Stock of a corporation that is exchangeable or convertible into another security (other than Capital Stock of such corporation that is neither Exchangeable Stock or Redeemable Stock). "Indebtedness" of any Person means, without duplication, (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all Capital Lease Obligations of such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (v) all obligations of the type referred to in clauses (i) through (iv) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured. "Interest Rate Protection Agreement" means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect the Company or any Subsidiary against fluctuations in interest rates. "Letter Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is intended to reflect the separate performance of certain of the businesses or operations conducted by such corporation or any of its subsidiaries. "Lien" means any lien, mortgage, pledge, security interest, conditional sale, title retention agreement or other charge or encumbrance of any kind. "Net Proceeds" means, with respect to any issuance or sale or contribution in respect of Capital Stock, the aggregate proceeds of such issuance, sale or contribution, including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Company, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts, or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof, provided, however, that if such fair market value as determined by the Board of Directors of property other than cash is greater than $25 million, the value thereof shall be based upon an opinion from an independent nationally recognized firm experienced in the appraisal or similar review of similar types of transactions. "NOMECO" means, CMS NOMECO Oil & Gas Co., a Michigan corporation and wholly-owned subsidiary of the Company. "Non-Convertible Capital Stock" means, with respect to any corporation, any non-convertible Capital Stock of such corporation and any Capital Stock of such corporation convertible solely into non-convertible Capital Stock other than Preferred Stock of such corporation; provided, however, that Non-Convertible Capital Stock shall not include any Redeemable Stock or Exchangeable Stock. "Operating Cash Flow" means, for any period, with respect to the Company and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net Income after adding thereto Consolidated Interest Expense (adjusted to include costs recognized on early retirement of debt), income taxes, depreciation expense, Amortization Expense and any noncash amortization of debt issuance costs, any nonrecurring, noncash charges to earnings and any negative accretion recognition. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Redeemable Stock" means any Capital Stock that by its terms or otherwise is required to be redeemed prior to the first anniversary of the Maturity of any Outstanding General Term Notes or is redeemable at the option of the holder thereof at any time prior to the first anniversary of the Maturity of any Outstanding General Term Notes. "Restricted Subsidiary" means any Subsidiary (other than Consumers and its subsidiaries) of the Company which, as of the date of the Company's most recent quarterly consolidated balance sheet, constituted at least 10% of the total Consolidated Assets of the Company and its Consolidated Subsidiaries and any other Subsidiary which from time to time is designated a Restricted Subsidiary by the Board of Directors provided that no Subsidiary may be designated a Restricted Subsidiary if, immediately after giving effect thereto, an Event of Default or event that, with the lapse of time or giving of notice or both, would constitute an Event of Default would exist or the Company and its Restricted Subsidiaries could not incur at least $1 of additional Indebtedness under Section 510, and (i) any such Subsidiary so designated as a Restricted Subsidiary must be organized under the laws of the United States or any State thereof, (ii) more than 80% of the Voting Stock of such Subsidiary must be owned of record and beneficially by the Company or a Restricted Subsidiary, (iii) such Restricted Subsidiary must be a Consolidated Subsidiary, and (iv) such Subsidiary must not theretofore have been designated as a Restricted Subsidiary. "Standard & Poor's" shall mean Standard & Poor's Corporation, and any successor thereto which is a nationally recognized statistical rating organization, or if such entity shall cease to rate the General Term Notes or shall cease to exist and there shall be no such successor thereto, any other nationally recognized statistical rating organization selected by the Company which is acceptable to the Trustee. "Support Obligations" means, for any person, without duplication, any financial obligation, contingent or otherwise, of such person guaranteeing or otherwise supporting any debt or other obligation of any other person in any manner, whether directly or indirectly, and including, without limitation, any obligation of such person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such debt, (ii) to purchase property, securities or services for the purpose of assuring the owner of such debt of the payment of such debt, (iii) to maintain working capital, equity capital, available cash or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such debt, (iv) to provide equity capital under or in respect of equity subscription arrangements (to the extent that such obligation to provide equity capital does not otherwise constitute debt), or (v) to perform, or arrange for the performance of, any non-monetary obligations or non-funded debt payment obligations of the primary obligor. "Tax-Sharing Agreement" means the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as amended or supplemented from time to time, by and among Company, each of the members of the Consolidated Group (as defined therein), and each of the corporations that become members of the Consolidated Group. Certain terms, used principally in Articles Three, Four and Seven of this Second Supplemental Indenture, are defined in those Articles. ARTICLE II DESIGNATION AND TERMS OF THE GENERAL TERM NOTES; FORMS SECTION 201. Establishment of Series. There is hereby created a series of Securities to be known and designated as the "General Term Notes (registered servicemark), Series B" and limited in aggregate principal amount (except as contemplated in Section 301(2) of the Indenture) to $125,000,000. Each General Term Note will be dated and issued as of the date of its authentication by the Trustee. Each General Term Note shall also bear an Original Issue Date (as hereinafter defined) which, with respect to any General Term Note (or any portion thereof), shall mean the date of its original issue, as specified in such General Term Note (the "Original Issue Date"), and such Original Issue Date shall remain the same if such General Term Note is subsequently issued upon transfer, exchange, or substitution of such General Term Note regardless of its date of authentication. Principal on any General Term Note shall become due and payable from nine months to twenty-five years from the Original Issue Date of such General Term Note, as specified on such General Term Note. Each General Term Note will bear interest from the Original Issue Date, or from the most recent date to which interest has been paid or duly provided for, at the rate per annum stated therein until the principal thereof is paid or made available for payment. Interest will be payable either monthly, quarterly or semi-annually on each Interest Payment Date and at Maturity, as specified below and in each General Term Note. Interest will be payable to the person in whose name a General Term Note is registered at the close of business on the Regular Record Date next preceding each Interest Payment Date; provided, however, interest payable at Maturity will be payable to the person to whom principal shall be payable. Interest on the General Term Notes will be computed on the basis of a 360-day year of twelve 30-day months. The Interest Payment Dates for a General Term Note that provides for monthly interest payments shall be the fifteenth day of each calendar month; provided, however, that in the case of a General Term Note issued between the first and fifteenth day of a calendar month, interest otherwise payable on the fifteenth day of such calendar month will be payable on the fifteenth day of the next succeeding calendar month. In the case of a General Term Note that provides for quarterly interest payments, the Interest Payment Dates shall be the fifteenth day of each of the months specified in such General Term Note, commencing on the day that is three months from (i) the day on which such General Term Note is issued, if such General Term Note is issued on the fifteenth day of a calendar month, or (ii) the fifteenth day of the calendar month immediately preceding the calendar month in which such General Term Note is issued, if such General Term Note is issued prior to the fifteenth day of a calendar month, or (iii) the fifteenth day of the calendar month in which such General Term Note is issued, if such General Term Note is issued after the fifteenth day of a calendar month. In the case of a General Term Note that provides for semi-annual interest payments, the Interest Payment Dates shall be the fifteenth day of each of the months specified in such General Term Note, commencing on the day that is six months from (i) the day on which such General Term Note is issued, if such General Term Note is issued on the fifteenth day of a calendar month, or (ii) the fifteenth day of the calendar month immediately preceding the calendar month in which such General Term Note is issued, if such General Term Note is issued prior to the fifteenth day of a calendar month, or (iii) the fifteenth day of the calendar month in which such General Term Note is issued, if such General Term Note is issued after the fifteenth day of a calendar month. Payment of principal of the General Term Notes (and premium, if any) and, unless otherwise paid as hereinafter provided, any interest thereon will be made at the office or agency of the Company in New York, New York; provided, however, that payment of interest (other than interest at Maturity) may be made at the option of the Company by check or draft mailed to the Person entitled thereto at such Person's address appearing in the Security Register or by wire transfer to an account designated by such Person not later than ten days prior to the date of such payment. The Regular Record Date referred to in Section 301 of the Indenture for the payment of the interest on any General Term Note payable on any Interest Payment Date (other than at Maturity) shall be the first day (whether or not a Business Day) of the calendar month in which such Interest Payment Date occurs as is specified in such General Term Note, and, in the case of interest payable at Maturity, the Regular Record Date shall be the date of Maturity. Unless otherwise specified in such General Term Notes, the cities of New York, New York and Chicago, Illinois shall be the reference cities for determining a Business Day. The General Term Notes may be issued only as registered notes, without coupons, in denominations of $1,000 and any larger denomination which is in an integral multiple of $1,000. Upon the execution of this Second Supplemental Indenture, or from time to time thereafter, General Term Notes may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said General Term Notes in accordance with the procedures set forth in or upon a Company Order complying with Sections 301 and 303 of the Indenture. SECTION 202. Forms Generally. The General Term Notes shall be in substantially the form set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such General Term Notes, as evidenced by their execution thereof. The definitive General Term Notes shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such General Term Notes, as evidenced by their execution thereof. SECTION 203. Form of Face of General Term Note. [Insert any legend required by the Internal Revenue Code and the regulations thereunder.] CMS ENERGY CORPORATION GENERAL TERM NOTE (registered servicemark), SERIES B No. ________ $__________ [Initial Redemption Date] CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _________________________________, or registered assigns, the principal sum of ____________________ Dollars on __________________________ and to pay interest thereon from _____________ (the "Original Issue Date") or from the most recent Interest Payment Date to which interest has been paid or duly provided for, [choose one of the following -- monthly/quarterly/semi-annually [insert as applicable -- on ___________ [________, ____________] and _________ in each [year/month], commencing ______________, and at Maturity at the rate of ____% per annum, until the principal hereof is paid or made available for payment [if applicable, insert --, and at the rate of ___% per annum on any overdue principal and premium and on any overdue installment of interest]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this General Term Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the first day of the calendar month in which such Interest Payment Date occurs (whether or not a Business Day) next preceding such Interest Payment Date except that the Regular Record Date for interest payable at Maturity shall be the date of Maturity. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this General Term Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of General Term Notes not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the General Term Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. [If the General Term Note is not to bear interest prior to Maturity, insert -- The principal of this General Term Note shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal of this General Term Note shall bear interest at the rate of ___% per annum, which shall accrue from the date of such default in payment to the date payment of such principal has been made or duly provided for. Interest on any overdue principal shall be payable on demand. Any such interest on any overdue principal that is not so paid on demand shall bear interest at the rate of ____% per annum, which shall accrue from the date of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest shall also be payable on demand.] Payment of the principal of (and premium, if any) and interest, if any, on this General Term Note will be made at the office or agency of the Company maintained for that purpose in New York, New York (the "Place of Payment"), in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest (other than interest payable at Maturity) may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or by wire transfer to an account designated by such Person not later than ten days prior to the date of such payment. Reference is hereby made to the further provisions of this General Term Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this General Term Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: CMS ENERGY CORPORATION By ____________________________ Attest: _________________________ SECTION 204. Form of Reverse of General Term Note. This General Term Note (registered servicemark), Series B is one of a duly authorized issue of securities of the Company (herein called the "General Term Notes"), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1994, as supplemented by certain supplemental indentures, including the Second Supplemental Indenture, dated as of _____________, 1996 (herein collectively referred to as the "Indenture"), between the Company and The Chase Manhattan Bank (National Association), as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the Holders of the General Term Notes and of the terms upon which the General Term Notes are, and are to be, authenticated and delivered. This General Term Note is one of the series designated on the face hereof, limited in aggregate principal amount to $125,000,000. [If applicable, insert -- The General Term Notes of this series are subject to redemption upon not more than 60 nor less than 30 days' notice as provided in the Indenture, at any time [on or after __________, _____,] as a whole or in part from time to time, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [on or before _____________, ___%, and if redeemed] during the 12-month period beginning ____________ of the years indicated, Redemption Redemption Year Price Year Price ____ __________ ____ __________ and thereafter at a Redemption Price equal to ___% of the principal amount, together in the case of any such redemption with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such General Term Notes, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.] [Notwithstanding the foregoing, the Company may not, prior to __________, redeem this General Term Note of as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an effective interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than the effective interest cost to the Company (similarly calculated) of this General Term Note.] [If the General Term Note is subject to redemption, insert -- In the event of redemption of this General Term Note in part only, a new General Term Note or Notes of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.] If a Change in Control occurs, the Company shall notify the Holder of this General Term Note of such occurrence and such Holder shall have the right to require the Company to make a Required Repurchase of all or any part of this General Term Note at a Change in Control Purchase Price equal to 101% of the principal amount of this General Term Note to be so purchased as more fully provided in the Indenture and subject to the terms and conditions set forth therein. In the event of a Required Repurchase of only a portion of this General Term Note, a new General Term Note or Notes for the unrepurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. [If this General Term Note is subject to redemption upon exercising a Survivor's Option, insert -- As more fully provided in the Indenture and subject to the terms and conditions set forth therein, the Company will repay this General Term Note (or portion thereof) properly tendered for repayment by or on behalf of the person (the "Representative") that has authority to act on behalf of a deceased owner of the beneficial interest in this General Term Note under the laws of the appropriate jurisdiction (including, without limitation, the personal representative, executor, surviving joint tenant or surviving tenant by the entirety of such deceased beneficial owner) at a price equal to 100% of the principal amount hereof plus accrued interest to the date of such repayment. The Company may, in its sole discretion, limit the aggregate principal amount of all outstanding General Term Notes as to which exercises of this option (the "Survivor's Option") will be accepted in any calendar year to one percent (1%) of the outstanding principal amount of all General Term Notes as of the end of the most recent fiscal year, but not less than $500,000 in any such calendar year, or such greater amount as the Company in its sole discretion may determine for any calendar year, and may limit to $100,000, or such greater amount as the Company in its sole discretion may determine for any calendar year, the aggregate principal amount of General Term Notes (or portions thereof) as to which exercise of the Survivor's Option will be accepted in such calendar year with respect to any individual deceased owner of beneficial interests in such General Term Notes. [If the General Term Note is not an Original Issue Discount Security, insert -- If an Event of Default with respect to this General Term Note shall occur and be continuing, the principal of this General Term Note may be declared due and payable in the manner and with the effect provided in the Indenture.] In any case where any Interest Payment Date, Redemption Date, Repayment Date, Stated Maturity or Maturity of any General Term Note shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of the Indenture or this General Term Note), payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, Redemption Date or Repayment Date or at the Stated Maturity or Maturity; provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date, Repayment Date, Stated Maturity or Maturity, as the case may be, to such Business Day. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of all Outstanding Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in principal amount of all Outstanding Securities affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of all Outstanding Securities, on behalf of the Holders of all Outstanding Securities, to waive compliance by the Company with certain provisions of the Indenture. Any such consent or waiver by the Holder of this General Term Note shall be conclusive and binding upon such Holder and upon all future Holders of this General Term Note and of any General Term Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this General Term Note. The Indenture permits the Holders of not less than a majority in principal amount of all Outstanding Securities of any series thereunder to waive on behalf of the Holders of all Outstanding Securities of such series any past default by the Company, provided that no such waiver may be made with respect to a default in the payment of the principal of or premium, if any, or the interest on any Security of such series or the default by the Company in respect of certain covenants or provisions of the Indenture, the modification or amendment of which must be consented to by the Holder of each Outstanding Security of each series affected. As set forth in, and subject to, the provisions of the Indenture, no Holder of any General Term Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default, the Holders of not less than 25% in principal amount of the Outstanding General Term Notes shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of the Outstanding General Term Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days; provided, however, that such limitations do not apply to a suit instituted by the Holder hereof for the enforcement of payment of the principal of (and premium, if any) or any interest on this General Term Note on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this General Term Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this General Term Note at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this General Term Note is registerable in the Security Register, upon surrender of this General Term Note for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this General Term Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new General Term Notes of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The General Term Notes of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, General Term Notes of this series are exchangeable for a like aggregate principal amount of General Term Notes of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. [If this General Term Note is redeemable at the option of the Company, insert -- The Company shall not be required (i) to issue, register the transfer of or exchange this General Term Note if this General Term Note may be among those selected for redemption during a period beginning at the opening of business 15 days before selection of the General Term Notes to be redeemed under Section 1103 of the Indenture and ending at the close of business on the day of the mailing of the relevant notice of redemption, (ii) to register the transfer of or exchange any General Term Note so selected for redemption in whole or in part, except, in the case of any General Term Note to be redeemed in part, the portion thereof not to be redeemed, or (iii) to issue, register the transfer of or exchange any General Term Note which has been surrendered for repayment at the option of the Holder, except the portion, if any, of such General Term Note not to be so repaid.] Prior to due presentment of this General Term Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this General Term Note is registered as the owner hereof for all purposes, whether or not this General Term Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this General Term Note without definition which are defined in the Indenture shall have the meanings assigned to them in the Indenture. ______________________________ (Registered servicemark of J. W. Korth & Company) ---------------------- SECTION 205. Form of Legend for Global Notes. Any Global Note (as defined in Article VII below) authenticated and delivered hereunder shall bear a legend in substantially the following form: "This Security is a Global Note within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This General Term Note is not exchangeable for General Term Notes registered in the name of a Person other than the Depositary or its nominee except in the limited circumstances described in the Indenture, and no transfer of this General Term Note (other than a transfer of this General Term Note as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in the limited circumstances described in the Indenture." SECTION 206. Form of Trustee's Certificate of uthentication. The Trustee's certificates of authentication shall be in substantially the following form: This is one of the General Term Notes of the series designated therein referred to in the within-mentioned Indenture. _____________________________________, as Trustee By __________________________________ Authorized Officer ARTICLE III REDEMPTION OF GENERAL TERM NOTES; CHANGE OF CONTROL SECTION 301. Redemption of General Term Notes. (a) Each General Term Note may be redeemed by the Company in whole or in part if so provided in, and in accordance with, the terms of such General Term Note issued by the Company. The Company may redeem any General Term Note which by its terms is redeemable prior to Stated Maturity without also redeeming any other General Term Note which is redeemable prior to Stated Maturity. (b) Change of Control. Upon the occurrence of a Change in Control (the effective date of such Change in Control being the "Change in Control Date"), each Holder of a General Term Note shall have the right to require that the Company repurchase (a "Required Repurchase") all or any part of such Holder's General Term Note at a repurchase price payable in cash equal to 101% of the principal amount of such General Term Note plus accrued interest to the Purchase Date (the "Change in Control Purchase Price"). (1) Within 30 days following the Change in Control Date, the Company shall mail a notice (the "Required Repurchase Notice") to each Holder with a copy to the Trustee stating: (i) that a Change in Control has occurred and that such Holder has the right to require the Company to repurchase all or any part of such Holder's General Term Notes at the Change of Control Purchase Price; (ii) the Change of Control Purchase Price; (iii) the date on which any Required Repurchase shall be made (which shall be no earlier than 60 days nor later than 90 days from the date such notice is mailed) (the "Purchase Date"); (iv) the name and address of the Paying Agent; and (v) the procedures that Holders must follow to cause the General Term Notes to be repurchased, which shall be consistent with this Section and the Indenture. (2) Holders electing to have a General Term Note repurchased must deliver a written notice (the "Change in Control Purchase Notice") to the Paying Agent (initially the Trustee) at its office in The City of New York, or any other office of the Paying Agent maintained for such purposes, not later than 30 days prior to the Purchase Date. The Change in Control Purchase Notice shall state: (i) the portion of the principal amount of any General Term Notes to be repurchased, which portion must be $1,000 or an integral multiple thereof; (ii) that such General Term Notes are to be repurchased by the Company pursuant to the change in control provisions of the Indenture; and (iii) unless the General Terms Notes are represented by one or more Global Notes, the certificate numbers of the General Term Notes to be delivered by the Holder thereof for repurchase by the Company. Any Change in Control Purchase Notice may be withdrawn by the Holder by a written notice of withdrawal delivered to the Paying Agent not later than three Business Days prior to the Purchase Date. The notice of withdrawal shall state the principal amount and, if applicable, the certificate numbers of the General Term Notes as to which the withdrawal notice relates and the principal amount of such General Term Notes, if any, which remains subject to a Change in Control Purchase Notice. If a General Term Note is represented by a Global Note (as described in Article VII below), the Depositary or its nominee will be the Holder of such General Term Note and therefore will be the only entity that can elect a Required Repurchase of such General Term Note. To obtain repayment pursuant to this Section 301(b) with respect to such General Term Note, the beneficial owner of such General Term Note must provide to the broker or other entity through which it holds the beneficial interest in such General Term Note (i) the Change in Control Purchase Notice signed by such beneficial owner, and such signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, and (ii) instructions to such broker or other entity to notify the Depositary of such beneficial owner's desire to obtain repayment pursuant to this Section 301(b). Such broker or other entity will provide to the Paying Agent (i) the Change of Control Purchase Notice received from such beneficial owner and (ii) a certificate satisfactory to the Paying Agent from such broker or other entity stating that it represents such beneficial owner. Such broker or other entity will be responsible for disbursing any payments it receives pursuant to this Section 301(b) to such beneficial owner. (3) Payment of the Change of Control Purchase Price for a General Term Note for which a Change in Control Purchase Notice has been delivered and not withdrawn is conditioned (except in the case of a General Term Note represented by one or more Global Notes) upon delivery of such General Term Note (together with necessary endorsements) to the Paying Agent at its office in The City of New York, or any other office of the Paying Agent maintained for such purpose, at any time (whether prior to, on or after the Purchase Date) after the delivery of such Change in Control Purchase Notice. Payment of the Change of Control Purchase Price for such General Term Note will be made promptly following the later of the Purchase Date or the time of delivery of such General Term Note. If the Paying Agent holds, in accordance with the terms of the Indenture, money sufficient to pay the Change in Control Purchase Price of such General Term Note on the Business Day following the Purchase Date, then, on and after such date, interest will cease accruing, and, if applicable, amounts will no longer accrue on any such General Term Note that is an Original Issue Discount Security, whether or not such General Term Note is delivered to the Paying Agent, and all other rights of the Holder shall terminate (other than the right to receive the Change of Control Purchase Price upon delivery of the General Term Note). (4) The Company shall comply with the provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act, which may then be applicable and shall file Schedule 13E-4 or any other schedule required thereunder in connection with any offer by the Company to repurchase General Term Notes at the option of Holders upon a Change in Control. (5) No General Term Note may be repurchased by the Company as a result of a Change in Control if there has occurred and is continuing an Event of Default (other than a default in the Payment of the Change in Control Purchase Price with respect to the General Term Notes). ARTICLE IV REPAYMENT UPON DEATH If so specified in any General Term Note, the Holder of such General Term Note will have the option (the "Survivor's Option") to elect repayment of such General Term Note prior to its Stated Maturity in the event of the death of the beneficial owner of such General Term Note. Pursuant to exercise of the Survivor's Option, if applicable, the Company will repay any General Term Note (or portion thereof) properly tendered for repayment by or on behalf of the person (the "Representative") that has authority to act on behalf of the deceased beneficial owner of such General Term Note under the laws of the appropriate jurisdiction (including, without limitation, the personal representative, executor, surviving joint tenant or surviving tenant by the entirety of such deceased beneficial owner) at a price equal to one-hundred percent (100%) of the principal amount of the beneficial interest of the deceased owner of such General Term Note plus accrued interest to the date of such payment, subject to the following limitations. The Company may, in its sole discretion, limit the aggregate principal amount of General Term Notes as to which exercises of the Survivor's Option will be accepted in any calendar year (the "Annual Put Limitation") to one percent (1%) of the outstanding principal amount of the General Term Notes as of the end of the most recent fiscal year, but not less than $500,000 in any such calendar year, or such greater amount as the Company in its sole discretion may determine for any calendar year, and may limit to $100,000, or such greater amount as the Company in its sole discretion may determine for any calendar year, the aggregate principal amount of General Term Notes (or portions thereof) as to which exercise of the Survivor's Option will be accepted in such calendar year with respect to any individual deceased owner of beneficial interests in such General Term Notes (the "Individual Put Limitation"). Moreover, the Company will not make principal repayments pursuant to exercise of the Survivor's Option in amounts that are less that $1,000, and, in the event that the limitations described in the preceding sentence would result in the partial repayment of any General Term Note, the principal amount of such General Term Note remaining outstanding after repayment must be at least $1,000 (the minimum authorized denomination of the General Term Notes). Any General Term Note (or portion thereof) tendered pursuant to exercise of the Survivor's Option may be withdrawn by a written request of its Holder received by the Trustee prior to its repayment. Each General Term Note (or portion thereof) that is tendered pursuant to a valid exercise of the Survivor's Option will be accepted promptly in the order all such General Term Notes are tendered, except for any General Term Note (or portion thereof) the acceptance of which would contravene (i) the Annual Put Limitation, if applied, or (ii) the Individual Put Limitation, if applied, with respect to the relevant individual deceased owner of beneficial interests therein. If, as of the end of any calendar year, the aggregate principal amount of General Term Notes (or portions thereof) that have been accepted pursuant to exercise of the Survivor's Option for such year has not exceeded the Annual Put Limitation, if applied, for such year, any exercise(s) of the Survivor's Option with respect to General Term Notes (or portions thereof) not accepted during such calendar year because such acceptance would have contravened the Individual Put Limitation, if applied, with respect to an individual deceased owner of beneficial interests therein will be accepted in the order all such General Term Notes (or portions thereof) were tendered, to the extent that any such exercise would not exceed the Annual Put Limitation, if applied, for such calendar year. Any General Term Note (or portion thereof) accepted for repayment pursuant to exercise of the Survivor's Option will be repaid no later than the first Interest Payment Date that occurs 20 or more calendar days after the date of such acceptance. Each General Term Note (or any portion thereof) tendered for repayment that is not accepted in any calendar year because of the application of the Annual Put Limitation will be deemed to be tendered in the following calendar year in the order in which all such General Term Notes (or portions thereof) were originally tendered, unless any such General Term Note (or portion thereof) is withdrawn by the Representative for the deceased owner prior to its repayment. In the event that a General Term Note (or any portion thereof) tendered for repayment pursuant to valid exercise of the Survivor's Option is not accepted, the Trustee will deliver a notice by first-class mail to the registered Holder thereof at its last known address as indicated in the Security Register that states the reasons such General Term Note (or portion thereof) has not been accepted for repayment. Subject to the foregoing, in order for a Survivor's Option to be validly exercised with respect to any General Term Note (or portion thereof), the Trustee must receive from the Representative of the individual deceased owner of beneficial interests therein (i) a written request for payment signed by the Representative, and such signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, (ii) if any such General Term Note is not represented by a Global Note (as described in Article VII below), tender of the General Term Note (or portion thereof) to be repaid, (iii) appropriate evidence satisfactory to the Company and the Trustee that (A) the Representative has authority to act on behalf of the individual deceased beneficial owner, (B) the death of such beneficial owner has occurred and (C) the deceased individual was the owner of a beneficial interest in such General Term Note at the time of death, (iv) if applicable, a properly executed assignment or endorsement, and (v) if the beneficial interest in such General Term Note is held by a nominee of the deceased beneficial owner, a certificate satisfactory to the Trustee from such nominee attesting to the deceased's ownership of a beneficial interest in such General Term Note. All questions as to the eligibility or validity of any exercise of the Survivor's Option will be determined by the Company, in its sole discretion, which determinations will be final and binding on all parties. If a General Term Note is represented by a Global Note (as described in Article VII below), the Depositary or its nominee will be the Holder of such General Term Note and therefore will be the only entity that can exercise the Survivor's Option for such General Term Note. To obtain repayment pursuant to exercise of the Survivor's Option with respect to such General Term Note, the Representative must provide to the broker or other entity through which the beneficial interest in such General Term Note is held by the deceased owner (i) the documents described in clauses (i) and (iii) of the preceding paragraph and (ii) instructions to such broker or other entity to notify the Depositary of such Representative's desire to obtain repayment pursuant to exercise of the Survivor's Option. Such broker or other entity shall provide to the Trustee (i) the documents received from the Representative referred to in clause (i) of the preceding sentence and (ii) a certificate satisfactory to the Trustee from such broker or other entity stating that it represents the deceased beneficial owner. Such broker or other entity will be responsible for disbursing any payments it receives pursuant to exercise of the Survivor's Option to the appropriate Representative. ARTICLE V ADDITIONAL COVENANTS OF THE COMPANY WITH RESPECT TO THE GENERAL TERM NOTES SECTION 501. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, within 120 days after the end of each fiscal year a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Second Supplemental Indenture. For such purposes, such compliance shall be determined without regard to any period of grace or requirement of notice provided hereunder and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. (b) The Company shall deliver to the Trustee, as soon as possible and in any event within 10 days after the Company becomes aware of the occurrence of an Event of Default or an event which, with notice or the lapse of time or both, would constitute an Event of Default, an Officers' Certificate setting forth the details of such Event of Default or default, and the action which the Company proposes to take with respect thereto. SECTION 502. Existence. So long as any of the General Term Notes are Outstanding, subject to Article 8 of the Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and all rights (charter and statutory) and franchises other than rights or franchises the loss of which would not be disadvantageous in any material respect to the Holders of the General Term Notes. SECTION 503. Maintenance of Properties. So long as any of the General Term Notes are Outstanding, the Company will cause all properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business and not disadvantageous in any material respect to the Holders. SECTION 504. Payment of Taxes and Other Claims. So long as any of the General Term Notes are Outstanding, the Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim the amount of which, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 505. Insurance. So long as any of the General Term Notes are Outstanding, the Company shall, and each of its Restricted Subsidiaries and Consumers shall, keep insured by financially sound and reputable insurers all property of a character usually insured by entities engaged in the same or similar businesses similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such entities and carry such amounts of other insurance as is usually carried by such entities. SECTION 506. Compliance with Laws. So long as any of the General Term Notes are Outstanding, the Company shall, and each of its Restricted Subsidiaries and Consumers shall, comply in all material respects with all laws applicable to the Company or such Restricted Subsidiary or Consumers, as the case may be, its respective business and properties. SECTION 508. Limitation on Certain Liens. (a) So long as any of the General Term Notes are outstanding, the Company shall not create, incur, assume or suffer to exist any lien, mortgage, pledge, security interest, conditional sale, title retention agreement or other charge or encumbrance of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor of the Company or any Subsidiary a preferential interest (hereinafter in this Section referred to as a "Lien") upon or with respect to the Capital Stock of Consumers, Enterprises or NOMECO without making effective provision whereby the General Term Notes shall (so long as any such other creditor shall be so secured) be equally and ratably secured (along with any other creditor similarly entitled to be secured) by a direct Lien on all property subject to such Lien, provided, however, that the foregoing restrictions shall not apply to: (i) Liens for taxes, assessments or governmental charges or levies to the extent not past due; (ii) pledges or deposits to secure (a) obligations under workmen's compensation laws or similar legislation, (b) statutory obligations of the Company or (c) Support Obligations not to exceed $30 million at any one time outstanding; (iii) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which have been fully bonded and are being contested in good faith; (iv) purchase money Liens upon or in property acquired and held by the Company in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing the acquisition of any such property to be subject to such Liens, or Liens existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien shall extend to or cover any property other than the property being acquired and no such extension, renewal or replacement shall extend to or cover property not theretofore subject to the Lien being extended, renewed or replaced, and provided, further, that the aggregate principal amount of the Indebtedness at any one time outstanding secured by Liens permitted by this clause (iv) shall not exceed $10,000,000; and (v) Liens not otherwise permitted by clauses (i) through (iv) of this Section securing Indebtedness of the Company; provided that on the date such Liens are created, and after giving effect to such Indebtedness, the aggregate principal amount at maturity of all of the secured Indebtedness of the Company at such date shall not exceed 10% of Consolidated Assets at such date. SECTION 509. Limitation on Consolidation, Merger, Sale or Conveyance. So long as the General Term Notes are Outstanding, and subject also to Article Eight of the Indenture, the Company shall not consolidate with or merge into any other Person or sell, lease or convey the property of the Company in the entirety or substantially as an entirety, unless (i) immediately after giving effect to such transaction the Consolidated Net Worth of the surviving entity is at least equal to the Consolidated Net Worth of the Company immediately prior to the transaction, and (ii) after giving effect to such transaction, the surviving entity would be entitled to incur at least one dollar of additional Indebtedness (other than revolving Indebtedness to banks) without violation of the limitations in Section 510 hereof. SECTION 510. Limitation on Consolidated Indebtedness. (a) So long as any of the General Term Notes are Outstanding, the Company shall not, and shall not permit any Restricted Subsidiary of the Company to, issue, create, assume, guarantee, incur or otherwise become liable for (collectively, "issue"), directly or indirectly, any Indebtedness unless (i) the Consolidated Coverage Ratio of the Company and its Consolidated Subsidiaries for the four consecutive fiscal quarters immediately preceding the issuance of such Indebtedness (as shown by a pro forma consolidated income statement of the Company and its Consolidated Subsidiaries for the four most recent fiscal quarters ending at least 30 days prior to the issuance of such Indebtedness after giving effect to (i) the issuance of such Indebtedness and (if applicable) the application of the net proceeds thereof to refinance other Indebtedness as if such Indebtedness was issued at the beginning of the period, (ii) the issuance and retirement of any other Indebtedness since the first day of the period as if such Indebtedness was issued or retired at the beginning of the period and (iii) the acquisition of any company or business acquired by the Company or any Subsidiary since the first day of the period (including giving effect to the pro forma historical earnings of such company or business), including any acquisition which will be consummated contemporaneously with the issuance of such Indebtedness, as if in each case such acquisition occurred at the beginning of the period) exceeds a ratio of 1.6 to 1.0 and (ii), immediately after giving effect to the issuance of such Indebtedness and (if applicable) the application of the net proceeds thereof to refinance other Indebtedness, the Consolidated Leverage Ratio is equal to or less than a ratio of 0.75 to 1.0. (b) Notwithstanding the foregoing paragraph, the Company or any Restricted Subsidiary may issue, directly or indirectly, the following Indebtedness: (1) Revolving Indebtedness to banks not to exceed $450,000,000 in the aggregate outstanding principal amount at any time; (2) Indebtedness (other than Indebtedness described in clause (1) of this Subsection) outstanding on the date of the original Indenture, as set forth on Schedule 510(b)(2) attached hereto and made a part hereof, and Indebtedness issued in exchange for, or the proceeds of which are used to refund or refinance, any Indebtedness permitted by this clause (2); provided, however, that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the General Term Notes, the Indebtedness is subordinated to the General Term Notes in right of payment; (3) Indebtedness of the Company owed to and held by a Subsidiary and Indebtedness of a Subsidiary owed to and held by the Company; provided, however, that, in the case of Indebtedness of the Company owed to and held by a Subsidiary, (i) any subsequent issuance or transfer of any Capital Stock that results in any such Subsidiary ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness (except to the Company or a Subsidiary) shall be deemed for the purposes of this Subsection to constitute the issuance of such Indebtedness by the Company; (4) Indebtedness of the Company issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of the Company issued in accordance with Subsection (a) of this Section, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the General Term Notes, the Indebtedness so issued is subordinated to the General Term Notes in right of payment; and (5) Indebtedness of a Restricted Subsidiary issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of a Restricted Subsidiary issued in accordance with Subsection (a) of this Section, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced and (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced. SECTION 511. Limitation on Restricted Payments.(a) So long as the General Term Notes are Outstanding and are rated below BBB- by Standard & Poor's or by Duff & Phelps (or, if Duff & Phelps or Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization) the Company shall not, and shall not permit any Restricted Subsidiary of the Company, directly or indirectly, to (i) declare or pay any dividend or make any distribution on the Capital Stock of the Company to the direct or indirect holders of the Capital Stock of the Company (except dividends or distributions payable solely in Non- Convertible Capital Stock of the Company or in options, warrants or other rights to purchase such Non-Convertible Capital Stock and except dividends or distributions payable to the Company or a Subsidiary), (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company (any such dividend, distribution, purchase, redemption, other acquisition or retirement being hereinafter referred to as a "Restricted Payment") if at the time the Company or such Subsidiary makes such Restricted Payment: (1) an Event of Default, or an event that with the lapse of time or the giving of notice or both would constitute an Event of Default, shall have occurred and be continuing (or would result therefrom); or (2) the aggregate amount of such Restricted Payment and all other Restricted Payments made since September 30, 1993, would exceed the sum of: (A) $120,000,000; (B) 100% of Consolidated Net Income, accrued during the period (treated as one accounting period) from September 30, 1993 to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such sum shall be a deficit, minus 100% of the deficit); and (C) the aggregate Net Proceeds received by the Company from the issue or sale of or contribution with respect to its Capital Stock subsequent to September 30, 1993. For the purpose of determining the amount of any Restricted Payment not in the form of cash, the amount shall be the fair value of such Restricted Payment as determined in good faith by the Board of Directors, provided that if the value of the non-cash portion of such Restricted Payment as determined by the Board of Directors is in excess of $25 million, such value shall be based on the opinion from a nationally recognized firm experienced in the appraisal of similar types of transactions. (b) The provisions of Section 511(a) shall not prohibit: (i) any purchase or redemption of Capital Stock of the Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Redeemable Stock or Exchangeable Stock); provided, however, that such purchase or redemption shall be excluded from the calculation of the amount of Restricted Payments; (ii) dividends or other distributions paid in respect of any class of the Company's Capital Stock issued in respect of the acquisition of any business or assets by the Company or a Restricted Subsidiary if the dividends or other distributions with respect to such Capital Stock are payable solely from the net earnings of such business or assets; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section; provided, however, that at the time of payment of such dividend, no Event of Default shall have occurred and be continuing (or result therefrom), and provided further, however, that such dividends shall be included (without duplication) in the calculation of the amount of Restricted Payments; or (iv) payments pursuant to the Tax-Sharing Agreement. SECTION 512. Limitation on Transactions with Affiliates. So long as any of the General Term Notes are Outstanding, the Company shall not directly or indirectly, conduct any business or enter into any transaction or series of related transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service) with an Affiliate unless the terms of such business, transaction or series of transactions are as favorable to the Company as terms that could be obtainable at the time for a comparable transaction or series of related transactions in arm's-length dealings with an unrelated third Person. This Section shall not apply to (x) compensation paid to officers and directors of the Company which has been approved by the Board of Directors of the Company or (y) loans to the Company or an Affiliate pursuant to a global cash management program, which loans mature within one year from the date thereof. ARTICLE VI ADDITIONAL EVENTS OF DEFAULT WITH RESPECT TO THE GENERAL TERM NOTES SECTION 601. Definition. All of the events specified in Section 501 of the Indenture and the events specified in Section 602 of this Article shall be "Events of Default" with respect to the General Term Notes. SECTION 602. Additional Events of Default. As contemplated by Sections 301(15) and 501(7) of the Indenture, any one of the following events (whatever the reason for such Event of Default and whether or not it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall be an Event of Default with respect to the General Term Notes for all purposes of the Indenture: (a) a default or event of default in respect of any Indebtedness of the Company having an aggregate outstanding principal amount at the time of such default in excess of $25,000,000 shall occur which results in the acceleration of such Indebtedness or Indebtedness of the Company having an outstanding principal amount at maturity in excess of $25,000,000 shall not be paid at maturity thereof, which default shall not have been waived by the holder or holders of such Indebtedness within 30 days of such default; or (b) the entry of a final judgment or judgments against the Company aggregating in excess of $25,000,000 which remain undischarged or unbonded for a period (during which execution shall not be effectively stayed) of 60 days. ARTICLE VII GLOBAL NOTES The General Term Notes will be issued initially in the form of Global Notes. "Global Note" means a registered General Term Note evidencing one or more General Term Notes issued to a depositary (the "Depositary") or its nominee, in accordance with this Article and bearing the legend prescribed in this Article. A single Global Note will represent all General Term Notes issued on the same date and having the same terms, including, but not limited to, the same Interest Payment Dates, rate of interest, Stated Maturity, and redemption provisions (if any). The Company shall execute and the Trustee shall, in accordance with this Article and the Company Order with respect to the General Term Notes, authenticate and deliver one or more Global Notes in temporary or permanent form that (i) shall represent and shall be denominated in an aggregate amount equal to the aggregate principal amount of the General Term Notes to be represented by such Global Note or Notes, (ii) shall be registered in the name of the Depositary for such Global Note or Notes or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions and (iv) shall bear a legend substantially to the following effect: "Unless this Global Note is presented by an authorized representative of the Depositary to the Company or its agent for registration of transfer, exchange or payment, and any Note issued is registered in the name of the Depositary or in such other name as is requested by the Depositary, any transfer, pledge or other use hereof for value or otherwise by or to any person shall be wrongful inasmuch as the registered owner hereof, the Depositary, has an interest herein." Notwithstanding Section 305 of the Indenture, unless and until it is exchanged in whole or in part for General Term Notes in definitive form, a Global Note representing one or more General Term Notes may not be transferred except as a whole by the Depositary, to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for General Term Notes or a nominee of such successor Depositary. If at any time the Depositary for the General Term Notes is unwilling or unable to continue as Depositary for the General Term Notes, the Company shall appoint a successor Depositary with respect to the General Term Notes. If a successor Depositary for the General Term Notes is not appointed by the Company by the earlier of (i) 90 days from the date the Company receives notice to the effect that the Depositary is unwilling or unable to act, or the Company determines that the Depositary is unable to act or (ii) the effectiveness of the Depositary's resignation or failure to fulfill its duties as Depositary, the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive General Term Notes, will authenticate and deliver General Term Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Notes representing such General Term Notes in exchange for such Global Note or Notes. The Company may at any time and in its sole discretion determine that the General Term Notes issued in the form of one or more Global Notes shall no longer be represented by such Global Note or Notes. In such event the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive General Term Notes, will authenticate and deliver General Term Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Notes representing such General Term Notes in exchange for such Global Note or Notes. The Depositary for such General Term Notes may surrender a Global Note or Notes for such General Term Notes in exchange in whole or in part for General Term Notes in definitive form on such terms as are acceptable to the Company and such Depositary. Thereupon, the Company shall execute, and the Trustee shall authenticate and deliver, without service charge: (i) to each Person specified by such Depositary a new General Term Note or Notes, of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Note; and (ii) to such Depositary a new Global Note in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Note and the aggregate principal amount of General Term Notes in definitive form delivered to Holders thereof. In any exchange provided for in this Article, the Company will execute and the Trustee will authenticate and deliver General Term Notes in definitive registered form in authorized denominations. Upon the exchange of a Global Note for General Term Notes in definitive form, such Global Note shall be cancelled by the Trustee. General Term Notes in definitive form issued in exchange for a Global Note pursuant to this Article shall be registered in such names and in such authorized denominations as the Depositary for such Global Note, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or Security Registrar. The Trustee shall deliver such General Term Notes to the persons in whose names such General Term Notes are so registered. ARTICLE VIII DEFEASANCE All of the provisions of Article Fourteen of the Original Indenture shall be applicable to the General Term Notes. Upon satisfaction by the Company of the requirements of Section 1404 of the Indenture, in connection with any covenant defeasance (as provided in Section 1403 of the Indenture), the Company shall be released from its obligations under Article Eight of the Original Indenture and under Articles III and V of this Second Supplemental Indenture with respect to the General Term Notes. ARTICLE IX SUPPLEMENTAL INDENTURES This Second Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Second Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Second Supplemental Indenture shall together constitute one and the same instrument. The Company may, by supplemental indenture, amend this Second Supplemental Indenture to provide for additional definitions, terms and provisions relating to General Term Notes. Any such supplemental indenture shall not adversely affect the rights and privileges of Holders of General Term Notes issued prior to such supplemental indenture. Any such supplemental indenture may include, but is not limited to including, additional provisions permitting payment of General Term Notes prior to Stated Maturity at the option of the Holders, issuance of General Term Notes in currencies other than Dollars, and special provisions relating to interest rate provisions. TESTIMONIUM This Second Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 54 IN WITNESS WHEREOF,the parties hereto have caused this Second Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. CMS ENERGY CORPORATION By: /s/ A. M. Wright _____________________________ Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer Attest: /s/ T. A. McNish (Corporate Seal) ______________________________ Vice President and Secretary THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Trustee By: _____________________________ Attest: (Corporate Seal) ______________________________ 54 IN WITNESS WHEREOF,the parties hereto have caused this Second Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. CMS ENERGY CORPORATION By: _____________________________ Attest: (Corporate Seal) ______________________________ THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Trustee By: /s/ Mary Walicki _____________________________ Mary Walicki Attest: /s/ John T. Needham, Jr. (Corporate Seal) ______________________________ John T. Needham, Jr. SCHEDULE 510 (b) (2) ____________________ Indebtedness of CMS Energy Corporation outstanding on January 20, 1994: $146,000,000 of Series A Senior Deferred Coupon Notes due 1997 and $248,000,000 of Series B Senior Deferred Coupon Notes due 1999. EX-10 3 EMPLOYMENT AGREEMENT - P D HOPPER EMPLOYMENT AGREEMENT AGREEMENT between CMS Energy Corporation, a Michigan corporation (the "Corporation"), and Preston D. Hopper (the "Executive") dated this 20th day of March, 1996. Whereas the Corporation considers the maintenance of a vital management essential to protecting and enhancing the best interests of the Corporation and its shareholders. Whereas the Corporation has determined to encourage the continuing attention and dedication of the key members of its management without the distraction arising from the possibility of a change in control. Therefore, the parties hereto agree as follows: 1. Operation of Agreement. The "Effective Date" shall be the date on which a Change of Control (as defined in Section 2) shall occur. 2. Change of Control. As used in this Agreement, "Change of Control" shall be deemed to have taken place if a person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes the beneficial owner of shares having 35% or more of the total number of votes that may be cast in the election of Directors of CMS Energy Corporation. 3. Employment. The Corporation hereby agrees to continue to employ and engage the services of the Executive as its Senior Vice President, Controller and Chief Accounting Officer of CMS Energy Corporation for the period beginning on the Effective Date and ending on the earlier of the fifth anniversary of such date or the Normal Retirement Date of the Executive under the Consumers Power Company's Pension Plan (hereinafter "Employment Period"). The Executive agrees to serve the Corporation in such position, unless an event shall occur which is described in Section 6. 4. Duties. The Executive agrees during the Employment Period to devote his full business time to the business and affairs of the Corporation (except for (i) services on corporate, civic or charitable boards or committees, (ii) such reasonable time as shall be required for the investment of the Executive's assets, which do not significantly interfere with the performance of his responsibilities hereunder and (iii) periods of vacation and sick leave to which he is entitled) and to use his best efforts to promote the interests of the Corporation and to perform faithfully and efficiently the responsibilities of Senior Vice President, Controller and Chief Accounting Officer of CMS Energy Corporation. 5. Compensation and Other Terms of Employment. (a) Base Salary. The Executive shall receive an annual base salary ("Base Salary") of not less than his annual salary immediately prior to the Effective Date (payable in equal semi-monthly installments) from the Corporation. The Base Salary shall be reviewed and may be increased at any time and from time to time in accordance with the Corporation's regular practices, and shall be reviewed at least annually by the Organization and Compensation Committee of its Board of Directors. (b) Incentive Compensation. As further compensation, the Executive will be eligible for awards ("Incentive Compensation") under the Corporation's Executive Incentive Compensation Plan in which he was participating immediately prior to the Effective Date. (c) Retirement, Savings and Stock Option Plans. In addition to the Base Salary and Incentive Compensation payable as hereinabove provided, the Executive shall be entitled to participate in savings, stock options and other incentive plans and programs available to executives of the Corporation or to opportunities provided under any such plans in which he was participating immediately preceding the Effective Date, whichever is greater. (d) Vacation and Employee Benefits. (i) The Executive shall be entitled to paid vacation and other employee benefits and perquisites, in accordance with the policies of the Corporation in effect for executive officers, or the vacation employee benefits and perquisites to which he was entitled immediately prior to the Effective Date, whichever is greater. 6. Termination. (a) Death. This Agreement shall terminate automatically upon the Executive's death. In the event of such termination, the Corporation shall pay to the Executive's estate all benefits and compensation accrued hereunder to the date of death, including a pro rata portion of incentive compensation. (b) Disability. In the event the Executive becomes unable by reason of physical or mental disability to render the services required hereunder and such disability continues for a continuous period of 6 months, the employment of the Executive hereunder shall terminate, unless the employment is extended by agreement of the Corporation and the Executive. Commencing at the date of termination of employment for disability, the Executive shall receive annually a sum equal to 50% of his Base Salary at the time of termination of employment, in monthly installments until his 62nd birthday, or his death if earlier. Disability payments hereunder shall be reduced by the amount of other Corporation-sponsored disability benefits paid to the Executive through insurance or otherwise. (c) Termination with Cause. The Corporation may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" shall mean an act or acts of dishonesty, fraud, misappropriation or intentional material damage to the property or business of the Corporation or commission of a felony on the Executive's part. If the Executive's employment is terminated for Cause, the Corporation shall pay the Executive his full accrued Base Salary through the date of such termination at the rate in effect at the time of such termination, and the Corporation shall have no further obligations to the Executive under this Agreement. (d) Other Termination or Resignation of Executive. (i) The Corporation may terminate the Executive's employment without Cause. (ii) In the event that the Executive determines in his sole judgment that his position, authority, or responsibilities have been diminished as a result of the "Change of Control," the Executive may terminate his employment with the Corporation upon written notice given within 12 months after the Effective Date. (iii) In the event of a termination of employment under this subsection (d), the Executive shall receive a severance payment equal to twice his Base Salary at the time of termination of employment plus either twice his incentive compensation payable with respect to the last full calendar year prior to the termination of employment or, if no incentive compensation was awarded to the Executive with respect to the last full calendar year prior to the termination of employment, twice the standard incentive award, as defined in the Corporation's Executive Incentive Compensation Plan for the salary grade of the Executive for such year. The severance payment shall be paid in a lump sum payment, in cash, or as otherwise directed by the Executive. 7. No Obligation to Mitigate Damages. The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Corporation's obligations to make the payments and arrangements required to be made under this Agreement. 8. Indemnification. The Corporation shall include the Executive in its Director and Officer Liability Insurance policy, if any, during his Employment Period and for a period of not less than five years after the termination of the Executive's employment for any reason whatsoever. In addition to insurance and any other indemnification available to the Executive as an Officer, the Corporation shall indemnify, to the extent permitted by applicable law, the Executive for settlements, judgments and reasonable expenses in connection with activities arising from services rendered by the Executive as a Director or Officer of the Corporation or any affiliated company. 9. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Corporation or, in the case of the Corporation, Attn: Secretary, at its principal executive offices. 10. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien or security interest upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution. 11. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Michigan. 12. Amendment. This Agreement may be amended or cancelled only by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 13. Successor to the Corporation. Except as may be otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Corporation and any successor of the Corporation. 14. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. IN WITNESS WHEREOF, the Corporation and the Executive have executed this Agreement as of the date first above written. /s/ P.D. Hopper ___________________________________ Preston D. Hopper CMS ENERGY CORPORATION By: /s/ William T. McCormick, Jr. _________________________________ William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer EX-12 4 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges (Millions of Dollars)
Three Months Ended Years Ended December 31 March 31, 1996 1995 1994 1993 1992 1991 (b) (c)(d) Earnings as defined (a) Net income $ 88 $ 204 $ 179 $ 155 $(297) $(262) Income taxes 54 118 92 75 (146) (94) Exclude equity basis subsidiaries (17) (57) (18) (6) 10 10 Fixed charges as defined, adjusted to exclude capitalized interest of $2, $8, $6, $5, $3, and $5 million for the three months ended March 31, 1996 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively 73 280 237 245 228 364 ------ ------ ------ ------ ------ ------ Earnings as defined $ 198 $ 545 $ 490 $ 469 $(205) $ 18 ====== ====== ====== ====== ====== ====== Fixed charges as defined (a) Interest on long-term debt $ 57 $ 224 $ 193 $ 204 $ 169 $ 274 Estimated interest portion of lease rental 2 9 9 11 16 17 Other interest charges 7 27 18 24 35 68 Preferred securities dividends and distributions 13 42 36 17 16 15 ------ ------ ------ ------ ------ ------ Fixed charges as defined $ 79 $ 302 $ 256 $ 256 $ 236 $ 374 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.51 1.81 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.
EX-15 5 ARTHUR ANDERSEN CONSENT 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. 33-29681, No. 33-47629, No. 33-57719, No. 33-57719-01, No. 33-64044, No. 33-60007, No. 33-61595, No. 33-62573 and No. 33-01261 its Form 10-Q for the quarter ended March 31, 1996, which includes our report dated May 10, 1996 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, May 10, 1996. EX-27 6 CMS ENERGY FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 PER-BOOK 4,344 1,591 750 1,358 0 8,043 1 1,959 (411) 1,541 100 356 1,868 38 1,242 0 52 0 108 45 2,685 8,043 1,275 54 1,061 1,118 157 (2) 158 62 96 8 88 24 0 349 .83 0 EPS for CMS Energy Common Stock $ .83 EPS for Class G Common Stock $1.50
EX-27 7 CONSUMERS FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000201533 CONSUMERS POWER COMPANY 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 PER-BOOK 4,344 698 513 1,216 0 6,771 841 504 331 1,705 100 356 1,520 38 403 0 45 0 96 44 2,493 6,771 1,141 58 944 1,005 136 0 139 37 102 8 94 0 0 308 0 0
EX-99 8 CONSUMERS GAS GROUP FINANCIALS 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 March 31, 1996 and 1995, and the related statements of income, common stockholders' equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Consumers Gas Group as of December 31, 1995, 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 26, 1996, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 10, 1996. 2 Consumers Gas Group Statements of Income (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions, Except Per Share Amounts OPERATING REVENUE $ 546 $ 482 $1,259 $1,105 ------- ------- ------- ------- OPERATING EXPENSES Operation Cost of gas sold 345 281 735 608 Other 43 46 194 188 ------- ------- ------- ------- Total operation 388 327 929 796 Maintenance 9 10 38 38 Depreciation, depletion and amortization 37 33 87 78 General taxes 21 21 54 50 ------- ------- ------- ------- Total operating expenses 455 391 1,108 962 ------- ------- ------- ------- PRETAX OPERATING INCOME 91 91 151 143 INCOME TAXES 32 31 49 44 ------- ------- ------- ------- NET OPERATING INCOME 59 60 102 99 ------- ------- ------- ------- OTHER INCOME (DEDUCTIONS) Other income taxes, net - (1) 1 - Other, net (1) - (1) (2) ------- ------- ------- ------- Total other income (deductions) (1) (1) - (2) ------- ------- ------- ------- FIXED CHARGES Interest on long-term debt 8 8 30 30 Other interest 1 1 6 5 Capitalized interest - - (1) (1) Preferred dividends 1 1 6 6 ------- ------- ------- ------- Net fixed charges 10 10 41 40 ------- ------- ------- ------- NET INCOME $ 48 $ 49 $ 61 $ 57 ======= ======= ======= ======= NET INCOME ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS THROUGH RETAINED INTEREST $ 36 $ 49 $ 46 $ 57 ======= ======= ======= ======= NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 12 $ - $ 15 $ - ======= ======= ======= ======= AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 - 8 - ======= ======= ======= ======= EARNINGS PER AVERAGE CLASS G COMMON SHARE $ 1.50 $ - $ 1.90 $ - ======= ======= ======= ======= DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .84 $ - ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3 Consumers Gas Group Statements of Cash Flows (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 48 $ 49 $ 61 $ 57 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 37 33 87 78 Capital lease and other amortization 1 1 5 4 Deferred income taxes and investment tax credit 6 16 3 16 Changes in other assets and liabilities 6 17 5 (9) Other - - 1 1 ------ ------ ------ ------ Net cash provided by operating activities 98 116 162 147 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (24) (21) (127) (130) Cost to retire property, net (2) (2) (10) (9) Other 1 (1) 4 2 ------ ------ ------ ------ Net cash used in investing activities (25) (24) (133) (137) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable, net (90) (89) 5 10 Payment of common stock dividends (9) - (67) (38) Payment of capital lease obligations (1) (1) (5) (4) Proceeds from long-term note 22 - 22 - Contribution from CMS Energy stockholders 3 - 21 22 Repayment of bank loans and other long-term debt - (2) (6) (103) Proceeds from bank loans and other long-term debt - - - 89 ------ ------ ------ ------ Net cash used in financing activities (75) (92) (30) (24) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) - (1) (14) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 5 4 4 18 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 3 $ 4 $ 3 $ 4 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4 Consumers Gas Group Balance Sheets
March 31 March 31 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions ASSETS PLANT (At original cost) Plant $2,207 $2,169 $2,078 Less accumulated depreciation, depletion and amortization 1,216 1,179 1,145 ------ ------ ------ 991 990 933 Construction work-in-progress 48 55 50 ------ ------ ------ 1,039 1,045 983 ------ ------ ------ CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 3 5 4 Accounts receivable and accrued revenue, less allowances of $1, $2 and $2, respectively (Note 6) 254 99 170 Inventories at average cost Gas in underground storage 39 184 80 Materials and supplies 10 10 10 Trunkline settlement 30 30 30 Deferred income taxes 8 9 8 Prepayments and other 39 49 35 ------ ------ ------ 383 386 337 ------ ------ ------ NON-CURRENT ASSETS Postretirement benefits 162 161 157 Trunkline settlement 17 25 48 Deferred income taxes 14 14 - Other 59 59 71 ------ ------ ------ 252 259 276 ------ ------ ------ TOTAL ASSETS $1,674 $1,690 $1,596 ====== ====== ======
5
March 31 March 31 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholders' equity $ 381 $ 339 $ 366 Preferred stock 78 78 78 Long-term debt 433 411 425 Non-current portion of capital leases 20 20 18 ------ ------ ------ 912 848 887 ------ ------ ------ CURRENT LIABILITIES Current portion of long-term debt and capital leases 23 23 12 Notes payable 15 105 10 Accounts payable 84 79 59 Accrued taxes 70 66 53 Trunkline settlement 30 30 30 Accrued refunds 25 20 25 Accrued interest 6 7 6 Other 46 52 43 ------ ------ ------ 299 382 238 ------ ------ ------ NON-CURRENT LIABILITIES Postretirement benefits 178 175 175 Regulatory liabilities for income taxes, net 167 162 148 Deferred investment tax credit 28 28 29 Trunkline settlement 18 25 48 Deferred income taxes - - 1 Other 72 70 70 ------ ------ ------ 463 460 471 ------ ------ ------ COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,674 $1,690 $1,596 ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6 Consumers Gas Group Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Twelve Months Ended March 31 March 31 1996 1995 1996 1995 In Millions COMMON STOCK At beginning and end of period $ 184 $ 184 $ 184 $ 184 ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 125 107 107 85 CMS Energy stockholders' contribution 3 - 21 22 ------- ------- ------- ------- At end of period 128 107 128 107 ------- ------- ------- ------- RETAINED EARNINGS At beginning of period 30 26 75 56 Net income 48 49 61 57 Common stock dividends declared (9) - (67) (38) ------- ------- ------- ------- At end of period 69 75 69 75 ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 381 $ 366 $ 381 $ 366 ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7 Consumers Gas Group Notes to Financial Statements 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the business of CMS Energy, see the Notes to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common Stock. This new class of common stock reflects the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). For further information regarding the Class G Common Stock, see Note 8 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. These financial statements and their related notes should be read along with the financial statements and notes contained in the 1995 Form 10-K of CMS Energy that includes the Report of Independent Public Accountants, included and incorporated by reference herein. 2: Earnings Per Share and Dividends Earnings per share, for the twelve month period ended March 31, 1996, reflect 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 are computed by considering the weighted average number of common shares outstanding. Earnings (loss) attributable to outstanding Class G Common Stock are equal to the Consumers Gas Group's net income (loss) multiplied by a fraction, the numerator is the weighted average number of Outstanding Shares during the period and the denominator represents the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis, for the three months ended March 31, 1996, are based on 23.72 percent of the earnings of the Consumers Gas Group. Earnings per share are omitted from the statements of income, for the periods ended March 31, 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 three months ended March 31, 1995, and the year ended December 31, 1995, which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to the Consumers Gas Group) on January 1, 1994. In Millions, Except Per Share Amounts ------------------------------------- Actual Pro Forma Pro Forma Three Months EndedThree Months Ended Year Ended March 31 March 31 December 31 1996 1995 1995 ------------- ------------- ----------- Consumers Gas Group Net Income $ 48 $ 49 $ 62 Net Income attributable to CMS Energy Common Stock through Retained Interest $ 36 $ 37 $ 47 Net Income attributable to outstanding Class G Common Stock $ 12 $ 12 $ 15 Average shares outstanding of Class G Common Stock 7.627 7.520 7.536 Earnings per share attributable to outstanding Class G Common Stock $1.50 $1.55 $1.93 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 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 in the financial statements. In July and October 1995, and January and April 1996, the Board of Directors declared quarterly dividends of $.28 per share 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 Matters" 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 $130 million for 1996, $110 million for 1997 and $105 million for 1998. These estimates include an attributed portion of Consumers' anticipated capital expenditures for common plant and equipment. 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," 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. Consumers Gas Group's other cash flow activities and non-cash investing and financing activities for the periods ended March 31 were: In Millions Three Months Ended Twelve Months Ended 1996 1995 1996 1995 ---- ---- ---- ---- Cash transactions Interest paid (net of amounts capitalized) $ 9 $ 10 $ 34 $ 32 Income taxes paid (net of refunds) 2 - 27 31 Non-cash transactions Assets placed under capital lease $ - $ 1 $ 1 $ 5 Capital leases refinanced - - 9 - 6: Short-Term and Long-Term Financings Consumers' short-term and long-term financings are discussed in Note 7 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. Consumers generally manages its short-term financings on a centralized consolidated basis. The portion of receivables sold attributable to the Consumers Gas Group at March 31, 1996 and 1995, is estimated by management to be $141 million and $135 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 borrowing to finance the purchase of gas for storage in the summer and fall periods. Management believes these allocations to be reasonable. 10 Consumers Gas Group Management's Discussion and Analysis In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common Stock. This new class of common stock reflects 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 1995 Form 10-K of CMS Energy. CMS Energy is the parent holding company of Consumers and CMS Enterprises Company. 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 March 31, 1996 and 1995 For the first quarter of 1996, net income for the Consumers Gas Group was $48 million, compared to $49 million for the comparable 1995 period. The decrease in net income is affected by the reversal, during the three months ended March 1995 period, of a gas contract contingency which benefited the 1995 period (see Note 3 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein). Additionally, during the first quarter of 1996, there were higher gas deliveries resulting from customer additions and load conversions to natural gas from alternative fuels and colder weather than experienced in the first quarter of 1995. Earnings for the 12 months ended March 31, 1996 and 1995 Net income for the Consumers Gas Group for the 12 months ended March 31, 1996 totaled $61 million compared to $57 million for the 12 months ended March 31, 1995. The increase in 1996 net income reflects higher gas deliveries and higher operating expenses during the 12-months ended March 1996 period compared to the 12 months ended March 1995 period. Also affecting the comparison of net income for the 12 months ended March 31, 1996 and 1995 periods was the reversal, during the 12 months ended March 1995 period, of previously recorded gas contingencies (see Note 3 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein). Cash Position, Financing and Investing Consumers Gas Group's cash requirements are met by its operating and financing activities. Consumers Gas Group's cash from operations is derived mainly from Consumers' sale and transportation of natural gas. Cash from operations for the first quarters of 1996 and 1995 totaled $98 million and $116 million, respectively. The $18 million decrease primarily reflects the timing of cash payments related to Consumers' operations. Consumers Gas Group primarily uses its operating cash to maintain and expand its gas utility transmission and distribution systems and to retire portions of its long-term debt and pay dividends. Financing Activities: Net cash used in financing activities in the first quarters of 1996 and 1995 totaled $75 million and $92 million, respectively. The $17 million decrease reflects increased cash, primarily resulting from the sale of Trust Originated Preferred Securities, partially offset by increased cash used to pay common stock dividends. Investing Activities: Net cash used in financing activities totaled $25 million and $24 million for the first quarters of 1996 and 1995, respectively. Increased cash used for capital expenditures was principally offset by reduced costs to retire property. Financing and Investing Outlook: Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At March 31, 1996, receivables sold totaled $280 million. Consumers Gas Group's attributed portion of such receivables sold totaled $141 million. For further information, see CMS Energy's MD&A included and incorporated by reference herein. 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 Rate Proceedings, GCR Matters and Environmental Matters, see "Consumers Gas Group Issues" in CMS Energy's MD&A included and incorporated by reference herein. Forward-Looking Information Capital Expenditures: CMS Energy estimates that capital expenditures for the Consumers Gas Group, including new lease commitments, will total $345 million over the next three years. In Millions Years Ended December 31 1996 1997 1998 ---- ---- ---- Gas Utility (a) $121 $107 $102 Michigan Gas Storage 9 3 3 ---- ---- ---- $130 $110 $105 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to Consumers' gas and electric utility businesses. These capital expenditures are estimates prepared for planning purposes and are subject to revision. 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. For further information regarding Consumers Gas Group's forward looking information, see the "Gas Outlook, Competition and Deliveries" and "Other Forward Looking Information" discussions in CMS Energy's MD&A included and incorporated by reference herein. -----END PRIVACY-ENHANCED MESSAGE-----