-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, UFjmjcivhLXOQs9rCzjVr7uqNQvanmYrfjxVKazQn4+Cx2cEFOM4C/SgKEiTekvr fUJNEz+lCOwHRlZui0tCrQ== 0000201533-94-000081.txt : 19941116 0000201533-94-000081.hdr.sgml : 19941116 ACCESSION NUMBER: 0000201533-94-000081 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS POWER CO CENTRAL INDEX KEY: 0000201533 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94559796 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94559797 BUSINESS ADDRESS: STREET 1: FAIRLANE PLZ SOUTH STE 1100 STREET 2: 330 TOWN CENTER DR CITY: DEARBORN STATE: MI ZIP: 48126 BUSINESS PHONE: 3134369261 MAIL ADDRESS: STREET 1: FAIRLANE PLAZA SOUTH, SUITE 1100 STREET 2: 330 TOWN CENTER DRIVE CITY: DEARBORN STATE: MI ZIP: 48126 10-Q 1 BODY OF 10-Q DOCUMENT FOR CMS ENERGY & CONSUMERS 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994 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)436-9261 1-5611 CONSUMERS POWER COMPANY 38-0442310 (A Michigan Corporation) 212 West Michigan Avenue Jackson, Michigan 49201 (517)788-1030 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CMS Energy Corporation, $.01 par value, shares outstanding at October 31, 1994 - 86,302,557 Consumers Power Company, $10 par value, shares outstanding and privately held by CMS Energy Corporation at October 31, 1994 - 84,108,789 2 CMS Energy Corporation and Consumers Power Company Quarterly reports on Form 10-Q to the Securities and Exchange Commission for the Quarter Ended September 30, 1994 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. . . . . . . . . . . . . . 27 Consumers Power Company Report of Independent Public Accountants. . . . . . . . . . . . 44 Consolidated Statements of Income . . . . . . . . . . . . . . . 45 Consolidated Statements of Cash Flows . . . . . . . . . . . . . 46 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 47 Consolidated Statements of Common Stockholder's Equity. . . . . 49 Condensed Notes to Consolidated Financial Statements. . . . . . 50 Management's Discussion and Analysis. . . . . . . . . . . . . . 64 PART II: Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 76 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 79 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3 GLOSSARY Certain terms used in the text and financial statements are defined below. ABATE . . . . . . . . . . . . . . . . Association of Businesses Advocating Tariff Equity ALJ . . . . . . . . . . . . . . . . . Administrative Law Judge Articles. . . . . . . . . . . . . . . Articles of Incorporation Attorney General. . . . . . . . . . . Michigan Attorney General bcf . . . . . . . . . . . . . . . . . Billion cubic feet Big Rock. . . . . . . . . . . . . . . Big Rock Point nuclear plant, owned by Consumers Clean Air Act . . . . . . . . . . . . Federal Clean Air Act as amended on November 15, 1990 CMS Energy. . . . . . . . . . . . . . CMS Energy Corporation CMS Gas Marketing . . . . . . . . . . CMS Gas Marketing Company, a subsidiary of Enterprises CMS Gas Transmission. . . . . . . . . CMS Gas Transmission and Storage Company, a subsidiary of Enterprises CMS Generation. . . . . . . . . . . . CMS Generation Co., a subsidiary of Enterprises CMS Holdings. . . . . . . . . . . . . CMS Midland Holdings Company, a subsidiary of MGL CMS Midland . . . . . . . . . . . . . CMS Midland, Inc., a subsidiary of MGL Consumers . . . . . . . . . . . . . . Consumers Power Company Court of Appeals. . . . . . . . . . . Michigan Court of Appeals Detroit Edison. . . . . . . . . . . . The Detroit Edison Company DNR . . . . . . . . . . . . . . . . . Michigan Department of Natural Resources DOE . . . . . . . . . . . . . . . . . U. S. Department of Energy DSM . . . . . . . . . . . . . . . . . Demand-side management Enterprises . . . . . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy EPA . . . . . . . . . . . . . . . . . Environmental Protection Agency FASB. . . . . . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . . . . . Gas cost recovery GPSLP . . . . . . . . . . . . . . . . Genesee Power Station Limited Partnership GTN . . . . . . . . . . . . . . . . . $250 million CMS Energy General Term Notes, Series A Hydra-Co. . . . . . . . . . . . . . . Independent power production subsidiary of Niagara Mohawk Power Corporation kWh . . . . . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison mcf . . . . . . . . . . . . . . . . . Thousand cubic feet MCV . . . . . . . . . . . . . . . . . Midland Cogeneration Venture MCV Bonds . . . . . . . . . . . . . . Collectively, senior secured lease obligation bonds and subordinated secured lease obligation bonds issued in connection with the leveraged-lease financing of the MCV Facility, and tax-exempt PCRBs MCV Facility. . . . . . . . . . . . . A natural gas-fueled, combined cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . . . . . Midland Cogeneration Venture Limited Partnership MGL . . . . . . . . . . . . . . . . . Midland Group, Ltd., a subsidiary of Consumers MichCon . . . . . . . . . . . . . . . Michigan Consolidated Gas Company Michigan Cogeneration Partners. . . . Michigan Cogeneration Partners Limited Partnership Michigan Gas Storage. . . . . . . . . Michigan Gas Storage Company, a subsidiary of Consumers MMBtu . . . . . . . . . . . . . . . . Million British thermal unit MMCG. . . . . . . . . . . . . . . . . Michigan Municipal Cooperative Group MOAPA . . . . . . . . . . . . . . . . MOAPA Energy Limited Partnership, a wholly owned affiliate of CMS Generation MPSC. . . . . . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . . . . . Megawatts NEIL. . . . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd. NML . . . . . . . . . . . . . . . . . Nuclear Mutual Ltd. NOMECO. . . . . . . . . . . . . . . . NOMECO Oil & Gas Co., a wholly owned subsidiary of Enterprises Notes . . . . . . . . . . . . . . . . Collectively, Series A . . . . . . . . . . . . . . Series A Senior Deferred Coupon Notes of CMS Energy due October 1, 1997 Series B . . . . . . . . . . . . . . Series B Senior Deferred Coupon Notes of CMS Energy due October 1, 1999 NRC . . . . . . . . . . . . . . . . . Nuclear Regulatory Commission O&M . . . . . . . . . . . . . . . . . Other operation and maintenance expense Order 636 . . . . . . . . . . . . . . Orders affecting interstate gas pipelines, including Order 636A and 636B issued by the FERC in 1992, known also as the Restructuring Rule Palisades . . . . . . . . . . . . . . Palisades nuclear plant, owned by Consumers PCRB. . . . . . . . . . . . . . . . . Pollution control revenue bond PPA . . . . . . . . . . . . . . . . . Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990 PSCR. . . . . . . . . . . . . . . . . Power supply cost recovery PUHCA . . . . . . . . . . . . . . . . Public Utility Holding Company Act of 1935 PURPA . . . . . . . . . . . . . . . . Public Utility Regulatory Policies Act of 1978 Revised Settlement Proposal . . . . . Request for approval of a settlement proposal to resolve MCV cost recovery issues, PURPA issues and court remand as filed with the MPSC on July 7, 1992 and amended on September 8, 1992 Risk Service Contract . . . . . . . . Service Contract for Exploration and Exploitation of Hydrocarbons and Block No. 16 of the Ecuadorian Amazon Region, dated January 27, 1986 SEC . . . . . . . . . . . . . . . . . Securities and Exchange Commission Secured Credit Facility . . . . . . . $220 million secured Revolving Credit Facility dated November 30, 1992 SERP. . . . . . . . . . . . . . . . . Supplemental Executive Retirement Plan Settlement Order. . . . . . . . . . . MPSC Order issued March 31, 1993 in MPSC Case Nos. U-10127, U-8871 and others, and the rehearing order issued May 26, 1993, approving with modifications the Revised Settlement Proposal SFAS. . . . . . . . . . . . . . . . . Statement of Financial Accounting Standards Superfund . . . . . . . . . . . . . . Comprehensive Environmental Response, Compensation and Liability Act Trunkline . . . . . . . . . . . . . . Trunkline Gas Company Unsecured Credit Facility . . . . . . $400 million unsecured revolving credit and letter of credit facility dated as of July 29, 1994 Walter. . . . . . . . . . . . . . . . Walter International, Inc., a Texas corporation 6 ARTHUR ANDERSEN LLP Report of Independent Public Accountants To CMS Energy Corporation: We have reviewed the accompanying consolidated balance sheets of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of September 30, 1994 and 1993, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1993, 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 28, 1994, 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, 1993, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Detroit, Michigan, November 10, 1994. 7 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1994 1993 1994 1993 1994 1993 In Millions, Except Per Share Amounts OPERATING REVENUE Electric utility $ 573 $ 578 $1,667 $1,556 $2,188 $2,015 Gas utility 126 123 837 809 1,188 1,172 Oil and gas exploration and production 26 19 64 58 82 79 Independent power production 13 5 29 14 37 11 Natural gas pipeline, storage and marketing 28 32 106 105 143 139 Other 1 1 2 4 3 5 --------------------------------------------------------- Total operating revenue 767 758 2,705 2,546 3,641 3,421 --------------------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 80 83 230 224 299 294 Purchased power - related parties 119 124 359 344 482 469 Purchased and interchange power 37 53 134 105 177 134 Cost of gas sold 71 83 566 564 803 820 Other 163 134 460 394 637 567 --------------------------------------------------------- Total operation 470 477 1,749 1,631 2,398 2,284 Maintenance 46 52 138 152 193 206 Depreciation, depletion and amortization 85 84 272 263 372 363 General taxes 40 43 138 149 182 193 --------------------------------------------------------- Total operating expenses 641 656 2,297 2,195 3,145 3,046 --------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) Electric utility 107 98 281 231 336 249 Gas utility 5 3 106 97 156 130 Oil and gas exploration and production 7 - 11 8 6 8 Independent power production 7 1 12 5 13 (3) Natural gas pipeline, storage and marketing 2 2 8 6 9 8 Other (2) (2) (10) 4 (24) (17) --------------------------------------------------------- Total pretax operating income 126 102 408 351 496 375 --------------------------------------------------------- INCOME TAXES 27 25 97 82 107 77 --------------------------------------------------------- NET OPERATING INCOME 99 77 311 269 389 298 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Income from contractual arrangements (MCV Bonds) - 8 - 24 8 33 Accretion income 3 4 10 11 13 15 Accretion expense (Note 2) (8) (9) (27) (27) (36) (27) Loss on MCV power purchases - settlement - - - - - (520) Other income taxes, net 3 7 9 13 13 190 Other, net 2 7 9 15 10 6 --------------------------------------------------------- Total other income (deductions) - 17 1 36 8 (303) --------------------------------------------------------- FIXED CHARGES Interest on long-term debt 49 54 142 155 191 205 Other interest 5 6 10 17 18 27 Capitalized interest (2) (1) (5) (3) (6) (4) Preferred dividends 7 3 17 8 19 11 --------------------------------------------------------- Net fixed charges 59 62 164 177 222 239 --------------------------------------------------------- NET INCOME (LOSS) $ 40 $ 32 $ 148 $ 128 $ 175 $ (244) ========================================================= AVERAGE COMMON SHARES OUTSTANDING 86 80 86 80 85 80 ========================================================= EARNINGS (LOSS) PER AVERAGE COMMON SHARE $ .46 $ .40 $ 1.73 $ 1.60 $ 2.05 $(3.06) ========================================================= DIVIDENDS DECLARED PER COMMON SHARE $ .21 $ .18 $ .57 $ .42 $ .75 $ .54 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1994 1993 1994 1993 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 148 $ 128 $ 175 $(244) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $37, $36, $48 and $47, respectively) 272 263 372 363 Debt discount amortization 28 27 38 37 Capital lease amortization 25 21 34 32 Deferred income taxes and investment tax credit 61 77 40 (163) Accretion expense (Note 2) 27 27 36 27 Accretion income - abandoned Midland project (10) (11) (13) (15) MCV power purchases - settlement (Note 2) (71) (64) (90) (64) Loss on MCV power purchases - settlement (Note 2) - - - 520 Other (13) (6) (15) - Changes in other assets and liabilities (43) (217) 85 (124) ------ ------ ------ ------ Net cash provided by operating activities 424 245 662 369 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (415) (377) (584) (547) Investments in partnerships and unconsolidated subsidiaries (40) (83) (66) (96) Investments in nuclear decommissioning trust funds (37) (36) (48) (47) Cost to retire property, net (25) (24) (33) (25) Deferred demand-side management costs (5) (42) (15) (54) Proceeds from sale of property 10 1 10 11 Sale of subsidiary - (14) - (14) Reduction of investments in MCV Bonds - 13 309 13 Proceeds from Bechtel settlement - - - 46 Other (5) (1) (8) (2) ------ ------ ------ ------ Net cash used in investing activities (517) (563) (435) (715) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Issuance of preferred stock 193 - 193 - Proceeds from bank loans, notes and bonds 178 667 186 843 Increase (decrease) in notes payable, net 142 349 (163) 160 Issuance of common stock 24 8 148 8 Retirement of bonds and other long-term debt (228) (645) (228) (645) Repayment of bank loans (143) (57) (278) (58) Payment of common stock dividends (49) (34) (64) (43) Payment of capital lease obligations (24) (18) (31) (27) Retirement of common stock (2) (3) (2) (3) ------ ------ ------ ------ Net cash provided by (used in) financing activities 91 267 (239) 235 ------ ------ ------ ------ NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (2) (51) (12) (111) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 28 89 38 149 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 26 $ 38 $ 26 $ 38 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9 CMS Energy Corporation Consolidated Balance Sheets
September 30 September 30 1994 December 31 1993 (Unaudited) 1993 (Unaudited) In Millions ASSETS PLANT AND PROPERTY (At Cost) Electric $5,523 $5,347 $5,225 Gas 1,931 1,862 1,795 Oil and gas properties (full-cost method) 925 845 823 Other 338 294 254 ----------------------------------- 8,717 8,348 8,097 Less accumulated depreciation, depletion and amortization 4,244 4,022 3,967 ----------------------------------- 4,473 4,326 4,130 Construction work-in-progress 279 257 365 ----------------------------------- 4,752 4,583 4,495 ----------------------------------- INVESTMENTS First Midland Limited Partnership (Note 2) 216 213 211 Independent power production 131 115 118 Midland Cogeneration Venture Limited Partnership (Note 2) 71 67 67 Other 50 26 26 ----------------------------------- 468 421 422 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 26 28 38 Accounts receivable and accrued revenue, less allowances of $4, $4 and $4, respectively (Note 8) 112 149 121 Inventories at average cost Gas in underground storage 271 228 284 Materials and supplies 79 74 75 Generating plant fuel stock 33 41 30 Trunkline settlement (Note 3) 30 31 32 Deferred income taxes 20 17 - Investment in MCV Bonds - - 309 Prepayments and other 99 195 100 ----------------------------------- 670 763 989 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 490 491 484 Nuclear decommissioning trust funds (Note 4) 204 165 152 Abandoned Midland project (Note 3) 151 162 165 Trunkline settlement (Note 3) 63 86 93 Other 363 293 235 ----------------------------------- 1,271 1,197 1,129 ----------------------------------- TOTAL ASSETS $7,161 $6,964 $7,035 ===================================
10
September 30 September 30 1994 December 31 1993 (Unaudited) 1993 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION (Note 8) Common stockholders' equity $1,085 $ 966 $ 830 Preferred stock of subsidiary 356 163 163 Long-term debt 2,378 2,405 2,621 Non-current portion of capital leases 118 115 112 ----------------------------------- 3,937 3,649 3,726 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 238 368 247 Notes payable 401 259 564 Accounts payable 152 171 158 Accounts payable - related parties 46 46 51 Accrued taxes 102 233 96 MCV power purchases - settlement (Note 2) 82 82 81 Accrued refunds 37 28 19 Accrued interest 29 40 33 Deferred income taxes - - 16 Other 188 189 172 ----------------------------------- 1,275 1,416 1,437 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 566 509 450 Postretirement benefits 556 540 531 MCV power purchases - settlement (Note 2) 345 391 402 Deferred investment tax credits 184 191 193 Trunkline settlement (Note 3) 63 86 93 Regulatory liabilities for income taxes, net 20 6 51 Other (Note 4) 215 176 152 ----------------------------------- 1,949 1,899 1,872 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,161 $6,964 $7,035 =================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11 CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1994 1993 1994 1993 1994 1993 In Millions COMMON STOCK At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 ------------------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 1,688 1,543 1,672 1,539 1,548 1,539 Common Stock reacquired (1) (3) (2) (3) (2) (3) Common Stock issued 7 8 24 8 148 8 Common Stock reissued 1 - 1 4 1 4 ------------------------------------------------------------------- At end of period 1,695 1,548 1,695 1,548 1,695 1,548 ------------------------------------------------------------------- REVALUATION CAPITAL (Note 7) At beginning of period (1) - - - - - SFAS 115 - unrealized loss, net of tax (2) - (3) - (3) - ------------------------------------------------------------------- At end of period (3) - (3) - (3) - ------------------------------------------------------------------- RETAINED EARNINGS (DEFICIT) At beginning of period (630) (736) (707) (813) (719) (432) Net income (loss) 40 32 148 128 175 (244) Common stock dividends declared (18) (15) (49) (34) (64) (43) ------------------------------------------------------------------- At end of period (608) (719) (608) (719) (608) (719) ------------------------------------------------------------------- TOTAL COMMON STOCKHOLDERS' EQUITY $1,085 $ 830 $1,085 $ 830 $1,085 $ 830 =================================================================== 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 1993 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 most of the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) transmission and storage of natural gas. CMS Energy uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating revenue. For the three, nine and 12 month periods ended September 30, 1994, equity earnings were $10 million, $21 million and $25 million, respectively and $4 million, $13 million and $10 million for the three, nine and 12 month periods ended September 30, 1993. In September 1994, management announced that Consumers is being internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, effective January 1, 1995, while not affecting Consumers' or CMS Energy's consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will ultimately, in the long term, result in lower overall costs. 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 for 15- and 20-year periods, respectively. At September 30, 1994, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership Consumers' obligations for purchase of contract capacity from the MCV Partnership under the PPA since 1992 follows: 1995 and Year 1992 1993 1994 thereafter - ---- ---- ----- ----- ---------- MW 915 1,023 1,132 1,240 Prior to 1993, the MPSC allowed Consumers to recover costs of power purchased from the MCV Partnership based on delivered energy for up to 840 MW at rates less than Consumers paid. In March 1993, the MPSC approved, with modifications, the Revised Settlement Proposal which had been co- sponsored by Consumers, the MPSC staff and 10 small power and cogeneration developers. These parties accepted the Settlement Order, and the MCV Partnership confirmed that it did not object to the modifications. ABATE and the Attorney General have filed claims of appeal of the Settlement Order with the Court of Appeals. The Settlement Order determined the cost of power purchased from the MCV Partnership that Consumers can recover from its electric retail customers and significantly reduced the amount of future underrecoveries for these power costs. Effective January 1993, the Settlement Order allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity from the MCV Partnership. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be competitively bid into Consumers' next solicitation for power or, if necessary, utilized for current power needs with a prudency review and a cost recovery determination in annual PSCR cases. In either instance, the MPSC would determine the levels of recovery from customers for the power purchased. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity, the cost of which Consumers is currently not authorized to recover from retail customers. The PPA provides that Consumers is to pay to the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. Consumers is scheduling deliveries of energy from the MCV Partnership whenever it has energy available up to hourly availability limits, or "caps," for the 915 MW of capacity authorized for recovery in the Settlement Order. Consumers can recover an average 3.62 cents per kWh capacity charge and the prescribed energy charges associated with the scheduled deliveries within the caps, whether or not those deliveries are scheduled on an economic basis. Through December 1997, there is no cap applied during on-peak hours to Consumers' recovery for the purchase of capacity made available within the 915 MW authorized. Recovery for purchases during off-peak hours is capped at 82 percent in 1994 and 1995, 84 percent in 1996 and 1997, increasing to 88.7 percent in 1998 and thereafter at which time the 88.7 percent cap is applicable during all hours. For all economic energy deliveries above the caps to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the corresponding variable energy charge. In December 1992, Consumers recognized an after-tax loss of $343 million for the present value of estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss included management's best estimates regarding 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. Except for adjustments to the above loss to reflect the after-tax time value of money through accretion expense, no additional losses are expected unless actual future experience materially differs from management's estimates. Because the calculation of the 1992 loss depended in part upon estimates of future unregulated sales of energy to third parties, a more conservative or risk-free investment rate of 7 percent was used to calculate $188 million of the total $343 million after-tax loss. The remaining portion of the loss was calculated using an 8.5 percent discount rate reflecting Consumers' incremental borrowing rate as required by SFAS 90, Regulated Enterprises- Accounting for Abandonments and Disallowances of Plant Costs. The after- tax expense for the time value of money for the loss is estimated to be $24 million in 1994, and various lower levels thereafter, including $22 million in 1995 and $20 million in 1996. Although the settlement loss was recorded in 1992, Consumers' continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries, including fixed energy charges (in connection with a dispute with the MCV Partnership discussed below), which are being escrowed, totaled $51 million for the first nine months of 1994. Consumers believes there is and will be a market for the resale of capacity purchases from the MCV Partnership above the MPSC-authorized level. However, if Consumers is unable to sell any capacity above the current MPSC-authorized level, future additional after-tax losses and after-tax cash underrecoveries could be incurred. Consumers' estimates of its 1994 and future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are as follows: After-tax, In Millions 1994 1995 1996 1997 1998 - --------------------------------------------------------------------- Expected cash underrecoveries $65 $65 $62 $61 $ 8 Possible additional underrecoveries and losses (a) $ 5 $20 $20 $22 $72 ===================================================================== (a) If unable to sell any capacity above the MPSC's authorized level. At December 31, 1993, and September 30, 1994, the after-tax, present value of the Settlement Order liability totaled $307 million and $277 million, respectively. The reduction in the Settlement Order liability during 1994 reflects after-tax cash underrecoveries related to capacity totaling $47 million, partially offset by after-tax accretion expense of $17 million. The PPA, while providing for payment of a fixed energy charge, contains a "regulatory out" provision which permits Consumers to reduce the fixed energy charges payable to the MCV Partnership throughout the entire contract term if Consumers is not able to recover these amounts from its customers. In connection with the MPSC's approval of the Revised Settlement Proposal, Consumers and the MCV Partnership are engaged in arbitration proceedings under the PPA to determine whether Consumers is entitled to exercise its regulatory out regarding fixed energy charges on the portion of available MCV capacity above the current MPSC-authorized levels. An arbitrator acceptable to both parties has been selected and hearings are being conducted. If the arbitrator determines that Consumers cannot exercise its regulatory out, Consumers would be required to make these fixed energy payments to the MCV Partnership even though Consumers may not be recovering these costs. The arbitration proceedings will also determine who is entitled to the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to settlement. Although Consumers believes its position on arbitration is sound and intends to aggressively pursue its right to exercise the regulatory out, management cannot predict the outcome of the arbitration proceedings or any possible settlement of the matter. Accordingly, losses were recorded prior to 1993 for all fixed energy amounts at issue in the arbitration. At September 30, 1994, $25 million has been escrowed by Consumers and is included as a non-current asset in Consumers' financial statements. In December 1993, Consumers made an irrevocable offer to pay through September 15, 2007, fixed energy charges to the MCV Partnership on all kWh delivered by the MCV Partnership to Consumers from the contract capacity in excess of 915 MW, which represents a portion of the fixed energy charges in dispute. Consumers made the offer in connection with the sale of its remaining $309 million investment in the MCV Bonds which was completed in 1993. The lessors of the MCV Facility have filed a lawsuit in federal district court in New York against CMS Energy, Consumers and CMS Holdings. It alleges breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of the arbitration between the MCV Partnership and Consumers discussed above. The action alleges damages in excess of $1 billion and seeks injunctive relief relative to Consumers' payments of the fixed energy charges. CMS Energy and Consumers believe that at all times they and CMS Holdings have conducted themselves properly and that the action is without merit. It appears from the complaint that a significant portion of the alleged damages represent fixed energy charges in dispute in the arbitration. CMS Energy and Consumers have requested that the lawsuit be dismissed for lack of jurisdiction and have commenced a lawsuit in Midland, Michigan, to address these issues. While management believes that the possibility of the alleged damages being awarded is remote, CMS Energy and Consumers are unable to predict the outcome of this issue. In addition, CMS Holdings has filed a lawsuit in the circuit court of Jackson, Michigan, seeking reimbursement of $7 million of certain tax indemnification payments made to its partners in the FMLP and owed to CMS Holdings. Consumers is unable to predict the outcome of this issue. In May 1994, Consumers was notified by the MCV that it was initiating arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, is estimated by the MCV Partnership to total $8 million annually. The parties are in the process of selecting an arbitrator and establishing a schedule for arbitration. Consumers cannot predict the timing and outcome of these proceedings. In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility being developed by Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to substitute 65 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. The proposed substitution of capacity which would start in 1997, the year the coal-fired cogeneration facility was scheduled to begin operations, represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for a coal-fired cogeneration facility. As a result, Consumers recorded a regulatory asset of $30 million, which it believes will ultimately be recoverable in rates. PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. Consumers also agreed not to appeal any MCV- related issues raised in future orders for these plan cases and related reconciliations to the extent those issues are resolved by the Settlement Order. In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992 confirming Consumers' recovery for the purchase of 840 MW from the MCV in accordance with the MPSC plan case order and allowing recovery for the purchase of power above 840 MW based on replacement power costs. The MPSC subsequently confirmed the recovery of MCV-related costs consistent with the Settlement Order as part of the 1993 and 1994 PSCR plan case orders. 3: Rate Matters Electric Rate Case In May 1994, the MPSC issued an order, granting Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, higher depreciation and postretirement benefits computed under SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, and the continuation of certain demand-side management programs at reduced levels. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consequently, residential customers were allocated $40 million, which is 70 percent of the rate increase. In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104.4 million to $139.5 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. The filing addresses the ratemaking effect of jurisdictional sales losses by assuming adoption of a proposed special nonjurisdictional rate to large, qualifying industrial customers as requested by Consumers in an earlier June 1994 filing with the MPSC. An alternative approach presented would use the MCV contract capacity above 915 MW for jurisdictional electric customers and offer discounted jurisdictional tariffs. Consumers has also requested that the MPSC eliminate the rate cross-subsidization of residential rates in a two-step adjustment. In addition, Consumers proposes to eliminate all DSM expenditures after April 1995 and further requests MPSC approval to recover all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington. Special Rates: In June 1994, Consumers also filed a request with the MPSC, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers proposes to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. To serve these customers, Consumers would use power purchases from the MCV Partnership which exceed the 915 MW currently recoverable from electric retail customers. Certain other parties have subsequently filed various alternative proposals. The MPSC has adopted a hearing schedule that calls for briefs to be filed in December 1994. A final order is expected in the first quarter of 1995. Abandoned Midland Project: In 1984, Consumers abandoned construction of its unfinished nuclear power plant located in Midland, Michigan, and subsequently took a series of write-downs. In 1991, the MPSC issued orders permitting recovery of a portion of the plant and Consumers began collecting $35 million pretax annually for the next 10 years. Several parties, including the Attorney General, filed claims of appeal with the Court of Appeals regarding MPSC orders issued in 1991 that specified the recovery of abandoned investment. Oral arguments took place before the Court of Appeals in October 1994. Electric Demand-side Management: As a result of settlement discussions regarding demand-side management and an MPSC order in 1991, Consumers agreed to spend $65 million over two years on demand-side management programs. Based on the MPSC's determination of Consumers' effectiveness in implementing these programs, Consumers' future rate of return on common equity may be adjusted either upward by up to 1 percent or downward by up to 2 percent. This adjustment, if implemented, would be applied to Consumers' retail electric tariff rates and be in effect for one year following reconciliation hearings with the MPSC. The estimated revenue effects of the potential adjustment range from an $11 million increase to a $22 million decrease. The proceedings before the MPSC have started and based on the criteria set out in the demand-side management settlement agreement approved by the MPSC in 1992, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of the full $11 million incentive. Accordingly, during the second quarter of 1994, Consumers recognized $11 million in revenue, related to its demand-side management program. A final order from the MPSC is expected by mid-1995. In October 1993, Consumers completed the customer participation portion of these DSM programs. In May 1994, as part of Consumers' electric rate case, the MPSC issued an order that allowed Consumers to recover demand- side management expenditures which exceeded $65 million. The order also authorized Consumers to continue certain programs in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from its customers in accordance with an accounting order issued by the MPSC in September 1992. The unamortized balance of deferred costs at September 30, 1994 was $71 million. PSCR Issues On November 9, 1994, the ALJ presiding over the 1993 PSCR reconciliation proceeding issued a proposal for decision in this case. Several issues were included in this proposal for decision including issues related to a planned refueling and maintenance outage which Consumers began at Palisades in June 1993. Following several required, unanticipated repairs that extended the outage, the plant returned to service in early November. In addition, from mid-February through mid-June 1994, Palisades was temporarily taken out of service to repair valve-leakage and conduct other needed inspections and repairs. Recovery of replacement power costs incurred by Consumers during these outages were reviewed during the 1993 PSCR reconciliation of actual costs and revenues to determine the prudency of actions taken during the outages. The 1994 outages will be reviewed as part of that years reconciliation proceedings. Net replacement power costs during the outages were approximately $180,000 per day above the cost of fuel Consumers would have otherwise incurred when the plant is operating. Consumers had conceded that one day of the 1993 outage was inappropriate, while the MPSC staff has recommended a 20-day disallowance. The ALJ proposed a disallowance of 22 days of outage totaling $4.2 million. CMS Energy had previously established a reserve for this potential disallowance. See Note 4 for information regarding the NRC's review of Palisades' performance. Gas Rates In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits computed under SFAS 106 against earnings over the last six months of 1994. This charge against earnings will partially offset costs related to state property taxes which have been reduced. The agreement was reached in response to an assertion by the MPSC staff that gas utility business earnings for 1993 were in excess of the currently authorized level. The agreement also provides for an additional $4 million of 1995-related SFAS 106 costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers committed to file a gas rate case before December 31, 1994, that will, among other things, incorporate cost increases, including costs for postretirement benefits computed under SFAS 106, into its retail gas rates. A final order should be received approximately 9 to 12 months after the request is filed. No assurance can be given as to the level of rates which will be authorized by the MPSC. Consumers' gas distribution business is currently authorized to earn a 13.25 percent rate of return on equity. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. GCR Issues The MPSC, in a February 1993 order, provided that the price payable to certain intrastate gas producers by Consumers be reduced prospectively. In a related case, Consumers was not allowed to recover $13 million of gas supply costs incurred prior to February 8, 1993. Consumers previously had accrued a loss for this issue in excess of the disallowed amount. Future disallowances are not anticipated, unless the remaining appeals filed by the intrastate producers are successful. In 1992, the FERC approved a settlement involving Consumers, Trunkline and certain other parties, which resolved numerous claims and proceedings concerning Trunkline liquified natural gas costs. The settlement represents significant gas cost savings for Consumers and its customers in future years. As part of the settlement, Consumers will not incur any transition costs from Trunkline as a result of FERC Order 636. In 1992, Consumers recorded a liability and regulatory asset for the principal amount of payments to Trunkline over a five-year period. In May 1993, the MPSC approved a separate settlement agreement that provides Consumers with full recovery of these costs over a five-year period. At September 30, 1994, Consumers' remaining liability and regulatory asset were $93 million. Other A dispute involving pricing under contracts Consumers had with eight direct gas suppliers has been resolved. The dispute revolved around whether the price Consumers pays Trunkline for gas was the proper reference price for these eight gas supply contracts. Consumers and seven of the suppliers have agreed to enter into new contracts, at negotiated rates, with initial terms ranging from one to three years. Consumers and the remaining supplier agreed to terminate their existing contract. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 4: Commitments and Contingencies Ludington Pumped Storage Plant In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for the continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve recreational areas and convey undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to MPSC approval of Consumers being permitted to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve a lawsuit filed by the Attorney General in 1986 on behalf of the State of Michigan in the Circuit Court of Ingham County, seeking damages from Consumers and Detroit Edison for injuries to fishery resources because of the operation of the Ludington plant. The state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, with the latter amount to be adjusted upon installation of "adequate" fish barriers and other changed conditions. Since 1986 the parties have continued to dispute, in various courts, the amount of actual damages as well as the best alternative to mitigate future damages. Environmental Matters 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 information currently known by management, Consumers believes that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur clean-up costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers has prepared plans for remedial investigation/feasibility studies for several of these manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved two of three plans for remedial investigation/feasibility studies submitted by Consumers and is currently reviewing the third. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to remedial action for all 23 sites of between $40 million and $140 million. These estimates are based on undiscounted 1994 costs. At September 30, 1994, Consumers has accrued a liability for $40 million, representing the minimum amount in the range. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial costs for the sites. Consumers believes that remedial costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial costs for another Michigan gas utility as part of a gas rate case. In that proceeding, the MPSC determined that prudent investigation and remedial costs could be deferred and amortized over 10-year periods. In order to be recovered in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC stated that the length of the amortization period may be reviewed from time to time, but any revisions would be prospective. The order further provided that the prudency review would include a review of the utility's attempts to obtain reimbursement from others. The MPSC has also approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remediation costs. Accordingly, Consumers has recorded a regulatory asset for the same amount as the accrued liability for anticipated recovery of these investigation and remedial clean-up costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. Consumers plans to seek recovery of remedial action costs in its gas rate case to be filed in 1994. Included in the 1990 amendments to the federal Clean Air Act are provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. All of Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in 2000. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. The Clean Air Act's provisions require Consumers to make capital expenditures estimated to total $74 million through 1999 for completed, in-process and possible modifications at coal-fired units based on current regulations. Management believes that Consumers' annual operating costs will not be materially affected. In 1993, Consumers experienced increases in complaints relating to so- called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electric systems are diverted from their intended path. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of farm equipment, can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers. A complaint seeking certification as a class action suit was filed against Consumers in a local county circuit court in 1993. The complaint alleged the existence of a purported class that incurred damages in excess of $1 billion, primarily to certain livestock owned by the purported class, as a result of stray voltage from electricity being supplied by Consumers. Consumers believes the allegations to be without merit, and in March 1994, the circuit judge hearing the complaint refused to grant class action status to the suit. In April 1994, the plaintiffs in this action appealed the matter to the Court of Appeals. Consumers believes that the various claims are different enough to warrant separate trials, and that the circuit court's denial of class-action status will be upheld. A number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At October 31, 1994, Consumers had 88 separate stray voltage lawsuits pending. Palisades Plant In April 1993, the NRC approved the design of the dry spent fuel storage casks now being used by Consumers at Palisades. In May 1993, the Attorney General and certain other parties commenced litigation to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. The courts have declined to prevent such use and have refused to issue temporary restraining orders or stays. Several appeals relating to this matter are now pending at the U.S. Sixth Circuit Court of Appeals where oral argument was held during October 1994. As of October 31, 1994, Consumers had loaded seven dry storage casks with spent nuclear fuel and expects to load six additional casks prior to Palisades' 1995 refueling. If Consumers is unable to continue to use the casks as planned, significant costs could be incurred, including replacement power costs during any resulting plant shutdown and costs to remove the spent fuel from the dry casks. If Consumers cannot store fuel on-site in the dry casks, and if no off-site storage is available, Palisades could be forced to cease operation as early as mid- 1995, when all fuel must be off-loaded for a ten-year inspection of the reactor vessel. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and concluded that the pad location is acceptable to support the casks. In August 1994, Consumers announced that it would unload and replace one of the dry fuel storage casks at Palisades that contain spent nuclear fuel. In examining radiographs during a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although testing has not disclosed any leakage from the cask, Consumers has nevertheless decided to remove the spent fuel from this cask and insert it in another cask. Consumers has examined the radiographs for all of its casks, including the casks containing spent fuel, and has found all other welds to be acceptable. In November 1993, Palisades returned to service following a planned refueling and maintenance outage that had been extended due to several unanticipated repairs (see Note 3). The results of an NRC review of Consumers' performance at Palisades published shortly after the planned outage showed a decline in performance ratings for the plant. In order to provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection evaluated all aspects of nuclear plant operation and management. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the problems at Palisades. The NRC did not place Palisades on either the NRC's "Troubled" or "Declining Performance" list. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report, which included both short- and long-term enhancements planned for Palisades to improve performance. Attaining and maintaining acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned levels of expenditures. As the holder of a license to operate a pressurized-water reactor nuclear power plant, Consumers is required by NRC regulations to calculate and report to the NRC, values relating to the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. If the results of the calculation indicate that a temperature screening criterion established in the regulations will be exceeded, Consumers must submit a safety analysis to determine what, if any, plant modifications are necessary to prevent potential reactor vessel failure as a result of postulated pressurized thermal shock events if continued operation beyond the screening criterion value is allowed, and the NRC will then decide whether to permit continued operation in excess of the criterion. Consumers had previously submitted a calculation indicating that the Palisades reactor vessel would not exceed the screening criterion before the year 2004. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed the screening criterion prior to 2004. Consumers is continuing to analyze this data and will report its conclusions to the NRC in late November. Consumers is also continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. Nuclear Decommissioning Consumers collects estimated costs to decommission (decontamination and dismantlement) its two nuclear plants through a monthly surcharge to electric customers which currently totals $45 million annually. Consumers currently estimates decommissioning costs of $220 million and $423 million, in 1994 dollars, for the Big Rock and Palisades nuclear plants, respectively. Amounts collected from electric retail customers and deposited in trusts, and earnings on the trusts, which are credited to accumulated depreciation, are estimated to accumulate $425 million and $1.2 billion for decommissioning Big Rock and Palisades, respectively. The trust funds, which are estimated to earn 7.1 percent, will be used for decommissioning Big Rock and Palisades at the end of their respective license periods in 2000 and 2007. In order to meet NRC requirements for decommissioning, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades which assumed that each plant site will be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. Consumers is currently updating those estimates, and expects that the decommissioning costs may increase, principally due to the unavailability of low- and high-level radioactive waste disposal facilities. The lack of an available disposal site could result in the need to maintain the facilities in a mothballed state for a significant period of time after retirement. Consumers expects to file updated decommissioning estimates with the MPSC on or before March 31, 1995. At September 30, 1994, Consumers had an investment in nuclear decommissioning trust funds of $204 million for future decommissioning. The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the FASB has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed: annual provisions for decommissioning could increase; estimated costs for decommissioning could be recorded as a liability rather than as accumulated depreciation; and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. Nuclear Insurance Consumers, as a member of NML and NEIL and through the purchase of other forms of nuclear insurance, maintains coverage against property damage, debris removal, personal injury liability and other losses for damages that could be incurred at its nuclear generating facilities. In the event of covered losses at its own or any other participating nuclear facility, Consumers could be subject to the following maximum assessments: $18 million in any one year under the NML and NEIL policies; $79 million per incident under other forms of nuclear insurance and financial protection, limited to a maximum payment of $10 million per incident in any one year; and $6 million in the event of claims under insurance provisions of the master workers program. Consumers considers the possibility of these assessments to be remote. For further information regarding Consumers' nuclear insurance, see Item 1. Business, contained in the 1993 Form 10-K of Consumers. Commitments for Coal and Gas Supplies Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1994 to 2004. Generally, Consumers contracts for approximately 70% of its annual coal requirements which in 1993 totalled approximately $260 million. Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs. Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1994 to 1999. Generally, Consumers contracts for approximately 75% of its annual gas requirements which in 1993 totalled approximately $680 million. Consumers supplements its long-term contracts with spot- market purchases to fulfill its gas needs. Capital Expenditures CMS Energy's estimated capital expenditures, including demand-side management and new lease commitments, are $863 million for 1994, $733 million for 1995 and $645 million for 1996. Public Utility Holding Company Act Exemption CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. Other 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. The ultimate effect of the proceedings discussed in this note is not expected to have a material impact on CMS Energy's financial position or results of operations. 5: Effects of the Ratemaking Process Consumers is subject to the provisions of SFAS 71, Accounting for the Effects of Certain Types of Regulation. Regulatory assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. The following regulatory assets (liabilities) which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets: In Millions Sept. 30, 1994 Dec. 31, 1993 Sept. 30, 1993 - --------------------------------------------------------------------- Postretirement benefits $ 509 $ 510 $ 503 Income taxes 180 189 154 Abandoned Midland project 151 162 165 Trunkline settlement 93 117 125 Demand-side management - deferred costs 71 71 63 Environmental clean-up 40 - - DOE - decommissioning uranium enrichment facility 32 33 33 Power purchase termination 30 - - Other 32 39 39 -------------------------------------- Total regulatory assets $1,138 $1,121 $1,082 ===================================================================== Income taxes $ (199) $ (195) $ (205) Demand-side management - deferred revenue (19) (17) (17) Other (1) - - -------------------------------------- Total regulatory liabilities $ (219) $ (212) $ (222) ===================================================================== Consumers has MPSC orders to recover virtually all of its regulatory assets through future rates and anticipates MPSC approval for recovery of the remaining amounts. 6: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with original maturities of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1994 1993 1994 1993 - --------------------------------------------------------------------- Cash transactions - ----------------- Interest paid (net of amounts capitalized) $126 $157 $163 $207 Income taxes paid (net of refunds) 24 37 19 43 Non-cash transactions - --------------------- Nuclear fuel placed under capital lease $ 18 $ 23 $ 24 $ 27 Other assets placed under capital leases 11 28 12 46 Capital leases refinanced - 42 - 42 Assumption of debt - - - 15 ===================================================================== 7: Financial Instruments On January 1, 1994, CMS Energy adopted SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, requiring accounting for investments in debt securities to be held to maturity at amortized cost; otherwise debt and marketable equity securities are recorded at fair value, with any unrealized gains or losses included in earnings if the securities are for trading purposes or as a separate component of stockholders' equity if the security is available for sale. CMS Energy has nuclear decommissioning and SERP investments classified as available for sale securities with an amortized cost of $227 million and a fair market value of $223 million. An unrealized loss on available for sale securities of $2 million, $3 million and $3 million, net of taxes, is included in common stockholders' equity for three, nine and 12 months ended September 30, 1994. CMS Energy also has certain equity investments classified as trading securities with a carrying cost of $11 million and a fair market value of $15 million. An unrealized gain (loss) on trading securities of $1 million, $3 million and $3 million, net of taxes, is included in other income for three, nine and 12 months ended September 30, 1994. 8: Capitalization and Other CMS Energy In January 1994, CMS Energy filed a registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. The net proceeds are being used to reduce the amount of Notes outstanding and for general corporate purposes. As of November 4, 1994, CMS Energy had issued approximately $80 million of GTNs with interest rates ranging from 6.75 to 7.75 percent and reduced the principal amount of Notes outstanding by $95 million. On July 29, 1994, CMS Energy refinanced its Secured Credit Facility with a new $400 million Unsecured Credit Facility and extended the termination date to June 30, 1997. At October 31, 1994, $129 million was outstanding at a weighted average interest rate of 6.4 percent. On October 6, 1994, CMS Energy filed a shelf registration statement for the offering and issuance of up to two million shares of common stock. As described in the SEC filing, the shares may be offered and issued in connection with acquisitions of energy-related businesses and assets. Consumers Power Debt In October 1994, the FERC granted Consumers' request for authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. This is the same amount of short-term debt currently authorized through 1994. Consumers has a $470 million facility to finance seasonal working capital requirements and unsecured, committed lines of credit aggregating $185 million. At September 30, 1994, Consumers had $300 million and $101 million, respectively, outstanding under these facilities. Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, Articles and the need for regulatory approvals in compliance with applicable state and federal law. In the first quarter of 1994, Consumers redeemed first mortgage bonds totaling $100 million. These redemptions completed Consumers' commitment to the MPSC, under the 1993 authorization to issue first mortgage bonds, to refinance certain long- term debt. In January 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for a fixed-rate interest of 5.2 percent on the latest maturing $250 million of the then remaining $500 million obligation under its long-term credit agreement. The swap agreement has the same term as the debt agreement and had the effect of increasing the weighted average interest rate to 4.8 percent from 3.9 percent for the 12 month period ended December 31, 1993. The swap agreement will amortize beginning in February 1995 and terminate in May 1996. At September 30, 1994, the outstanding balance of Consumers' long-term credit agreement totaled $328 million. In November 1994, subsequent to MPSC authorization, Consumers entered into a new $400 million unsecured, variable rate, five- year term loan and subsequently used the proceeds to refinance the long- term credit agreement discussed above and to reduce short-term borrowings. Other Consumers has an established $500 million trade receivables purchase and sale program. At September 30, 1994, receivables sold under the agreement totaled $210 million as compared to $285 million at December 31, 1993. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In March 1994, Consumers issued and sold 8 million shares of Consumers' $2.08 Class A Preferred Stock (cumulative, without par value) with a stated annual dividend rate of 8.32 percent. Net proceeds to Consumers were $193 million. The stock is redeemable at the option of Consumers, on or after April 1, 1999, at a redemption price of $25 per share plus accrued dividends. In May 1994, Consumers received a $100 million equity investment from CMS Energy. The investment was consistent with CMS Energy's plan to improve Consumers' capital structure and was recognized and included in the capitalization structure employed by the MPSC as part of Consumers' most recent electric rate order. At December 31, 1992, Consumers effected a quasi-reorganization, an elective accounting procedure in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. This action had no effect on CMS Energy's consolidated financial statements. As a result of the quasi-reorganization and subsequent accumulated earnings, Consumers resumed paying common stock dividends during 1993. Consumers has continued paying common stock dividends in 1994, including $16 million attributable to 1993 earnings, and $97 million, attributable to current year earnings through September 30, 1994. In addition, in October 1994, Consumers declared a $36 million common stock dividend payable in November 1994. In January 1994, Consumers amended its nuclear fuel lease to include fuel previously owned at Big Rock and further increased the maximum amount of nuclear fuel that could be leased to $80 million. At September 30, 1994, $61 million was under lease. In November 1992, the FASB issued SFAS 112, Employers' Accounting for Postemployment Benefits, which Consumers adopted January 1, 1994. Consumers pays for several postemployment benefits, the most significant being workers' compensation. Because Consumers' postemployment benefit plans do not vest or accumulate, the standard did not materially impact Consumers' financial position or results of operations. NOMECO In June, 1994, NOMECO executed a non-binding letter of intent which calls for a newly-formed subsidiary of CMS Energy to merge with and into Walter, thereby making Walter a wholly-owned subsidiary of CMS Energy. Walter is a privately held corporation primarily engaged in international oil and gas exploration, development and production and activities related thereto. The letter of intent has expired pursuant to its terms. Nonetheless, NOMECO expects that this transaction will be completed in late 1994 or early 1995. The letter of intent contemplated that the holders of Walter common stock would receive shares of CMS Energy Common Stock with an aggregate market value of approximately $25 million. In November 1993, NOMECO amended the terms of its revolving credit agreement and increased the amount to $110 million. At September 30, 1994, $90 million of revolving credit debt was outstanding at a weighted average interest rate of 6.3 percent. NOMECO has hedging arrangements which are used to reduce the risk of price fluctuations for its spot sales of oil and gas. These arrangements limit potential gains/losses from any future decrease/increase in the spot prices. NOMECO has one arrangement which is used to fix the price that NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed, escalated price starting at $2.82 per MMBtu in 2001. The settlement periods are each a one-year period ending December 31, 2001 through 2006 on 3.65 MMBtu. If the "floating price," essentially the then current Gulf Coast spot price, for a period is higher than the "fixed price," the seller pays NOMECO the difference, and vice versa. If a party's exposure at any time exceeds $2 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $2 million and up to $10 million, which is the maximum exposure under this hedge arrangement. At December 31, 1993 and September 30, 1994, the seller had arranged a letter of credit in NOMECO's favor for $10 million. NOMECO also periodically enters into oil and gas price hedging arrangements to mitigate its exposure to price fluctuations on the sale of crude oil and natural gas. As of December 31, 1993, NOMECO was party to gas price collar contracts on 7.3 bcf of gas for the delivery months of January through December 1994 at prices ranging from $2.05 to $2.30 per MMBtu. Also, NOMECO has contracts on 7.3 bcf of gas for the delivery months of January through December 1995 at prices ranging from $2.05 to $2.35 per MMBtu. These hedging arrangements are accounted for as hedges; accordingly, any gains or losses are deferred and recognized on the settlement dates. As of December 31, 1993 and September 30, 1994, the fair value of these hedge arrangements was not materially different than the book value. CMS Generation In May 1994, MOAPA redeemed $22 million of Clark County, Nevada tax-exempt bonds. The bonds had been included in current maturities on the balance sheet and the funds held in a trust account had been included as other current assets. The bonds were issued in 1990 for the purpose of providing partial funding for the development of a proposed tires-to- energy solid waste disposal and resource recovery facility. The bonds were redeemed due to the Nevada Public Service Commission's rejection of a signed power purchase agreement for the facility. Other In October 1994, the FASB issued SFAS 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, which amends SFAS 114, Accounting by Creditors for Impairment of a Loan. SFAS 114 provided two alternatives for income recognition to be used for changes in the net carrying amount of an impaired loan subsequent to the initial measure of impairment. The creditor could recognize all changes in the net carrying amount of the loan as an adjustment to bad-debt expense, or the creditor could accrue interest on the net carrying amount of the impaired loan and recognize other changes as an adjustment to bad-debt expense. SFAS 118 allows the use of any existing methods for recognizing interest income on impaired loans. In October 1994, the FASB also issued SFAS 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, which requires added disclosures about the amounts, nature and terms of derivatives. Derivatives are financial agreements whose returns are linked to or derived from the performance of underlying assets such as bonds, currencies or commodities. CMS Energy is continuing to study SFAS 118 and SFAS 119, which are effective for year-end 1994 financial statements, but does not expect either statement will have a material impact on CMS Energy's financial position or results of operations. 27 CMS Energy Corporation Management's Discussion and Analysis (MD&A) This MD&A should be read along with the MD&A in the 1993 Form 10-K of CMS Energy. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving most of the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas. In September 1994, management announced that Consumers is being internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, effective January 1, 1995, while not affecting Consumers' or CMS Energy's consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will ultimately, in the long term, result in lower overall costs. In conjunction with the internal reorganization of Consumers into separate electric and gas strategic business units, CMS Energy is considering the possible future issuance of equity securities whose financial characteristics would be tied to the performance of one or the other of the business units. No final decision has been made to issue any such securities, and no assurance can be given as to whether or in what form such securities may be issued. Consolidated earnings for the quarters ended September 30, 1994 and 1993 Consolidated net income totaled $40 million or 46 cents per share for the third quarter of 1994, compared to $32 million or 40 cents per share for the corresponding third quarter of 1993. The increased net income reflects increased electric utility sales resulting from Michigan's continuing economic growth, increased revenue from the May 1994 electric rate increase and additional earnings from the growth of non-utility businesses. Consolidated earnings for the nine months ended September 30, 1994 and 1993 Consolidated net income totaled $148 million or $1.73 per share for the nine months ended September 30, 1994, compared to $128 million or $1.60 per share for the nine months ended September 30, 1993. The increased net income reflects increased electric utility sales resulting from increased motor vehicle production, increased levels of employment and the overall strong economic expansion in Consumers' service territory. Also, the increased net income reflects increased gas utility deliveries due largely to record cold winter weather. Furthermore, net income benefited from a mid-May 1994 electric rate increase and additional earnings from the growth of non-utility businesses. Consolidated earnings for the 12 months ended September 30, 1994 and 1993 Consolidated net income totaled $175 million or $2.05 per share for the 12 months ended September 30, 1994, compared to a net loss of $244 million or $3.06 per share for the 12 months ended September 30, 1993. The increased net income reflects the impact of the 1993 Settlement Order related to the cost recovery for power purchases from the MCV Partnership, the benefit of increased electric utility sales and gas utility deliveries. Furthermore, net income benefited from the impact of a mid-May 1994 electric rate increase and additional earnings from the growth of non-utility businesses. Cash Position, Financing and Investing CMS Energy's primary ongoing source of operating cash is dividends from its principal subsidiaries. CMS Energy's consolidated operating cash requirements are met by its operating and financing activities. CMS Energy's consolidated cash from operations was derived mainly from Consumers' sale and transportation of natural gas and its generation, sale and transmission of electricity and from NOMECO's sale of oil and natural gas. Consolidated cash from operations for the first nine months of 1994 primarily reflects the benefits of Consumers' increased electric sales and significantly higher gas deliveries. Financing Activities In January 1994, CMS Energy filed a shelf registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. The net proceeds are being used to reduce the amount of Notes outstanding and for general corporate purposes. As of November 4, 1994, CMS Energy had issued approximately $80 million of GTNs with interest rates ranging from 6.75 to 7.75 percent and reduced the principal amount of Notes outstanding by $95 million. On July 29, 1994, CMS Energy refinanced its Secured Credit Facility with a new $400 million Unsecured Credit Facility and extended the termination date to June 30, 1997. At October 31, 1994, $129 million was outstanding at a weighted average interest rate of 6.4 percent. On October 6, 1994, CMS Energy filed a shelf registration statement for the offering and issuance of up to two million shares of common stock. As described in the SEC filing, the shares may be offered and issued in connection with acquisitions of energy-related businesses and assets. As a result of the 1992 quasi-reorganization (see Note 8 of the Condensed Notes to Consolidated Financial Statements), and subsequent accumulated earnings, Consumers resumed paying common stock dividends during 1993. Consumers has continued paying common stock dividends in 1994, including $16 million attributable to 1993 earnings, and $97 million attributable to current year earnings through September 30, 1994. In October 1994, Consumers declared a $36 million common stock dividend payable in November 1994. During February and March 1994, Consumers continued to reduce its future interest charges by retiring $100 million of high-cost first mortgage bonds. Also, in March 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with a stated annual dividend rate of 8.32 percent. Net proceeds of $193 million from the sale are being used for general corporate purposes, including debt retirement and improvements to Consumers' distribution systems. In November 1994, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its long-term credit agreement (see Note 8) and to reduce short- term borrowings. Investing Activities Capital expenditures (excluding assets placed under capital lease), deferred demand-side management costs and investments in unconsolidated subsidiaries totaled $460 million for the first nine months of 1994 as compared to $502 million for the first nine months of 1993. These amounts primarily represent capital investments in CMS Energy's electric and gas utility segments, and the continued expansion of the non-utility business segments. CMS Energy's expenditures for the first nine months of 1994 for its utility and non-utility businesses were $318 million and $142 million, respectively. Outlook CMS Energy estimates that capital expenditures, including demand-side management and new lease commitments, will total approximately $2.2 billion for the years 1994 through 1996. Cash generated by operations is expected to satisfy a substantial portion of capital expenditures. Additionally, CMS Energy will continue to evaluate capital markets in 1994 and 1995 as a potential source of financing its subsidiaries' investing activities. The following estimates for electric and gas utility reflect Consumers' current outage schedules for its nuclear plants and construction expenditures to be included in its electric and gas rate requests which are expected to be filed with the MPSC in late 1994. For independent power production, the following estimates include acquisition costs relating to HYDRA-CO. In Millions Years Ended December 31 1994 1995 1996 - -------------------------------------------------------------------------- Electric utility $ 347 $ 333 $ 255 Gas utility 132 125 115 Oil and gas exploration and production 162 85 100 Independent power production 186 166 146 Natural gas pipeline, storage and marketing 36 24 29 ------------------------ $ 863 $ 733 $ 645 ============================================================================ Consumers' short-term sources of credit include a $470 million working capital facility and unsecured, committed lines of credit totaling $185 million. At September 30, 1994, Consumers had $300 million and $101 million, respectively, outstanding under these facilities. Consumers has also received FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. This is the same amount of short-term debt authorized through 1994. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At September 30, 1994, receivables sold totaled $210 million as compared to $285 million at December 31, 1993. Electric Utility Operations Comparative Results of Operations Electric Pretax Operating Income for the quarters ended September 30, 1994 and 1993: During the third quarter of 1994, electric pretax operating income increased $9 million from the 1993 level. This increase reflects higher electric system sales related to economic growth, and the impact of the May 1994 electric rate increase. Electric Pretax Operating Income for the nine months ended September 30, 1994 and 1993: The $50 million improvement in 1994 electric pretax operating income compared to 1993 primarily is the result of increased electric system sales due in large part to Michigan's increased levels of employment and overall economic expansion and the May 1994 electric rate increase. Also, during the second quarter of 1994, Consumers recognized $11 million in revenue, related to DSM, based on having achieved all objectives agreed-upon with the MPSC (see Note 3). Electric Pretax Operating Income for the 12 months ended September 30, 1994 and 1993: The $87 million improvement in 1994 electric pretax operating income compared to 1993 primarily is the result of the 1993 resolution of the recoverability of MCV power purchase costs under the PPA, increased electric system sales and the May 1994 electric rate increase, partially offset by higher electric operating costs and depreciation. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1994 Compared 1994 Compared 1994 Compared to 1993 to 1993 to 1993 - ------------------------------------------------------------------------ Sales $7 $31 $37 Resolution of MCV power cost issues - - 34 Rate increases and other regulatory issues 11 29 39 O&M, general taxes and depreciation (9) (10) (23) ---------------------------------------- Total change $ 9 $50 $87 ======================================================================== Electric Sales: Electric system sales during the third quarter of 1994 totaled 8.5 billion kWh, a 3.0 percent increase from 1993 levels. During the third quarter of 1994, residential sales decreased .2 percent, commercial sales increased 1.6 percent, and industrial sales increased 7.9 percent, compared to the corresponding period in 1993. Consumers' electric sales have benefited from improved employment and economic conditions. Electric system sales during the nine months ended September 30, 1994 totaled 24.8 billion kWh, a 4.8 percent increase from 1993 levels. During the nine month 1994 period, residential and commercial sales increased 2.7 percent and 3.0 percent respectively, while industrial sales increased 7.6 percent. The industrial segments of chemicals, primary metals, and transportation equipment contributed approximately one-fourth of the total Company electric sales growth this year. Electric system sales during the 12 months ended September 30, 1994 totaled 32.8 billion kWh, a 4.2 percent increase from 1993 levels. During the 12 months ended 1994 period, residential and commercial sales increased 2.0 percent and 2.8 percent respectively, while industrial sales increased 7.5 percent. Growth in the industrial sales was the strongest in the automotive and chemical sectors. The following table quantifies electric sales by customer type for the periods ended September 30: Electric Sales Millions of kWh Quarter ended Nine months ended 12 months ended 1994 1993 1994 1993 1994 1993 - -------------------------------------------------------------------------- Residential 2,596 2,602 7,753 7,549 10,271 10,073 Commercial 2,487 2,449 6,920 6,718 9,110 8,866 Industrial 3,158 2,926 9,159 8,515 12,185 11,330 Sales for resale 304 316 964 869 1,237 1,201 -------------------------------------------------- System sales (a) 8,545 8,293 24,796 23,651 32,803 31,470 ========================================================================== (a) Excludes intersystem exchanges of power with other utilities through joint dispatching for the economic benefit of customers. Power Costs: Power costs for the three-month period ending September 30, 1994 totaled $236 million, a $24 million decrease from the corresponding 1993 period. This decrease primarily reflects increased generation at Consumers' nuclear power plants and the corresponding reduction in purchased power. Power costs for the nine-month period ending September 30, 1994 totaled $723 million, a $50 million increase from the corresponding 1993 period. Power costs for the 12-month period ending September 30, 1994 totaled $958 million, a $61 million increase from the corresponding 1993 period. Electric Utility Rates Power Purchases from the MCV Partnership: Consumers is obligated to purchase 1,132 MW in 1994 and 1,240 MW in 1995 and thereafter, of contract capacity from the MCV Partnership. In 1993, the MPSC issued the Settlement Order that allows Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with certain estimates by Consumers, and other factors required by the Settlement Order, resulted in Consumers recognizing an after-tax loss of $343 million for the present value of estimated future underrecoveries of power purchases from the MCV Partnership. This loss included all fixed energy amounts at issue in the arbitration proceedings discussed below. Except for adjustments to reflect the time value of money through accretion expense, no additional losses are expected unless actual future experience materially differs from management's estimates. ABATE and the Attorney General have filed claims of appeal of the Settlement Order with the Court of Appeals. Although the settlement loss was recorded in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $51 million for the first nine months of 1994. Consumers estimates that its after-tax cash underrecoveries will total $65 million in 1994 and 1995, decreasing slightly for 1996 and 1997, and then decreasing to $8 million in 1998. Possible additional losses for the next five years if Consumers is unable to sell any capacity above the MPSC's authorized level are estimated to be $5 million in 1994, $20 million in 1995, increasing slightly for 1996 and 1997, and then increasing to $72 million in 1998. The PPA contains a "regulatory out" provision, permitting Consumers to reduce the fixed energy charges payable to the MCV Partnership if Consumers is not able to recover these amounts from its customers. Consumers and the MCV Partnership are currently engaged in arbitration to determine whether Consumers is entitled to exercise its rights under the regulatory out provision. Consumers is escrowing the fixed energy amounts in dispute until resolution of the arbitration is achieved. At September 30, 1994, Consumers has escrowed $25 million related to this issue. The lessors of the MCV Facility have filed a lawsuit in federal district court in New York against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order. The action alleges damages in excess of $1 billion and seeks injunctive relief relative to Consumers' payments of the fixed energy charges. CMS Energy and Consumers believe that at all times they and CMS Holdings have conducted themselves properly and that the action is without merit. It appears from the complaint that a significant portion of the alleged damages represent fixed energy charges in dispute in the arbitration. CMS Energy and Consumers have requested that the lawsuit be dismissed for lack of jurisdiction and have commenced a lawsuit in Midland, Michigan, to address these issues. While management believes that the possibility of the alleged damages being awarded is remote, CMS Energy and Consumers are unable to predict the outcome of this issue. In addition, CMS Holdings has filed a lawsuit in a local circuit court seeking reimbursement of $7 million of certain tax indemnification payments made to its partners in the FMLP and owed to CMS Holdings. Consumers is unable to predict the outcome of this issue. In May 1994, Consumers was notified by the MCV that it was initiating arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, is estimated by the MCV Partnership to total $8 million annually. The parties are in the process of selecting an arbitrator and establishing a schedule for arbitration. Consumers cannot predict the timing and outcome of these proceedings. For further information regarding power purchases from the MCV Partnership, see Note 2. In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility being developed by Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to substitute 65 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. For further information, see Note 2. PSCR Issues: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. From mid-February through mid-June 1994, Palisades was temporarily taken out of service to repair valve-leakage and conduct other needed inspections and repairs. Recovery of replacement power costs and the prudency of actions taken during the outages will be reviewed by the MPSC during the 1993 and 1994 PSCR reconciliations of actual costs and revenues. On November 9, 1994, the ALJ presiding over the 1993 PSCR reconciliation proceeding issued a proposal for decision that recommended a disallowance to Consumers related to the Palisades outage of $4.2 million. CMS Energy had previously established a reserve for this potential disallowance. For more information on the potential impact of the outages, see Note 3. Electric Rate Case: In May 1994, the MPSC issued an order, granting Consumers a $58 million annual increase in its retail electric rates effective May 11, 1994. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, higher depreciation and postretirement benefits computed under SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, and the continuation of certain demand-side management programs at reduced levels. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consumers filed a request with the MPSC on November 10, 1994, to increase its retail electric rates in a range from $104.4 million to $139.5 million annually. For further information, see Note 3. Special Rates: In June 1994, Consumers also filed a request with the MPSC, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers proposes to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. To serve these customers, Consumers would use power purchases from the MCV Partnership which exceed the 915 MW currently recoverable from electric retail customers. The MPSC has adopted a hearing schedule that calls for briefs to be filed in December 1994. A final order is expected in the first quarter of 1995. Electric Conservation Efforts In 1993, Consumers completed the customer participation portion of several demand-side management programs designed to encourage the efficient use of energy. Based on the MPSC's determination of Consumers' effectiveness in implementing these programs, Consumers' future rate of return on electric common equity may be adjusted for one year either upward by up to 1 percent or downward by up to 2 percent. The proceedings before the MPSC have started and based on the criteria set out in the demand-side management settlement agreement approved by the MPSC in 1992, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of the full $11 million incentive. Accordingly, during the second quarter of 1994, Consumers recognized $11 million in revenue, related to its demand-side management program. A final order from the MPSC is expected by mid-1995. In May 1994, as part of Consumers' electric rate case, the MPSC issued an order that authorized Consumers to continue certain demand-side management programs at reduced levels. For further information, see Note 3. Electric Capital Expenditures CMS Energy estimates capital expenditures, including deferred demand-side management costs and new lease commitments, related to Consumers' electric utility operations of $347 million for 1994, $333 million for 1995 and $255 million for 1996. These amounts include an attributed portion of anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Electric Environmental Matters The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions will require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected. In 1990, the State of Michigan passed amendments to the Environmental Response Act, under which Consumers expects that it will ultimately incur costs at a number of sites, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates or from others. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. The EPA has asked a number of utilities in the Great Lakes area to voluntarily retire certain equipment containing specific levels of polychlorinated biphenyls. While Consumers believes that it is largely in compliance with the EPA's request, it has agreed to a 10-year retirement period for certain equipment included in the EPA's request. Consumers does not anticipate that any significant additional costs will be incurred as a result of this agreement. For further information regarding electric environmental matters, see Note 4. Electric Outlook In late 1993, the NRC completed a review of Consumers' performance at Palisades that showed a decline in performance. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection evaluated all aspects of nuclear plant operation and management. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the problems at Palisades. The NRC did not place Palisades on either the NRC's "Troubled" or "Declining Performance" list. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report which included both short- and long- term enhancements planned for Palisades to improve performance. Attaining and maintaining acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned level of expenditures. Consumers' on-site storage pool at Palisades is at capacity, and it is unlikely that the DOE will begin accepting any spent nuclear fuel by the originally scheduled date in 1998. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks are now pending at the U.S. Sixth Circuit Court of Appeals where oral argument was held during October 1994. If Consumers is unable to continue to use the casks as planned, significant costs could be incurred, including replacement power costs during any resulting plant shutdown and costs to remove the spent fuel from the dry casks. If Consumers cannot store fuel on-site in the dry casks, and if no off-site storage is available, Palisades could be forced to cease operation as early as mid-1995, when all fuel must be off-loaded for a ten-year inspection of the reactor vessel. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and concluded that the pad location is acceptable to support the casks. Consumers is required by NRC regulations to calculate and report to the NRC, values relating to the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed, prior to 2004, a temperature screening criterion established in the regulations. Consumers is continuing to analyze this data and will report its conclusions to the NRC in late November. Consumers is also continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 4. The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. For further information on nuclear decommissioning, see Note 4. Consumers has experienced recent increases in complaints relating primarily to the effect of so-called stray voltage on certain livestock. A complaint seeking certification as a class action suit was filed in 1993 against Consumers alleging significant damages, primarily related to certain livestock. Consumers believes the allegations to be without merit, and in March 1994, the circuit judge hearing the complaint refused to grant class action status to the suit. This decision is being appealed by the plaintiffs, and a number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At October 31, 1994, Consumers had 88 separate stray voltage lawsuits pending (see Note 4). Some of Consumers' larger industrial customers are exploring the possibility, or have announced the intention, of constructing and operating their own on-site generating facilities. Certain other customers are also considering municipalization options. Consumers is actively working with these customers to develop rate and service alternatives designed to compete with these options. Consumers has on file with the FERC two open access interconnection tariffs which could have the effect of increasing competition for wholesale customers. As part of its most recent electric rate case, the MPSC reduced the level of rate subsidization of residential customers by commercial and industrial customers so as to further improve rate competitiveness for its largest customers. Consumers has also requested MPSC authorization to offer special rates to attract industrial and commercial customers into its service territory and to retain certain customers using high amounts of electricity that have expressed an intention and have the ability to acquire energy from other sources (see Note 3). In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. Rates to be used for the experiment have yet to be determined, and a final MPSC order on the program is not expected until mid-1995. Consumers does not expect this experiment to have a material impact on its financial position or results of operations. In July 1994, the FERC approved new 40-year licenses for 11 of Consumers' hydroelectric plants, confirming planned environmental expenditures. In issuing the licenses, the FERC approved, with modifications, a settlement agreement signed by Consumers, the Attorney General, the DNR and other state and federal officials. The agreement requires Consumers to make payments and investments which could total $30 million over the license periods for such things as environmental safeguards and fishery habitat improvements. Gas Utility Operations Comparative Results of Operations Gas Pretax Operating Income for the quarters ended September 30, 1994 and 1993: During the third quarter of 1994 gas pretax operating income increased $2 million from the 1993 level. This increase reflects the reversal of a gas cost contingency that was favorably resolved, partially offset by lower gas sales, and higher gas operating costs which include $7.5 million of SFAS 106 costs related to the gas settlement with the MPSC (see Gas Utility Rates). Gas Pretax Operating Income for the nine months ended September 30, 1994 and 1993: The $9 million improvement in 1994 gas pretax operating income compared to 1993 reflects higher gas deliveries (both sales and transportation volumes) and the favorable resolution of a previously recorded gas cost contingency, partially offset by higher depreciation and gas operating costs which include $7.5 million of SFAS 106 costs related to the gas settlement with the MPSC (see Gas Utility Rates). Gas Pretax Operating Income for the 12 months ended September 30, 1994 and 1993: The $26 million improvement in 1994 gas pretax operating income compared to 1993 reflects higher gas deliveries (both sales and transportation volumes) and the favorable resolution of a previously recorded gas cost contingency. Increased operating costs reflect $7.5 million of SFAS 106 costs related to the gas settlement with the MPSC (see Gas Utility Rates). The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1994 Compared 1994 Compared 1994 Compared to 1993 to 1993 to 1993 - ------------------------------------------------------------------------ Deliveries $(1) $12 $17 Regulatory recovery of gas cost 13 14 21 O&M, general taxes and depreciation (9) (14) (6) Other (1) (3) (6) ----------------------------------------- Total change $ 2 $ 9 $26 ======================================================================== Gas Deliveries: Gas sales and gas transported during the third quarter of 1994 totaled 50.6 bcf, a 1.9 percent decrease from the corresponding 1993 level. For the nine months ended September 30, 1994, gas sales and gas transported totaled 298.3 bcf, a 5.8 percent increase from the corresponding 1993 level due largely to record cold winter weather. For the 12 months ended September 30, 1994, gas sales and gas transported totaled 424.2 bcf, a 5.4 percent increase from the corresponding 1993 level, also reflecting record cold winter weather. The following table quantifies gas deliveries by customer type for the periods ended September 30: Gas Sales Thousands of Mcf Quarter ended Nine months ended 12 months ended 1994 1993 1994 1993 1994 1993 - -------------------------------------------------------------------------- Residential 11,501 12,846 123,179 117,508 180,528 172,780 Commercial 3,405 3,547 39,642 37,357 58,165 55,344 Industrial 1,145 1,124 10,214 9,456 14,676 13,728 Other 21 73 262 182 311 248 --------------------------------------------------- Gas sales 16,072 17,590 173,297 164,503 253,680 242,100 Transportation deliveries 12,559 12,257 51,946 49,787 72,636 69,186 Transportation for MCV 18,901 18,770 58,227 54,313 77,318 71,211 Off-system trans- portation service 3,043 2,927 14,844 13,380 20,536 20,123 --------------------------------------------------- Total deliveries 50,575 51,544 298,314 281,983 424,170 402,620 ========================================================================== Cost of Gas Sold: The utility cost of gas sold for the third quarter of 1994 decreased $7 million from the 1993 level as a result of reduced deliveries and lower costs per mcf. The utility cost of gas sold for the nine months ended September 30 increased $2 million from the corresponding 1993 level. This increase reflects higher deliveries partially offset by lower costs per mcf. The cost of gas sold for the 12 months ended September 30 decreased $18 million from the corresponding 1993 level. The lower costs per mcf are due to more favorable gas contracts with interstate suppliers, resulting from the impact of FERC Order 636, and the termination and expiration of high-cost contracts with certain Michigan gas producers. Gas Utility Rates In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits computed under SFAS 106 against earnings over the last six months of 1994. This charge against earnings will partially offset costs related to state property taxes which have been reduced. The agreement was reached in response to an assertion by the MPSC staff that gas utility business earnings for 1993 were in excess of the currently authorized level. The agreement also provides for an additional $4 million of 1995-related SFAS 106 costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers committed to file a gas rate case before December 31, 1994, that will, among other things, incorporate cost increases, including costs for postretirement benefits computed under SFAS 106, into its retail gas rates. A final order should be received approximately 9 to 12 months after the request is filed. No assurance can be given as to the level of rates which will be authorized by the MPSC. Consumers' gas distribution business is currently authorized to earn a 13.25 percent rate of return on equity. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. A dispute involving pricing under contracts Consumers had with eight direct gas suppliers has been resolved. The dispute revolved around whether the price Consumers pays Trunkline for gas was the proper reference price for these eight gas supply contracts. Consumers and seven of the suppliers have agreed to enter into new contracts, at negotiated rates, with initial terms ranging from one to three years. Consumers and the remaining supplier agreed to terminate their existing contract. In July 1993, Michigan Gas Storage submitted a notice of rate change with the FERC to revise its operation and maintenance expenses for 1993 and update plant costs to reflect the addition of $27 million of new plant additions in 1993 and began collecting the revised rates designed to provide annual revenues of $22 million, subject to refund and a hearing in February 1994. In June 1994, the FERC approved a stipulation and agreement in full settlement of the rate proceeding, which provides Michigan Gas Storage with estimated annual revenues of $20 million. For further information regarding gas utility rates, see Note 3. Gas Capital Expenditures CMS Energy estimates capital expenditures, including new lease commitments, related to Consumers' gas utility operations of $132 million for 1994, $125 million for 1995 and $115 million for 1996. These amounts include an attributed portion of anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Gas Environmental Matters Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur clean-up costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers has prepared plans for remedial investigation/feasibility studies for several of these manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved two of three plans for remedial investigation/feasibility studies submitted by Consumers and is currently reviewing the third. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to remedial action for all 23 sites of between $40 million and $140 million. These estimates are based on undiscounted 1994 costs. At September 30, 1994, Consumers has accrued a liability for $40 million, representing the minimum amount in the range. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial costs for the sites. Consumers believes that remedial costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial costs for another Michigan gas utility as part a gas rate case. In that proceeding, the MPSC determined that prudent investigation and remedial costs could be deferred and amortized over 10-year periods. In order to be recovered in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC stated that the length of the amortization period may be reviewed from time to time, but any revisions would be prospective. The order further provided that the prudency review would include a review of the utility's attempts to obtain reimbursement from others. The MPSC has also approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remediation costs. Accordingly, Consumers has recorded a regulatory asset for the same amount as the accrued liability for anticipated recovery of these investigation and remedial clean-up costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. Consumers plans to seek recovery of remedial action costs in its gas rate case to be filed in 1994. Oil and Gas Exploration and Production Pretax Operating Income Pretax operating income for the three months ended September 30, 1994 increased $7 million from the same period in 1993 reflecting the gain from assignment of a gas supply contract, higher gas sales volumes and lower international write-offs, partially offset by lower average market prices for oil and gas. Pretax operating income for the nine months ended September 30, 1994 increased $3 million from September 30, 1993 primarily for the same reasons stated above. The twelve months ended September 30, 1994 pretax operating income decrease of $2 million from the comparable period in 1993 reflects lower average market prices for oil and gas. Capital Expenditures In June 1994, NOMECO acquired for $22.5 million a working interest in the Espinal block in Colombia, South America, from Sun Company, Inc. The block is operated by LASMO Oil (Colombia) Limited. The other interest holder is Empresa Colombiana de Pelroleos (Ecopetrol), the Colombian State Oil Company. The block which includes 250,000 acres is currently producing 5,000 barrels of oil per day and is expected to exceed 8,500 barrels per day later this year. NOMECO estimates the block to contain at least 75 million barrels of proven oil reserves of which NOMECO's share is nine million barrels, a 12.4 percent interest. In September 1994, a consortium in which NOMECO is a 29 percent participant was awarded the right to enter in to an agreement with Maraven, S.A., a unit of the Venezuelan state oil company to develop the Colon block in the Maracaibo basin of western Venezuela. The consortium will spend at least $160 million over the next three years in a development program involving reworking, re-equipping and re-entering wells, and drilling new wells to optimize production from existing proved reserves and to develop additional probable and possible reserves. Total production from block is expected to exceed 30,000 barrels per day by 1997. The 1994 capital expenditures also reflect pipeline and road construction and development drilling in Ecuador. Production commenced in June 1994 and is now averaging 23,000 barrels of oil per day from block 16 and the adjoining Tivacuno block. Because of pipeline capacity constraints production proration is in effect, and the blocks are currently officially allocated approximately 12,000 barrels per day of pipeline capacity; however, because of under utilization of pipeline capacity by other producers, production has remained at 23,000 barrels per day and is not expected to drop below that volume. Further, the Ministry of Energy and Mines in Ecuador has recently informed NOMECO and other consortium members that the Ministry will seek to renegotiate the Risk Service Contract and other contracts governing the project. NOMECO cannot predict the outcome of these negotiations. NOMECO holds a 14% working interest in block 16 and the Tivacuno block. CMS Energy currently plans to invest $347 million for the years 1994 through 1996 in its oil and gas exploration and production operations. These anticipated capital expenditures primarily reflect continued development of Ecuador and Colombia oil, Michigan Antrim gas and further reserve acquisition. Independent Power Production Pretax Operating Income Pretax operating income for the three months ended September 30, 1994 increased $6 million from the 1993 period primarily reflecting higher capacity sales from the MCV partnership, as well as additional equity earnings by the CMS Generation subsidiaries due to the addition of new electric generating capacity. Pretax operating income increased $7 million and $16 million for the nine and twelve months ended September 30, 1994, respectively over the comparable 1993 periods. These increases reflect increases in subsidiary earnings and the addition of new electric generating capacity. Capital Expenditures CMS Energy continued expansion of its independent power production segment during the first nine months of 1994. In January, S.T./CMS Electric Co., an affiliate of CMS Generation, entered into a definitive agreement with the Tamil Nadu State Electric Board in India to supply 250 MW of electric capacity and energy from a lignite-fired plant to be built in Neyveli, India. Construction of the $450 million plant is currently scheduled to begin in early 1995 with commercial operation scheduled in 1998. CMS Generation will be the project manager and plant operator and will hold a 40 percent ownership interest. In March 1994, GPSLP, an unconsolidated affiliate of CMS Generation, obtained financing for the Genesee Power Station principally with the issuance and sale of $72 million of Michigan Strategic Fund Solid Waste Disposal Revenue Refunding Bonds (Genesee Power Station Project) Series 1994. CMS Generation has a 50 percent ownership interest in GPSLP. In April 1994, construction began on the 35 MW waste wood-fueled power plant near Flint, Michigan. Completion of the project is scheduled for Spring 1996 with an estimated cost of $94 million. In May 1994, CMS Generation acquired a 25 percent ownership interest in a 235 MW mixed fuel independent power generation project to be built in Jegurupadu, Andhra Pradesh, India. CMS Generation will provide project management services and will be the operator of the plant. The Andhra Pradesh State Electricity Board has signed a 30 year contract for the purchase of the plant's entire electric output. Construction of the natural gas and naptha-fueled combined-cycle project is currently expected to begin in early 1995, with completion scheduled by early 1997. The project is estimated to cost $300 million. Also in May 1994, CMS Generation announced it had acquired a 25 percent ownership interest in Magellan Utility Development Corporation, which is developing a 300 MW coal-fired power project at Pinamucan in Batangas Province, the Philippines. CMS Generation will be the project manager and plant operator. Magellan Utility Development Corporation has signed a 25- year power purchase agreement with the Manila Electric Company, the largest private electric utility in the Philippines, for the plant's entire electric output. Construction of the project is scheduled to begin in early 1995. The plant is scheduled to be completed by year-end 1997 at a cost of $300 million. The project has the potential to be expanded to 600 MW. In June 1994, CMS Generation acquired a 41 percent ownership interest in the Centrales Termicas Mendoza electric generating plant in western Argentina's Mendoza Province. CMS Generation is the lead developer and will become the plant operator. With major retrofitting and maintenance, this facility has the potential to produce 382 MW of generating capacity from oil and natural gas and currently sells 135 MW of capacity on the Argentine wholesale electric market. Takeover of the plant occurred on November 1, 1994. In October 1994, CMS Generation entered into an agreement with Niagara Mohawk Power Corporation for the acquisition of HYDRA-CO. HYDRA-CO holds ownership in six major operating electric generating facilities and a number of smaller plants totaling 835 MW of gross capacity and 285 MW of net capacity. HYDRA-CO's plants are fueled by coal, natural gas, waste wood and water (hydro). CMS Generation will acquire 100 percent of HYDRA- CO's stock for cash using a combination of equity and bank or capital market financing. The purchase price is between $200 and $215 million, including approximately $50 million of current assets. Closing is expected by the end of the year. CMS Generation holds a 32.5 percent ownership interest in Toledo Power Company which acquired two operating power plants totaling 135 MW of generating capacity located on the island of Cebu in the Philippines. CMS Generation is the plant operator of a consortium which purchased the plants, and has become the operator of the 93 MW coal- and oil-fueled Sangi station and the 42 MW oil-fired Carmen station. CMS Energy currently plans to invest $498 million relating to its independent power production operations for the years 1994 through 1996, primarily in domestic and international subsidiaries and partnerships. Natural Gas Pipeline Storage and Marketing Pretax Operating Income Pretax operating income remained constant for the three months ended period September 1994 as compared to the comparable period for 1993 and increased $2 million and $1 million for nine and twelve months ended September 30, 1994 as compared to the 1993 periods, reflecting earnings growth from gas pipeline and storage projects and gas marketed to end- users. Capital Expenditures CMS Energy continued its expansion of its natural gas pipeline, storage and marketing segment during 1994. In the first quarter of 1994 CMS Gas Transmission acquired a 50 percent ownership interest in Moss Bluff Gas Storage Systems, an existing 5 bcf high deliverability salt cavern storage facility on the Gulf Coast of Texas for $18 million. In October 1994, Moss Bluff Gas Storage Systems completed an expansion of its storage capacity creating an additional 0.5 bcf of working storage. CMS Gas Transmission has also agreed to develop an additional 2.5 bcf salt cavern at Moss Bluff which is expected to be in service by the beginning of the winter of 1995-1996. In April 1994, CMS Gas Transmission entered into an agreement in principle to develop a North American natural gas market center in southeastern Michigan. The Grands Lacs Market Center will provide a major exchange and storage point for natural gas buyers and sellers throughout the midwest and northeast United States and Canada. In August 1994, CMS Gas Marketing acquired Natural Gas Services, Inc., an Owensboro, Kentucky-based independent marketer of natural gas. Natural Gas Services has been active since 1988 in Tennessee, Indiana, Illinois, Ohio, South Carolina and Kentucky, providing gas marketing and consulting services to a variety of end-users and natural gas utilities. CMS Gas Marketing has acquired all of Natural Gas Services' assets and contracts. In October 1994, CMS Gas Transmission reached a revised agreement with MichCon to provide a gas treating service for up to 260 million cubic feet per day of Antrim gas. Under the agreement CMS Gas Transmission, which currently owns a 60 percent interest in two existing carbon dioxide treating facilities, will purchase the remaining 40 percent interest in the treating facilities from MCN Investment Corporation. CMS Gas Transmission currently plans to expand this existing 120 million cubic feet per day treating complex to accommodate new Antrim production. The construction is scheduled to be completed in two phases, with phase I in service by June 1995 and the final phase in service by December 1995. This $22 million expansion will treat gas connected to a number of gathering lines including CMS Gas Transmission's South Chester gathering system and deliver gas to MichCon's Northern Michigan pipeline network. Also in October 1994, CMS Gas Transmission announced that Peoples Gas Light and Coke Company of Chicago have agreed to become storage customers of the Grand Lacs Market Center under a five-year agreement commencing in April 1995. The Grand Lacs Market Center, located in southeastern Michigan's St. Clair County, will provide natural gas storage services, peaking storage, wheeling, parking and other related natural gas services. Under the agreement with Peoples Gas, Grand Lacs Market Center will provide up to 150 million cubic feet per day of Michigan-based firm storage service. CMS Energy currently plans to invest $89 million for the years 1994 through 1996 relating to its non-utility gas operations, continuing to pursue development of natural gas storage, gas gathering and pipeline operations both domestically and internationally. Other Other Income: Other income decreased $17 million and $35 million for the third quarter of 1994 and the first nine months of 1994, respectively, when compared to the corresponding 1993 periods, reflecting the impact of the sale of the remaining MCV Bonds. The $311 million improvement in Other Income when comparing the 12 months ended September 30, 1994 to the corresponding 1993 period reflects the impact of the March, 1993 Settlement Order related to power purchases from the MCV Partnership. The 12 months ended September 30, 1993 included an after-tax $343 million charge related to the Settlement Order. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. New Accounting Standards: In October 1994, the FASB issued SFAS 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, and SFAS 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. CMS Energy is studying these statements, which are effective for year-end 1994 financial statements, but does not expect either statement will have a material impact on CMS Energy's financial position or results of operations. (This page intentionally left blank) 44 ARTHUR ANDERSEN LLP Report of Independent Public Accountants To Consumers Power Company: We have reviewed the accompanying consolidated balance sheets of CONSUMERS POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of September 30, 1994 and 1993, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Power Company and subsidiaries as of December 31, 1993, 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 28, 1994, 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, 1993, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Detroit, Michigan, November 10, 1994. 45 Consumers Power Company Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1994 1993 1994 1993 1994 1993 In Millions OPERATING REVENUE Electric $ 573 $ 578 $1,667 $1,556 $2,188 $2,015 Gas 126 123 837 809 1,188 1,172 Other 6 1 9 4 11 - --------------------------------------------------------- Total operating revenue 705 702 2,513 2,369 3,387 3,187 --------------------------------------------------------- OPERATING EXPENSES AND TAXES Operation Fuel for electric generation 80 83 230 224 299 294 Purchased power - related parties 119 124 359 344 482 469 Purchased and interchange power 37 53 134 105 177 134 Cost of gas sold 48 55 475 473 680 698 Other 145 121 408 367 556 506 --------------------------------------------------------- Total operation 429 436 1,606 1,513 2,194 2,101 Maintenance 45 51 136 149 190 203 Depreciation, depletion and amortization 75 72 243 233 327 319 General taxes 39 42 133 145 176 187 --------------------------------------------------------- Total operating expenses 588 601 2,118 2,040 2,887 2,810 --------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) Electric 107 98 281 231 336 249 Gas 5 3 106 96 156 130 Other 5 - 8 2 8 (2) --------------------------------------------------------- Total pretax operating income 117 101 395 329 500 377 INCOME TAXES 30 31 109 92 132 106 --------------------------------------------------------- NET OPERATING INCOME 87 70 286 237 368 271 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) MCV Bond income - 8 - 24 8 33 Dividends from affiliates 4 4 12 12 17 16 Accretion income 3 4 10 11 13 15 Accretion expense (Note 2) (8) (9) (27) (27) (36) (27) Loss on MCV power purchases - settlement - - - - - (520) Other income taxes, net 3 9 10 19 16 199 Other, net 1 6 1 3 (1) (1) --------------------------------------------------------- Total other income (deductions) 3 22 6 42 17 (285) --------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 34 41 101 116 138 152 Other interest 4 6 9 16 16 24 Capitalized interest - - (1) (1) (1) (1) --------------------------------------------------------- Net interest charges 38 47 109 131 153 175 --------------------------------------------------------- Net Income (Loss) 52 45 183 148 232 (189) Preferred Stock Dividends 7 3 17 8 19 11 --------------------------------------------------------- NET INCOME (LOSS) AFTER DIVIDENDS ON PREFERRED STOCK $ 45 $ 42 $ 166 $ 140 $ 213 $ (200) ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
46 Consumers Power Company Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1994 1993 1994 1993 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 183 $ 148 $ 232 $(189) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $37, $36, $48 and $47, respectively) 243 233 327 319 Capital lease and other amortization 24 21 33 32 Deferred income taxes and investment tax credit 56 62 42 (155) Accretion expense (Note 2) 27 27 36 27 Accretion income - abandoned Midland project (10) (11) (13) (15) MCV power purchases - settlement (Note 2) (71) (64) (90) (64) Loss on MCV power purchases - settlement (Note 2) - - - 520 Other (8) (2) (8) (6) Changes in other assets and liabilities (95) (267) 47 (102) ------ ------ ------ ------ Net cash provided by operating activities 349 147 606 367 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (313) (321) (443) (474) Investments in nuclear decommissioning trust funds (37) (36) (48) (47) Deferred demand-side management costs (5) (42) (15) (54) Cost to retire property, net (25) (24) (33) (25) Sale of subsidiary - (14) - (14) Other 2 (1) 1 (2) Proceeds from sale of property 10 1 10 11 Proceeds from Midland-related assets - 13 309 13 Proceeds from loan to affiliate - - - 50 Proceeds from Bechtel settlement - - - 46 ------ ------ ------ ------ Net cash used in investing activities (368) (424) (219) (496) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Repayment of bank loans (141) - (172) - Retirement of bonds and other long-term debt (133) (640) (133) (640) Payment of common stock dividends (113) (79) (167) (79) Payment of capital lease obligations (23) (17) (30) (27) Payment of preferred stock dividends (12) (8) (15) (11) Proceeds from preferred stock 193 - 193 - Increase (decrease) in notes payable, net 142 349 (164) 230 Contribution from stockholder 100 - 100 - Proceeds from bonds - 644 - 644 ------ ------ ------ ------ Net cash provided by (used in) financing activities 13 249 (388) 117 ------ ------ ------ ------ NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (6) (28) (1) (12) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 13 36 8 20 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 7 $ 8 $ 7 $ 8 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
47 Consumers Power Company Consolidated Balance Sheets
September 30 September 30 1994 December 31 1993 (Unaudited) 1993 (Unaudited) In Millions ASSETS PLANT (At original cost) Electric $5,523 $5,347 $5,225 Gas 1,894 1,837 1,774 Other 294 253 225 ----------------------------------- 7,711 7,437 7,224 Less accumulated depreciation, depletion and amortization 3,751 3,550 3,509 ----------------------------------- 3,960 3,887 3,715 Construction work-in-progress 279 248 363 ---------------------------------- 4,239 4,135 4,078 ----------------------------------- INVESTMENTS Stock of affiliates (Note 7) 313 291 291 First Midland Limited Partnership (Note 2) 216 213 211 Midland Cogeneration Venture Limited Partnership (Note 2) 71 67 67 Other 8 6 8 ----------------------------------- 608 577 577 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 7 13 8 Accounts receivable and accrued revenue, less allowances of $4, $4 and $4, respectively (Note 8) 72 110 75 Accounts receivable - related parties 65 12 48 Inventories at average cost Gas in underground storage 271 228 284 Materials and supplies 79 73 75 Generating plant fuel stock 33 41 30 Trunkline settlement (Note 3) 30 31 32 Postretirement benefits 25 25 25 Deferred income taxes 22 17 - Investment in MCV Bonds - - 309 Prepayments and other 56 156 62 ----------------------------------- 660 706 948 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 484 485 478 Nuclear decommissioning trust funds (Note 4) 204 165 152 Abandoned Midland project (Note 3) 151 162 165 Trunkline settlement (Note 3) 63 86 93 Other 309 235 223 ----------------------------------- 1,211 1,133 1,111 ----------------------------------- TOTAL ASSETS $6,718 $6,551 $6,714 =================================== /TABLE 48
September 30 September 30 1994 December 31 1993 (Unaudited) 1993 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital (Note 8) 491 391 391 Revaluation capital (Note 7) 11 - - Retained earnings since December 31, 1992 107 54 61 ----------------------------------- 1,450 1,286 1,293 Preferred stock (Note 8) 356 163 163 Long-term debt 1,701 1,839 1,992 Non-current portion of capital leases 109 106 104 ----------------------------------- 3,616 3,394 3,552 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 226 355 235 Accounts payable 137 148 147 Accounts payable - related parties 47 49 53 Notes payable 401 259 564 Accrued taxes 77 171 23 MCV power purchases - settlement (Note 2) 82 82 81 Accrued refunds 37 28 19 Accrued interest 27 39 32 Deferred income taxes - - 16 Other 180 183 166 ----------------------------------- 1,214 1,314 1,336 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 545 485 418 Postretirement benefits 538 527 520 MCV power purchases - settlement (Note 2) 345 391 402 Deferred investment tax credit 182 190 191 Trunkline settlement (Note 3) 63 86 93 Regulatory liabilities for income taxes, net 20 6 51 Other (Note 4) 195 158 151 ----------------------------------- 1,888 1,843 1,826 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,718 $6,551 $6,714 =================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
49 Consumers Power Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1994 1993 1994 1993 1994 1993 In Millions COMMON STOCK At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841 --------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 491 391 391 391 391 965 Quasi-reorganization (Note 8) - - - - - (574) Stockholder's contribution (Note 8) - - 100 - 100 - --------------------------------------------------------- At end of period 491 391 491 391 491 391 --------------------------------------------------------- REVALUATION CAPITAL (Note 7) At beginning of period 11 - - - - - Implementation of SFAS 115 - January 1, 1994 - - 20 - 20 - Change in unrealized loss, net of tax - - (9) - (9) - --------------------------------------------------------- At end of period 11 - 11 - 11 - --------------------------------------------------------- RETAINED EARNINGS (DEFICIT) At beginning of period 93 41 54 - 61 (234) Net income (loss) 52 45 183 148 232 (189) Common stock dividends declared (31) (22) (113) (79) (167) (79) Preferred stock dividends declared (7) (3) (17) (8) (19) (11) Quasi-reorganization (Note 8) - - - - - 574 --------------------------------------------------------- At end of period 107 61 107 61 107 61 --------------------------------------------------------- TOTAL COMMON STOCKHOLDER'S EQUITY $1,450 $1,293 $1,450 $1,293 $1,450 $1,293 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
50 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 1993 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 most of the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. In September 1994, management announced that Consumers is being internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, effective January 1, 1995, while not affecting Consumers' consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will ultimately, in the long term, result in lower overall costs. 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 for 15- and 20-year periods, respectively. At September 30, 1994, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership Consumers' obligations for purchase of contract capacity from the MCV Partnership under the PPA since 1992 follows: 1995 and Year 1992 1993 1994 thereafter - ---- ---- ----- ----- ---------- MW 915 1,023 1,132 1,240 Prior to 1993, the MPSC allowed Consumers to recover costs of power purchased from the MCV Partnership based on delivered energy for up to 840 MW at rates less than Consumers paid. In March 1993, the MPSC approved, with modifications, the Revised Settlement Proposal which had been co- sponsored by Consumers, the MPSC staff and 10 small power and cogeneration developers. These parties accepted the Settlement Order, and the MCV Partnership confirmed that it did not object to the modifications. ABATE and the Attorney General have filed claims of appeal of the Settlement Order with the Court of Appeals. The Settlement Order determined the cost of power purchased from the MCV Partnership that Consumers can recover from its electric retail customers and significantly reduced the amount of future underrecoveries for these power costs. Effective January 1993, the Settlement Order allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity from the MCV Partnership. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be competitively bid into Consumers' next solicitation for power or, if necessary, utilized for current power needs with a prudency review and a cost recovery determination in annual PSCR cases. In either instance, the MPSC would determine the levels of recovery from customers for the power purchased. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity, the cost of which Consumers is currently not authorized to recover from retail customers. The PPA provides that Consumers is to pay to the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. Consumers is scheduling deliveries of energy from the MCV Partnership whenever it has energy available up to hourly availability limits, or "caps," for the 915 MW of capacity authorized for recovery in the Settlement Order. Consumers can recover an average 3.62 cents per kWh capacity charge and the prescribed energy charges associated with the scheduled deliveries within the caps, whether or not those deliveries are scheduled on an economic basis. Through December 1997, there is no cap applied during on-peak hours to Consumers' recovery for the purchase of capacity made available within the 915 MW authorized. Recovery for purchases during off-peak hours is capped at 82 percent in 1994 and 1995, 84 percent in 1996 and 1997, increasing to 88.7 percent in 1998 and thereafter at which time the 88.7 percent cap is applicable during all hours. For all economic energy deliveries above the caps to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the corresponding variable energy charge. In December 1992, Consumers recognized an after-tax loss of $343 million for the present value of estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss included management's best estimates regarding 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. Except for adjustments to the above loss to reflect the after-tax time value of money through accretion expense, no additional losses are expected unless actual future experience materially differs from management's estimates. Because the calculation of the 1992 loss depended in part upon estimates of future unregulated sales of energy to third parties, a more conservative or risk-free investment rate of 7 percent was used to calculate $188 million of the total $343 million after-tax loss. The remaining portion of the loss was calculated using an 8.5 percent discount rate reflecting Consumers' incremental borrowing rate as required by SFAS 90, Regulated Enterprises- Accounting for Abandonments and Disallowances of Plant Costs. The after- tax expense for the time value of money for the loss is estimated to be $24 million in 1994, and various lower levels thereafter, including $22 million in 1995 and $20 million in 1996. Although the settlement loss was recorded in 1992, Consumers' continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries, including fixed energy charges (in connection with a dispute with the MCV Partnership discussed below), which are being escrowed, totaled $51 million for the first nine months of 1994. Consumers believes there is and will be a market for the resale of capacity purchases from the MCV Partnership above the MPSC-authorized level. However, if Consumers is unable to sell any capacity above the current MPSC-authorized level, future additional after-tax losses and after-tax cash underrecoveries could be incurred. Consumers' estimates of its 1994 and future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are as follows: After-tax, In Millions 1994 1995 1996 1997 1998 - ---------------------------------------------------------------------- Expected cash underrecoveries $65 $65 $62 $61 $ 8 Possible additional underrecoveries and losses (a) $ 5 $20 $20 $22 $72 ====================================================================== (a) If unable to sell any capacity above the MPSC's authorized level. At December 31, 1993, and September 30, 1994, the after-tax, present value of the Settlement Order liability totaled $307 million and $277 million, respectively. The reduction in the Settlement Order liability during 1994 reflects after-tax cash underrecoveries related to capacity totaling $47 million, partially offset by after-tax accretion expense of $17 million. The PPA, while providing for payment of a fixed energy charge, contains a "regulatory out" provision which permits Consumers to reduce the fixed energy charges payable to the MCV Partnership throughout the entire contract term if Consumers is not able to recover these amounts from its customers. In connection with the MPSC's approval of the Revised Settlement Proposal, Consumers and the MCV Partnership are engaged in arbitration proceedings under the PPA to determine whether Consumers is entitled to exercise its regulatory out regarding fixed energy charges on the portion of available MCV capacity above the current MPSC-authorized levels. An arbitrator acceptable to both parties has been selected and hearings are being conducted. If the arbitrator determines that Consumers cannot exercise its regulatory out, Consumers would be required to make these fixed energy payments to the MCV Partnership even though Consumers may not be recovering these costs. The arbitration proceedings will also determine who is entitled to the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to settlement. Although Consumers believes its position on arbitration is sound and intends to aggressively pursue its right to exercise the regulatory out, management cannot predict the outcome of the arbitration proceedings or any possible settlement of the matter. Accordingly, losses were recorded prior to 1993 for all fixed energy amounts at issue in the arbitration. At September 30, 1994, $25 million has been escrowed by Consumers and is included as a non-current asset in Consumers' financial statements. In December 1993, Consumers made an irrevocable offer to pay through September 15, 2007, fixed energy charges to the MCV Partnership on all kWh delivered by the MCV Partnership to Consumers from the contract capacity in excess of 915 MW, which represents a portion of the fixed energy charges in dispute. Consumers made the offer in connection with the sale of its remaining $309 million investment in the MCV Bonds which was completed in 1993. The lessors of the MCV Facility have filed a lawsuit in federal district court in New York against CMS Energy, Consumers and CMS Holdings. It alleges breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of the arbitration between the MCV Partnership and Consumers discussed above. The action alleges damages in excess of $1 billion and seeks injunctive relief relative to Consumers' payments of the fixed energy charges. CMS Energy and Consumers believe that at all times they and CMS Holdings have conducted themselves properly and that the action is without merit. It appears from the complaint that a significant portion of the alleged damages represent fixed energy charges in dispute in the arbitration. CMS Energy and Consumers have requested that the lawsuit be dismissed for lack of jurisdiction and have commenced a lawsuit in Midland, Michigan, to address these issues. While management believes that the possibility of the alleged damages being awarded is remote, CMS Energy and Consumers are unable to predict the outcome of this issue. In addition, CMS Holdings has filed a lawsuit in the circuit court of Jackson, Michigan, seeking reimbursement of $7 million of certain tax indemnification payments made to its partners in the FMLP and owed to CMS Holdings. Consumers is unable to predict the outcome of this issue. In May 1994, Consumers was notified by the MCV that it was initiating arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, is estimated by the MCV Partnership to total $8 million annually. The parties are in the process of selecting an arbitrator and establishing a schedule for arbitration. Consumers cannot predict the timing and outcome of these proceedings. In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility being developed by Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to substitute 65 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. The proposed substitution of capacity which would start in 1997, the year the coal-fired cogeneration facility was scheduled to begin operations, represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for a coal-fired cogeneration facility. As a result, Consumers recorded a regulatory asset of $30 million, which it believes will ultimately be recoverable in rates. PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. Consumers also agreed not to appeal any MCV- related issues raised in future orders for these plan cases and related reconciliations to the extent those issues are resolved by the Settlement Order. In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992 confirming Consumers' recovery for the purchase of 840 MW from the MCV in accordance with the MPSC plan case order and allowing recovery for the purchase of power above 840 MW based on replacement power costs. The MPSC subsequently confirmed the recovery of MCV-related costs consistent with the Settlement Order as part of the 1993 and 1994 PSCR plan case orders. 3: Rate Matters Electric Rate Case In May 1994, the MPSC issued an order, granting Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, higher depreciation and postretirement benefits computed under SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, and the continuation of certain demand-side management programs at reduced levels. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consequently, residential customers were allocated $40 million, which is 70 percent of the rate increase. In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104.4 million to $139.5 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. The filing addresses the ratemaking effect of jurisdictional sales losses by assuming adoption of a proposed special nonjurisdictional rate to large, qualifying industrial customers as requested by Consumers in an earlier June 1994 filing with the MPSC. An alternative approach presented would use the MCV contract capacity above 915 MW for jurisdictional electric customers and offer discounted jurisdictional tariffs. Consumers has also requested that the MPSC eliminate the rate cross-subsidization of residential rates in a two-step adjustment. In addition, Consumers proposes to eliminate all DSM expenditures after April 1995 and further requests MPSC approval to recover all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington. Special Rates: In June 1994, Consumers also filed a request with the MPSC, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers proposes to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. To serve these customers, Consumers would use power purchases from the MCV Partnership which exceed the 915 MW currently recoverable from electric retail customers. Certain other parties have subsequently filed various alternative proposals. The MPSC has adopted a hearing schedule that calls for briefs to be filed in December 1994. A final order is expected in the first quarter of 1995. Abandoned Midland Project: In 1984, Consumers abandoned construction of its unfinished nuclear power plant located in Midland, Michigan, and subsequently took a series of write-downs. In 1991, the MPSC issued orders permitting recovery of a portion of the plant and Consumers began collecting $35 million pretax annually for the next 10 years. Several parties, including the Attorney General, filed claims of appeal with the Court of Appeals regarding MPSC orders issued in 1991 that specified the recovery of abandoned investment. Oral arguments took place before the Court of Appeals in October 1994. Electric Demand-side Management: As a result of settlement discussions regarding demand-side management and an MPSC order in 1991, Consumers agreed to spend $65 million over two years on demand-side management programs. Based on the MPSC's determination of Consumers' effectiveness in implementing these programs, Consumers' future rate of return on common equity may be adjusted either upward by up to 1 percent or downward by up to 2 percent. This adjustment, if implemented, would be applied to Consumers' retail electric tariff rates and be in effect for one year following reconciliation hearings with the MPSC. The estimated revenue effects of the potential adjustment range from an $11 million increase to a $22 million decrease. The proceedings before the MPSC have started and based on the criteria set out in the demand-side management settlement agreement approved by the MPSC in 1992, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of the full $11 million incentive. Accordingly, during the second quarter of 1994, Consumers recognized $11 million in revenue, related to its demand-side management program. A final order from the MPSC is expected by mid-1995. In October 1993, Consumers completed the customer participation portion of these DSM programs. In May 1994, as part of Consumers' electric rate case, the MPSC issued an order that allowed Consumers to recover demand- side management expenditures which exceeded $65 million. The order also authorized Consumers to continue certain programs in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from its customers in accordance with an accounting order issued by the MPSC in September 1992. The unamortized balance of deferred costs at September 30, 1994 was $71 million. PSCR Issues On November 9, 1994, the ALJ presiding over the 1993 PSCR reconciliation proceeding issued a proposal for decision in this case. Several issues were included in this proposal for decision including issues related to a planned refueling and maintenance outage which Consumers began at Palisades in June 1993. Following several required, unanticipated repairs that extended the outage, the plant returned to service in early November. In addition, from mid-February through mid-June 1994, Palisades was temporarily taken out of service to repair valve-leakage and conduct other needed inspections and repairs. Recovery of replacement power costs incurred by Consumers during these outages were reviewed during the 1993 PSCR reconciliation of actual costs and revenues to determine the prudency of actions taken during the outages. The 1994 outages will be reviewed as part of that years reconciliation proceedings. Net replacement power costs during the outages were approximately $180,000 per day above the cost of fuel Consumers would have otherwise incurred when the plant is operating. Consumers had conceded that one day of the 1993 outage was inappropriate, while the MPSC staff has recommended a 20-day disallowance. The ALJ proposed a disallowance of 22 days of outage totaling $4.2 million. CMS Energy had previously established a reserve for this potential disallowance. See Note 4 for information regarding the NRC's review of Palisades' performance. Gas Rates In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits computed under SFAS 106 against earnings over the last six months of 1994. This charge against earnings will partially offset costs related to state property taxes which have been reduced. The agreement was reached in response to an assertion by the MPSC staff that gas utility business earnings for 1993 were in excess of the currently authorized level. The agreement also provides for an additional $4 million of 1995-related SFAS 106 costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers committed to file a gas rate case before December 31, 1994, that will, among other things, incorporate cost increases, including costs for postretirement benefits computed under SFAS 106, into its retail gas rates. A final order should be received approximately 9 to 12 months after the request is filed. No assurance can be given as to the level of rates which will be authorized by the MPSC. Consumers' gas distribution business is currently authorized to earn a 13.25 percent rate of return on equity. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. GCR Issues The MPSC, in a February 1993 order, provided that the price payable to certain intrastate gas producers by Consumers be reduced prospectively. In a related case, Consumers was not allowed to recover $13 million of gas supply costs incurred prior to February 8, 1993. Consumers previously had accrued a loss for this issue in excess of the disallowed amount. Future disallowances are not anticipated, unless the remaining appeals filed by the intrastate producers are successful. In 1992, the FERC approved a settlement involving Consumers, Trunkline and certain other parties, which resolved numerous claims and proceedings concerning Trunkline liquified natural gas costs. The settlement represents significant gas cost savings for Consumers and its customers in future years. As part of the settlement, Consumers will not incur any transition costs from Trunkline as a result of FERC Order 636. In 1992, Consumers recorded a liability and regulatory asset for the principal amount of payments to Trunkline over a five-year period. In May 1993, the MPSC approved a separate settlement agreement that provides Consumers with full recovery of these costs over a five-year period. At September 30, 1994, Consumers' remaining liability and regulatory asset were $93 million. Other A dispute involving pricing under contracts Consumers had with eight direct gas suppliers has been resolved. The dispute revolved around whether the price Consumers pays Trunkline for gas was the proper reference price for these eight gas supply contracts. Consumers and seven of the suppliers have agreed to enter into new contracts, at negotiated rates, with initial terms ranging from one to three years. Consumers and the remaining supplier agreed to terminate their existing contract. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 4: Commitments and Contingencies Ludington Pumped Storage Plant In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for the continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve recreational areas and convey undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to MPSC approval of Consumers being permitted to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve a lawsuit filed by the Attorney General in 1986 on behalf of the State of Michigan in the Circuit Court of Ingham County, seeking damages from Consumers and Detroit Edison for injuries to fishery resources because of the operation of the Ludington plant. The state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, with the latter amount to be adjusted upon installation of "adequate" fish barriers and other changed conditions. Since 1986 the parties have continued to dispute, in various courts, the amount of actual damages as well as the best alternative to mitigate future damages. Environmental Matters 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 information currently known by management, Consumers believes that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur clean-up costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers has prepared plans for remedial investigation/feasibility studies for several of these manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved two of three plans for remedial investigation/feasibility studies submitted by Consumers and is currently reviewing the third. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to remedial action for all 23 sites of between $40 million and $140 million. These estimates are based on undiscounted 1994 costs. At September 30, 1994, Consumers has accrued a liability for $40 million, representing the minimum amount in the range. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial costs for the sites. Consumers believes that remedial costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial costs for another Michigan gas utility as part of a gas rate case. In that proceeding, the MPSC determined that prudent investigation and remedial costs could be deferred and amortized over 10-year periods. In order to be recovered in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC stated that the length of the amortization period may be reviewed from time to time, but any revisions would be prospective. The order further provided that the prudency review would include a review of the utility's attempts to obtain reimbursement from others. The MPSC has also approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remediation costs. Accordingly, Consumers has recorded a regulatory asset for the same amount as the accrued liability for anticipated recovery of these investigation and remedial clean-up costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. Consumers plans to seek recovery of remedial action costs in its gas rate case to be filed in 1994. Included in the 1990 amendments to the federal Clean Air Act are provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. All of Consumers' coal-fueled electric generating units burn low-sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in 2000. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. The Clean Air Act's provisions require Consumers to make capital expenditures estimated to total $74 million through 1999 for completed, in-process and possible modifications at coal-fired units based on current regulations. Management believes that Consumers' annual operating costs will not be materially affected. In 1993, Consumers experienced increases in complaints relating to so- called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electric systems are diverted from their intended path. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of farm equipment, can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers. A complaint seeking certification as a class action suit was filed against Consumers in a local county circuit court in 1993. The complaint alleged the existence of a purported class that incurred damages in excess of $1 billion, primarily to certain livestock owned by the purported class, as a result of stray voltage from electricity being supplied by Consumers. Consumers believes the allegations to be without merit, and in March 1994, the circuit judge hearing the complaint refused to grant class action status to the suit. In April 1994, the plaintiffs in this action appealed the matter to the Court of Appeals. Consumers believes that the various claims are different enough to warrant separate trials, and that the circuit court's denial of class-action status will be upheld. A number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At October 31, 1994, Consumers had 88 separate stray voltage lawsuits pending. Palisades Plant In April 1993, the NRC approved the design of the dry spent fuel storage casks now being used by Consumers at Palisades. In May 1993, the Attorney General and certain other parties commenced litigation to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. The courts have declined to prevent such use and have refused to issue temporary restraining orders or stays. Several appeals relating to this matter are now pending at the U.S. Sixth Circuit Court of Appeals where oral argument was held during October 1994. As of October 31, 1994, Consumers had loaded seven dry storage casks with spent nuclear fuel and expects to load six additional casks prior to Palisades' 1995 refueling. If Consumers is unable to continue to use the casks as planned, significant costs could be incurred, including replacement power costs during any resulting plant shutdown and costs to remove the spent fuel from the dry casks. If Consumers cannot store fuel on-site in the dry casks, and if no off-site storage is available, Palisades could be forced to cease operation as early as mid- 1995, when all fuel must be off-loaded for a ten-year inspection of the reactor vessel. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and concluded that the pad location is acceptable to support the casks. In August 1994, Consumers announced that it would unload and replace one of the dry fuel storage casks at Palisades that contain spent nuclear fuel. In examining radiographs during a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although testing has not disclosed any leakage from the cask, Consumers has nevertheless decided to remove the spent fuel from this cask and insert it in another cask. Consumers has examined the radiographs for all of its casks, including the casks containing spent fuel, and has found all other welds to be acceptable. In November 1993, Palisades returned to service following a planned refueling and maintenance outage that had been extended due to several unanticipated repairs (see Note 3). The results of an NRC review of Consumers' performance at Palisades published shortly after the planned outage showed a decline in performance ratings for the plant. In order to provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection evaluated all aspects of nuclear plant operation and management. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the problems at Palisades. The NRC did not place Palisades on either the NRC's "Troubled" or "Declining Performance" list. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report, which included both short- and long-term enhancements planned for Palisades to improve performance. Attaining and maintaining acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned levels of expenditures. As the holder of a license to operate a pressurized-water reactor nuclear power plant, Consumers is required by NRC regulations to calculate and report to the NRC, values relating to the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. If the results of the calculation indicate that a temperature screening criterion established in the regulations will be exceeded, Consumers must submit a safety analysis to determine what, if any, plant modifications are necessary to prevent potential reactor vessel failure as a result of postulated pressurized thermal shock events if continued operation beyond the screening criterion value is allowed, and the NRC will then decide whether to permit continued operation in excess of the criterion. Consumers had previously submitted a calculation indicating that the Palisades reactor vessel would not exceed the screening criterion before the year 2004. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed the screening criterion prior to 2004. Consumers is continuing to analyze this data and will report its conclusions to the NRC in late November. Consumers is also continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. Nuclear Decommissioning Consumers collects estimated costs to decommission (decontamination and dismantlement) its two nuclear plants through a monthly surcharge to electric customers which currently totals $45 million annually. Consumers currently estimates decommissioning costs of $220 million and $423 million, in 1994 dollars, for the Big Rock and Palisades nuclear plants, respectively. Amounts collected from electric retail customers and deposited in trusts, and earnings on the trusts, which are credited to accumulated depreciation, are estimated to accumulate $425 million and $1.2 billion for decommissioning Big Rock and Palisades, respectively. The trust funds, which are estimated to earn 7.1 percent, will be used for decommissioning Big Rock and Palisades at the end of their respective license periods in 2000 and 2007. In order to meet NRC requirements for decommissioning, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades which assumed that each plant site will be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. Consumers is currently updating those estimates, and expects that the decommissioning costs may increase, principally due to the unavailability of low- and high-level radioactive waste disposal facilities. The lack of an available disposal site could result in the need to maintain the facilities in a mothballed state for a significant period of time after retirement. Consumers expects to file updated decommissioning estimates with the MPSC on or before March 31, 1995. At September 30, 1994, Consumers had an investment in nuclear decommissioning trust funds of $204 million for future decommissioning. The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the FASB has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed: annual provisions for decommissioning could increase; estimated costs for decommissioning could be recorded as a liability rather than as accumulated depreciation; and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. Nuclear Insurance Consumers, as a member of NML and NEIL and through the purchase of other forms of nuclear insurance, maintains coverage against property damage, debris removal, personal injury liability and other losses for damages that could be incurred at its nuclear generating facilities. In the event of covered losses at its own or any other participating nuclear facility, Consumers could be subject to the following maximum assessments: $18 million in any one year under the NML and NEIL policies; $79 million per incident under other forms of nuclear insurance and financial protection, limited to a maximum payment of $10 million per incident in any one year; and $6 million in the event of claims under insurance provisions of the master workers program. Consumers considers the possibility of these assessments to be remote. For further information regarding Consumers' nuclear insurance, see Item 1. Business, contained in the 1993 Form 10-K of Consumers. Commitments for Coal and Gas Supplies Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1994 to 2004. Generally, Consumers contracts for approximately 70% of its annual coal requirements which in 1993 totalled approximately $260 million. Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs. Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1994 to 1999. Generally, Consumers contracts for approximately 75% of its annual gas requirements which in 1993 totalled approximately $680 million. Consumers supplements its long-term contracts with spot- market purchases to fulfill its gas needs. Capital Expenditures Consumers estimates capital expenditures, including demand-side management and new lease commitments, of $479 million for 1994, $458 million for 1995 and $370 million for 1996. Public Utility Holding Company Act Exemption CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. Other 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. The ultimate effect of the proceedings discussed in this note is not expected to have a material impact on Consumers' financial position or results of operations. 5: Effects of the Ratemaking Process Consumers is subject to the provisions of SFAS 71, Accounting for the Effects of Certain Types of Regulation. Regulatory assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. The following regulatory assets (liabilities) which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets: In Millions Sept. 30, 1994 Dec. 31, 1993 Sept. 30, 1993 - ---------------------------------------------------------------------- Postretirement benefits $ 509 $ 510 $ 503 Income taxes 180 189 154 Abandoned Midland project 151 162 165 Trunkline settlement 93 117 125 Demand-side management - deferred costs 71 71 63 Environmental clean-up 40 - - DOE - decommissioning uranium enrichment facility 32 33 33 Power purchase termination 30 - - Other 32 39 39 -------------------------------------- Total regulatory assets $1,138 $1,121 $1,082 ====================================================================== Income taxes $ (199) $ (195) $ (205) Demand-side management - deferred revenue (19) (17) (17) Other (1) - - -------------------------------------- Total regulatory liabilities $ (219) $ (212) $ (222) ====================================================================== Consumers has MPSC orders to recover virtually all of its regulatory assets through future rates and anticipates MPSC approval for recovery of the remaining amounts. 6: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with original maturities of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1994 1993 1994 1993 - ---------------------------------------------------------------------- Cash transactions Interest paid (net of amounts capitalized) $117 $144 $150 $190 Income taxes paid (net of refunds) 64 125 30 55 Non-cash transactions Nuclear fuel placed under capital lease $ 18 $ 23 $ 24 $ 27 Other assets placed under capital leases 11 28 12 46 Capital leases refinanced - 42 - 42 Assumption of debt - - - 15 ====================================================================== 7: Financial Instruments On January 1, 1994, Consumers adopted SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, requiring accounting for investments in debt securities to be held to maturity at amortized cost; otherwise debt and marketable equity securities are recorded at fair value, with any unrealized gains or losses included in earnings if the securities are for trading purposes or as a separate component of stockholders' equity if the securities are available for sale. The implementation resulted in an increase in assets of $30 million with a corresponding increase in stockholders' equity of $20 million, net of tax. The amortized costs, fair values and gross unrealized gains (losses) for available-for-sale securities at September 30, 1994, are as follows: In Millions Gross Amortized Fair Unrealized Available-for-sale securities Cost Value Gain (Loss) - ---------------------------------------------------------------------- Common stock of CMS Energy $ 43 $ 64 $ 21 Nuclear decommissioning and SERP investments 221 217 (4) ====================================================================== In addition, Consumers has an investment of $250 million in 10 shares of Enterprises' preferred stock classified as held-to-maturity. Beginning in 1997, two shares of these securities are required to be redeemed each year at a redemption price of $25 million per share. 8: Capitalization and Other Debt In October 1994, the FERC granted Consumers' request for authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. This is the same amount of short-term debt currently authorized through 1994. Consumers has a $470 million facility to finance seasonal working capital requirements and unsecured, committed lines of credit aggregating $185 million. At September 30, 1994, Consumers had $300 million and $101 million, respectively, outstanding under these facilities. Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, Articles and the need for regulatory approvals in compliance with applicable state and federal law. In the first quarter of 1994, Consumers redeemed first mortgage bonds totaling $100 million. These redemptions completed Consumers' commitment to the MPSC, under the 1993 authorization to issue first mortgage bonds, to refinance certain long- term debt. In January 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for a fixed-rate interest of 5.2 percent on the latest maturing $250 million of the then remaining $500 million obligation under its long-term credit agreement. The swap agreement has the same term as the debt agreement and had the effect of increasing the weighted average interest rate to 4.8 percent from 3.9 percent for the 12 month period ended December 31, 1993. The swap agreement will amortize beginning in February 1995 and terminate in May 1996. At September 30, 1994, the outstanding balance of Consumers' long-term credit agreement totaled $328 million. In November 1994, subsequent to MPSC authorization, Consumers entered into a new $400 million unsecured, variable rate, five- year term loan and subsequently used the proceeds to refinance the long- term credit agreement discussed above and to reduce short-term borrowings. Other Consumers has an established $500 million trade receivables purchase and sale program. At September 30, 1994, receivables sold under the agreement totaled $210 million as compared to $285 million at December 31, 1993. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In March 1994, Consumers issued and sold 8 million shares of Consumers' $2.08 Class A Preferred Stock (cumulative, without par value) with a stated annual dividend rate of 8.32 percent. Net proceeds to Consumers were $193 million. The stock is redeemable at the option of Consumers, on or after April 1, 1999, at a redemption price of $25 per share plus accrued dividends. In May 1994, Consumers received a $100 million equity investment from CMS Energy. The investment was consistent with CMS Energy's plan to improve Consumers' capital structure and was recognized and included in the capitalization structure employed by the MPSC as part of Consumers' most recent electric rate order. At December 31, 1992, Consumers effected a quasi-reorganization, an elective accounting procedure in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. The fair values of Consumers' assets and liabilities at the date of the quasi- reorganization were determined by management to approximate their carrying values, and no material adjustments to the historical bases were made. This action was approved by Consumers' Board of Directors and did not require shareholder approval. As a result of the quasi-reorganization and subsequent accumulated earnings, Consumers resumed paying common stock dividends during 1993. Consumers has continued paying common stock dividends in 1994, including $16 million attributable to 1993 earnings, and $97 million, attributable to current year earnings through September 30, 1994. In addition, in October 1994, Consumers declared a $36 million common stock dividend payable in November 1994. In January 1994, Consumers amended its nuclear fuel lease to include fuel previously owned at Big Rock and further increased the maximum amount of nuclear fuel that could be leased to $80 million. At September 30, 1994, $61 million was under lease. In November 1992, the FASB issued SFAS 112, Employers' Accounting for Postemployment Benefits, which Consumers adopted January 1, 1994. Consumers pays for several postemployment benefits, the most significant being workers' compensation. Because Consumers' postemployment benefit plans do not vest or accumulate, the standard did not materially impact Consumers' financial position or results of operations. In October 1994, the FASB issued SFAS 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, which amends SFAS 114, Accounting by Creditors for Impairment of a Loan. SFAS 114 provided two alternatives for income recognition to be used for changes in the net carrying amount of an impaired loan subsequent to the initial measure of impairment. The creditor could recognize all changes in the net carrying amount of the loan as an adjustment to bad-debt expense, or the creditor could accrue interest on the net carrying amount of the impaired loan and recognize other changes as an adjustment to bad-debt expense. SFAS 118 allows the use of any existing methods for recognizing interest income on impaired loans. In October 1994, the FASB also issued SFAS 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, which requires added disclosures about the amounts, nature and terms of derivatives. Derivatives are financial agreements whose returns are linked to or derived from the performance of underlying assets such as bonds, currencies or commodities. Consumers is continuing to study SFAS 118 and SFAS 119, which are effective for year-end 1994 financial statements, but does not expect either statement will have a material impact on Consumers' financial position or results of operations. 64 Consumers Power Company Management's Discussion and Analysis (MD&A) This MD&A should be read along with the MD&A in the 1993 Form 10-K of Consumers. Consumers is a combination electric and gas utility company serving most of the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. In September 1994, management announced that Consumers is being internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, effective January 1, 1995, while not affecting Consumers' consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will ultimately, in the long term, result in lower overall costs. Consolidated earnings for the quarters ended September 30, 1994 and 1993 Consolidated net income after dividends on preferred stock totaled $45 million for the third quarter of 1994, compared to $42 million for the corresponding third quarter of 1993. The increased net income reflects increased electric sales resulting from Michigan's continuing economic growth and increased revenue from the May 1994 electric rate increase. Consolidated earnings for the nine months ended September 30, 1994 and 1993 Consolidated net income after dividends on preferred stock totaled $166 million for the nine months ended September 30, 1994, compared to $140 million for the nine months ended September 30, 1993. The increased net income reflects increased electric sales resulting from increased motor vehicle production, increased levels of employment and the overall strong economic expansion in Consumers' service territory. Also, the increased net income reflects increased gas deliveries due largely to record cold winter weather. In addition, net income benefited from a mid-May 1994 electric rate increase. Consolidated earnings for the 12 months ended September 30, 1994 and 1993 Consolidated net income after dividends on preferred stock totaled $213 million for the 12 months ended September 30, 1994, compared to a net loss of $200 million for the 12 months ended September 30, 1993. The increased net income reflects the impact of the 1993 Settlement Order related to the cost recovery for power purchases from the MCV Partnership, the benefit of increased electric sales and gas deliveries, and the impact of a mid-May 1994 electric rate increase. Cash Position, Financing and Investing Consumers' operating cash requirements are met by its operating and financing activities. Consumers' cash from operations mainly resulted from its sale and transportation of natural gas and its generation, sale and transmission of electricity. Cash from operations for the first nine months of 1994 reflects the benefits of increased electric sales and significantly higher gas deliveries. Financing Activities As a result of the 1992 quasi-reorganization (see Note 8 of the Condensed Notes to Consolidated Financial Statements), and subsequent accumulated earnings, Consumers resumed paying common stock dividends during 1993. Consumers has continued paying common stock dividends in 1994, including $16 million attributable to 1993 earnings, and $97 million attributable to current year earnings through September 30, 1994. In October 1994, Consumers declared a $36 million common stock dividend payable in November 1994. During February and March 1994, Consumers continued to reduce its future interest charges by retiring $100 million of high-cost first mortgage bonds. Also, in March 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with a stated annual dividend rate of 8.32 percent. Net proceeds of $193 million from the sale are being used for general corporate purposes, including debt retirement and improvements to Consumers' distribution systems. In November 1994, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its long-term credit agreement (see Note 8) and to reduce short- term borrowings. Investing Activities Capital expenditures (excluding assets placed under capital lease) and deferred demand-side management costs totaled $318 million for the first nine months of 1994 as compared to $363 million for the first nine months of 1993. These amounts primarily represent capital investments in Consumers' electric and gas utility segments. Outlook Consumers estimates that capital expenditures, including demand-side management and new lease commitments, related to its electric and gas utility operations will total $1.3 billion over the next three years. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures. The following estimates reflect Consumers' current outage schedules for its nuclear plants and construction expenditures to be included in its electric and gas rate requests which are expected to be filed with the MPSC in late 1994. In Millions Years Ended December 31 1994 1995 1996 - ---------------------------------------------------------------------- Consumers Construction (including DSM) $442 $402 $343 Nuclear fuel lease 4 37 4 Capital leases other than nuclear fuel 27 14 15 Michigan Gas Storage 6 5 8 ------------------------ $479 $458 $370 ====================================================================== Consumers' short-term sources of credit include a $470 million working capital facility and unsecured, committed lines of credit totaling $185 million. At September 30, 1994, Consumers had $300 million and $101 million, respectively, outstanding under these facilities. Consumers has also received FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. This is the same amount of short-term debt authorized through 1994. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At September 30, 1994, receivables sold totaled $210 million as compared to $285 million at December 31, 1993. Electric Utility Operations Comparative Results of Operations Electric Pretax Operating Income for the quarters ended September 30, 1994 and 1993: During the third quarter of 1994, electric pretax operating income increased $9 million from the 1993 level. This increase reflects higher electric system sales related to economic growth, and the impact of the May 1994 electric rate increase. Electric Pretax Operating Income for the nine months ended September 30, 1994 and 1993: The $50 million improvement in 1994 electric pretax operating income compared to 1993 primarily is the result of increased electric system sales due in large part to Michigan's increased levels of employment and overall economic expansion and the May 1994 electric rate increase. Also, during the second quarter of 1994, Consumers recognized $11 million in revenue, related to DSM, based on having achieved all objectives agreed-upon with the MPSC (see Note 3). Electric Pretax Operating Income for the 12 months ended September 30, 1994 and 1993: The $87 million improvement in 1994 electric pretax operating income compared to 1993 primarily is the result of the 1993 resolution of the recoverability of MCV power purchase costs under the PPA, increased electric system sales and the May 1994 electric rate increase, partially offset by higher electric operating costs and depreciation. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income --------------------------------- Quarter ended Nine months ended 12 months ended 1994 Compared 1994 Compared 1994 Compared to 1993 to 1993 to 1993 - ------------------------------------------------------------------------ Sales $7 $31 $37 Resolution of MCV power cost issues - - 34 Rate increases and other regulatory issues 11 29 39 O&M, general taxes and depreciation (9) (10) (23) ---------------------------------------- Total change $ 9 $50 $87 ======================================================================== Electric Sales: Electric system sales during the third quarter of 1994 totaled 8.5 billion kWh, a 3.0 percent increase from 1993 levels. During the third quarter of 1994, residential sales decreased .2 percent, commercial sales increased 1.6 percent, and industrial sales increased 7.9 percent, compared to the corresponding period in 1993. Consumers' electric sales have benefited from improved employment and economic conditions. Electric system sales during the nine months ended September 30, 1994 totaled 24.8 billion kWh, a 4.8 percent increase from 1993 levels. During the nine month 1994 period, residential and commercial sales increased 2.7 percent and 3.0 percent respectively, while industrial sales increased 7.6 percent. The industrial segments of chemicals, primary metals, and transportation equipment contributed approximately one-fourth of the total Company electric sales growth this year. Electric system sales during the 12 months ended September 30, 1994 totaled 32.8 billion kWh, a 4.2 percent increase from 1993 levels. During the 12 months ended 1994 period, residential and commercial sales increased 2.0 percent and 2.8 percent respectively, while industrial sales increased 7.5 percent. Growth in the industrial sales was the strongest in the automotive and chemical sectors. The following table quantifies electric sales by customer type for the periods ended September 30: Electric Sales Millions of kWh Quarter ended Nine months ended 12 months ended 1994 1993 1994 1993 1994 1993 - ------------------------------------------------------------------------ Residential 2,596 2,602 7,753 7,549 10,271 10,073 Commercial 2,487 2,449 6,920 6,718 9,110 8,866 Industrial 3,158 2,926 9,159 8,515 12,185 11,330 Sales for resale 304 316 964 869 1,237 1,201 ------------------------------------------------------ System sales (a) 8,545 8,293 24,796 23,651 32,803 31,470 ======================================================================== (a) Excludes intersystem exchanges of power with other utilities through joint dispatching for the economic benefit of customers. Power Costs: Power costs for the three-month period ending September 30, 1994 totaled $236 million, a $24 million decrease from the corresponding 1993 period. This decrease primarily reflects increased generation at Consumers' nuclear power plants and the corresponding reduction in purchased power. Power costs for the nine-month period ending September 30, 1994 totaled $723 million, a $50 million increase from the corresponding 1993 period. Power costs for the 12-month period ending September 30, 1994 totaled $958 million, a $61 million increase from the corresponding 1993 period. Electric Utility Rates Power Purchases from the MCV Partnership: Consumers is obligated to purchase 1,132 MW in 1994 and 1,240 MW in 1995 and thereafter, of contract capacity from the MCV Partnership. In 1993, the MPSC issued the Settlement Order that allows Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with certain estimates by Consumers, and other factors required by the Settlement Order, resulted in Consumers recognizing an after-tax loss of $343 million for the present value of estimated future underrecoveries of power purchases from the MCV Partnership. This loss included all fixed energy amounts at issue in the arbitration proceedings discussed below. Except for adjustments to reflect the time value of money through accretion expense, no additional losses are expected unless actual future experience materially differs from management's estimates. ABATE and the Attorney General have filed claims of appeal of the Settlement Order with the Court of Appeals. Although the settlement loss was recorded in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $51 million for the first nine months of 1994. Consumers estimates that its after-tax cash underrecoveries will total $65 million in 1994 and 1995, decreasing slightly for 1996 and 1997, and then decreasing to $8 million in 1998. Possible additional losses for the next five years if Consumers is unable to sell any capacity above the MPSC's authorized level are estimated to be $5 million in 1994, $20 million in 1995, increasing slightly for 1996 and 1997, and then increasing to $72 million in 1998. The PPA contains a "regulatory out" provision, permitting Consumers to reduce the fixed energy charges payable to the MCV Partnership if Consumers is not able to recover these amounts from its customers. Consumers and the MCV Partnership are currently engaged in arbitration to determine whether Consumers is entitled to exercise its rights under the regulatory out provision. Consumers is escrowing the fixed energy amounts in dispute until resolution of the arbitration is achieved. At September 30, 1994, Consumers has escrowed $25 million related to this issue. The lessors of the MCV Facility have filed a lawsuit in federal district court in New York against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order. The action alleges damages in excess of $1 billion and seeks injunctive relief relative to Consumers' payments of the fixed energy charges. CMS Energy and Consumers believe that at all times they and CMS Holdings have conducted themselves properly and that the action is without merit. It appears from the complaint that a significant portion of the alleged damages represent fixed energy charges in dispute in the arbitration. CMS Energy and Consumers have requested that the lawsuit be dismissed for lack of jurisdiction and have commenced a lawsuit in Midland, Michigan, to address these issues. While management believes that the possibility of the alleged damages being awarded is remote, CMS Energy and Consumers are unable to predict the outcome of this issue. In addition, CMS Holdings has filed a lawsuit in a local circuit court seeking reimbursement of $7 million of certain tax indemnification payments made to its partners in the FMLP and owed to CMS Holdings. Consumers is unable to predict the outcome of this issue. In May 1994, Consumers was notified by the MCV that it was initiating arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, is estimated by the MCV Partnership to total $8 million annually. The parties are in the process of selecting an arbitrator and establishing a schedule for arbitration. Consumers cannot predict the timing and outcome of these proceedings. For further information regarding power purchases from the MCV Partnership, see Note 2. In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility being developed by Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to substitute 65 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. For further information, see Note 2. PSCR Issues: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. From mid-February through mid-June 1994, Palisades was temporarily taken out of service to repair valve-leakage and conduct other needed inspections and repairs. Recovery of replacement power costs and the prudency of actions taken during the outages will be reviewed by the MPSC during the 1993 and 1994 PSCR reconciliations of actual costs and revenues. On November 9, 1994, the ALJ presiding over the 1993 PSCR reconciliation proceeding issued a proposal for decision that recommended a disallowance to Consumers related to the Palisades outage of $4.2 million. CMS Energy had previously established a reserve for this potential disallowance. For more information on the potential impact of the outages, see Note 3. Electric Rate Case: In May 1994, the MPSC issued an order, granting Consumers a $58 million annual increase in its retail electric rates effective May 11, 1994. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, higher depreciation and postretirement benefits computed under SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, and the continuation of certain demand-side management programs at reduced levels. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consumers filed a request with the MPSC on November 10, 1994, to increase its retail electric rates in a range from $104.4 million to 139.5 million annually. For further information, see Note 3. Special Rates: In June 1994, Consumers also filed a request with the MPSC, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers proposes to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. To serve these customers, Consumers would use power purchases from the MCV Partnership which exceed the 915 MW currently recoverable from electric retail customers. The MPSC has adopted a hearing schedule that calls for briefs to be filed in December 1994. A final order is expected in the first quarter of 1995. Electric Conservation Efforts In 1993, Consumers completed the customer participation portion of several demand-side management programs designed to encourage the efficient use of energy. Based on the MPSC's determination of Consumers' effectiveness in implementing these programs, Consumers' future rate of return on electric common equity may be adjusted for one year either upward by up to 1 percent or downward by up to 2 percent. The proceedings before the MPSC have started and based on the criteria set out in the demand-side management settlement agreement approved by the MPSC in 1992, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of the full $11 million incentive. Accordingly, during the second quarter of 1994, Consumers recognized $11 million in revenue, related to its demand-side management program. A final order from the MPSC is expected by mid-1995. In May 1994, as part of Consumers' electric rate case, the MPSC issued an order that authorized Consumers to continue certain demand-side management programs at reduced levels. For further information, see Note 3. Electric Capital Expenditures Consumers estimates capital expenditures, including deferred demand-side management costs and new lease commitments, related to its electric utility operations of $347 million for 1994, $333 million for 1995 and $255 million for 1996. 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 will require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected. In 1990, the State of Michigan passed amendments to the Environmental Response Act, under which Consumers expects that it will ultimately incur costs at a number of sites, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates or from others. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. The EPA has asked a number of utilities in the Great Lakes area to voluntarily retire certain equipment containing specific levels of polychlorinated biphenyls. While Consumers believes that it is largely in compliance with the EPA's request, it has agreed to a 10-year retirement period for certain equipment included in the EPA's request. Consumers does not anticipate that any significant additional costs will be incurred as a result of this agreement. For further information regarding electric environmental matters, see Note 4. Electric Outlook In late 1993, the NRC completed a review of Consumers' performance at Palisades that showed a decline in performance. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection evaluated all aspects of nuclear plant operation and management. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the problems at Palisades. The NRC did not place Palisades on either the NRC's "Troubled" or "Declining Performance" list. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report which included both short- and long- term enhancements planned for Palisades to improve performance. Attaining and maintaining acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned level of expenditures. Consumers' on-site storage pool at Palisades is at capacity, and it is unlikely that the DOE will begin accepting any spent nuclear fuel by the originally scheduled date in 1998. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks are now pending at the U.S. Sixth Circuit Court of Appeals where oral argument was held during October 1994. If Consumers is unable to continue to use the casks as planned, significant costs could be incurred, including replacement power costs during any resulting plant shutdown and costs to remove the spent fuel from the dry casks. If Consumers cannot store fuel on-site in the dry casks, and if no off-site storage is available, Palisades could be forced to cease operation as early as mid-1995, when all fuel must be off-loaded for a ten-year inspection of the reactor vessel. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and concluded that the pad location is acceptable to support the casks. Consumers is required by NRC regulations to calculate and report to the NRC, values relating to the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed, prior to 2004, a temperature screening criterion established in the regulations. Consumers is continuing to analyze this data and will report its conclusions to the NRC in late November. Consumers is also continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 4. The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. For further information on nuclear decommissioning, see Note 4. Consumers has experienced recent increases in complaints relating primarily to the effect of so-called stray voltage on certain livestock. A complaint seeking certification as a class action suit was filed in 1993 against Consumers alleging significant damages, primarily related to certain livestock. Consumers believes the allegations to be without merit, and in March 1994, the circuit judge hearing the complaint refused to grant class action status to the suit. This decision is being appealed by the plaintiffs, and a number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At October 31, 1994, Consumers had 88 separate stray voltage lawsuits pending (see Note 4). Some of Consumers' larger industrial customers are exploring the possibility, or have announced the intention, of constructing and operating their own on-site generating facilities. Certain other customers are also considering municipalization options. Consumers is actively working with these customers to develop rate and service alternatives designed to compete with these options. Consumers has on file with the FERC two open access interconnection tariffs which could have the effect of increasing competition for wholesale customers. As part of its most recent electric rate case, the MPSC reduced the level of rate subsidization of residential customers by commercial and industrial customers so as to further improve rate competitiveness for its largest customers. Consumers has also requested MPSC authorization to offer special rates to attract industrial and commercial customers into its service territory and to retain certain customers using high amounts of electricity that have expressed an intention and have the ability to acquire energy from other sources (see Note 3). In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. Rates to be used for the experiment have yet to be determined, and a final MPSC order on the program is not expected until mid-1995. Consumers does not expect this experiment to have a material impact on its financial position or results of operations. In July 1994, the FERC approved new 40-year licenses for 11 of Consumers' hydroelectric plants, confirming planned environmental expenditures. In issuing the licenses, the FERC approved, with modifications, a settlement agreement signed by Consumers, the Attorney General, the DNR and other state and federal officials. The agreement requires Consumers to make payments and investments which could total $30 million over the license periods for such things as environmental safeguards and fishery habitat improvements. Gas Utility Operations Comparative Results of Operations Gas Pretax Operating Income for the quarters ended September 30, 1994 and 1993: During the third quarter of 1994 gas pretax operating income increased $2 million from the 1993 level. This increase reflects the reversal of a gas cost contingency that was favorably resolved, partially offset by lower gas sales, and higher gas operating costs which include $7.5 million of SFAS 106 costs related to the gas settlement with the MPSC (see Gas Utility Rates). Gas Pretax Operating Income for the nine months ended September 30, 1994 and 1993: The $10 million improvement in 1994 gas pretax operating income compared to 1993 reflects higher gas deliveries (both sales and transportation volumes) and the favorable resolution of a previously recorded gas cost contingency, partially offset by higher depreciation and gas operating costs which include $7.5 million of SFAS 106 costs related to the gas settlement with the MPSC (see Gas Utility Rates). Gas Pretax Operating Income for the 12 months ended September 30, 1994 and 1993: The $26 million improvement in 1994 gas pretax operating income compared to 1993 reflects higher gas deliveries (both sales and transportation volumes) and the favorable resolution of a previously recorded gas cost contingency. Increased operating costs reflect $7.5 million of SFAS 106 costs related to the gas settlement with the MPSC (see Gas Utility Rates). The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended September 30: In Millions Impact on Pretax Operating Income --------------------------------- Quarter ended Nine months ended 12 months ended 1994 Compared 1994 Compared 1994 Compared to 1993 to 1993 to 1993 - ------------------------------------------------------------------------ Deliveries $(1) $12 $17 Regulatory recovery of gas cost 13 14 21 O&M, general taxes and depreciation (9) (14) (6) Other (1) (2) (6) ---------------------------------------- Total change $ 2 $10 $26 ======================================================================== Gas Deliveries: Gas sales and gas transported during the third quarter of 1994 totaled 50.6 bcf, a 1.9 percent decrease from the corresponding 1993 level. For the nine months ended September 30, 1994, gas sales and gas transported totaled 298.3 bcf, a 5.8 percent increase from the corresponding 1993 level due largely to record cold winter weather. For the 12 months ended September 30, 1994, gas sales and gas transported totaled 424.2 bcf, a 5.4 percent increase from the corresponding 1993 level, also reflecting record cold winter weather. The following table quantifies gas deliveries by customer type for the periods ended September 30: Gas Sales Thousands of Mcf Quarter ended Nine months ended 12 months ended 1994 1993 1994 1993 1994 1993 - ------------------------------------------------------------------------ Residential 11,501 12,846 123,179 117,508 180,528 172,780 Commercial 3,405 3,547 39,642 37,357 58,165 55,344 Industrial 1,145 1,124 10,214 9,456 14,676 13,728 Other 21 73 262 182 311 248 ------------------------------------------------------- Gas sales 16,072 17,590 173,297 164,503 253,680 242,100 Transportation deliveries 12,559 12,257 51,946 49,787 72,636 69,186 Transportation for MCV 18,901 18,770 58,227 54,313 77,318 71,211 Off-system transportation service 3,043 2,927 14,844 13,380 20,536 20,123 ------------------------------------------------------- Total deliveries 50,575 51,544 298,314 281,983 424,170 402,620 ======================================================================== Cost of Gas Sold: The cost of gas sold for the third quarter of 1994 decreased $7 million from the 1993 level as a result of reduced deliveries and lower costs per mcf. The cost of gas sold for the nine months ended September 30 increased $2 million from the corresponding 1993 level. This increase reflects higher deliveries partially offset by lower costs per mcf. The cost of gas sold for the 12 months ended September 30 decreased $18 million from the corresponding 1993 level. The lower costs per mcf are due to more favorable gas contracts with interstate suppliers, resulting from the impact of FERC Order 636, and the termination and expiration of high-cost contracts with certain Michigan gas producers. Gas Utility Rates In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits computed under SFAS 106 against earnings over the last six months of 1994. This charge against earnings will partially offset costs related to state property taxes which have been reduced. The agreement was reached in response to an assertion by the MPSC staff that gas utility business earnings for 1993 were in excess of the currently authorized level. The agreement also provides for an additional $4 million of 1995-related SFAS 106 costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers committed to file a gas rate case before December 31, 1994, that will, among other things, incorporate cost increases, including costs for postretirement benefits computed under SFAS 106, into its retail gas rates. A final order should be received approximately 9 to 12 months after the request is filed. No assurance can be given as to the level of rates which will be authorized by the MPSC. Consumers' gas distribution business is currently authorized to earn a 13.25 percent rate of return on equity. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent. A dispute involving pricing under contracts Consumers had with eight direct gas suppliers has been resolved. The dispute revolved around whether the price Consumers pays Trunkline for gas was the proper reference price for these eight gas supply contracts. Consumers and seven of the suppliers have agreed to enter into new contracts, at negotiated rates, with initial terms ranging from one to three years. Consumers and the remaining supplier agreed to terminate their existing contract. In July 1993, Michigan Gas Storage submitted a notice of rate change with the FERC to revise its operation and maintenance expenses for 1993 and update plant costs to reflect the addition of $27 million of new plant additions in 1993 and began collecting the revised rates designed to provide annual revenues of $22 million, subject to refund and a hearing in February 1994. In June 1994, the FERC approved a stipulation and agreement in full settlement of the rate proceeding, which provides Michigan Gas Storage with estimated annual revenues of $20 million. For further information regarding gas utility rates, see Note 3. Gas Capital Expenditures Consumers estimates capital expenditures, including new lease commitments, related to its gas utility operations of $132 million for 1994, $125 million for 1995 and $115 million for 1996. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Gas Environmental Matters Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur clean-up costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers has prepared plans for remedial investigation/feasibility studies for several of these manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved two of three plans for remedial investigation/feasibility studies submitted by Consumers and is currently reviewing the third. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to remedial action for all 23 sites of between $40 million and $140 million. These estimates are based on undiscounted 1994 costs. At September 30, 1994, Consumers has accrued a liability for $40 million, representing the minimum amount in the range. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial costs for the sites. Consumers believes that remedial costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial costs for another Michigan gas utility as part a gas rate case. In that proceeding, the MPSC determined that prudent investigation and remedial costs could be deferred and amortized over 10-year periods. In order to be recovered in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC stated that the length of the amortization period may be reviewed from time to time, but any revisions would be prospective. The order further provided that the prudency review would include a review of the utility's attempts to obtain reimbursement from others. The MPSC has also approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remediation costs. Accordingly, Consumers has recorded a regulatory asset for the same amount as the accrued liability for anticipated recovery of these investigation and remedial clean-up costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. Consumers plans to seek recovery of remedial action costs in its gas rate case to be filed in 1994. Other Other Income: Other income decreased $19 million and $36 million for the third quarter of 1994 and the first nine months of 1994, respectively, when compared to the corresponding 1993 periods, reflecting the impact of the sale of the remaining MCV Bonds. The $302 million improvement in Other Income when comparing the 12 months ended September 30, 1994 to the corresponding 1993 period reflects the impact of the March, 1993 Settlement Order related to power purchases from the MCV Partnership. The 12 months ended September 30, 1993 included an after-tax $343 million charge related to the Settlement Order. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. New Accounting Standards: In October 1994, the FASB issued SFAS 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, and SFAS 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. Consumers is studying these statements, which are effective for year-end 1994 financial statements, but does not expect either statement will have a material impact on Consumers' financial position or results of operations. 76 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' 1993 Forms 10-K and in the Forms 10-Q for the quarter ended June 30, 1994. 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. (a) 1993 Electric Rate Case. On May 10, 1994, the MPSC issued a final order in this case which increased annual electric revenues by $58 million, or about 2.8 percent, and approved an allowed rate of return on common equity of 11.75%. The rate increase is effective for service rendered on and after May 11, 1994. In August 1994, the MPSC denied petitions for rehearing filed by Consumers and the Attorney General. (b) 1994 Electric Rate Case Filing. In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104.4 million to $139.5 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. The filing addresses the ratemaking effect of jurisdictional sales losses by assuming adoption of a proposed special nonjurisdictional rate to large, qualifying industrial customers as requested by Consumers in an earlier June 1994 filing with the MPSC. An alternative approach presented would use the MCV contract capacity above 915 MW for jurisdictional electric customers and offer discounted jurisdictional tariffs. Consumers has also requested that the MPSC eliminate the rate cross-subsidization of residential rates in a two-step adjustment. In addition, Consumers proposes to eliminate all DSM expenditures after April 1995 and further requests MPSC approval to recover all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington. (c) Arbitration Proceedings between Consumers and the MCV Partnership. A dispute has arisen between the MCV Partnership and Consumers relating to the impact of the Settlement Order on the fixed energy charge payment called for in the PPA and Consumers' ability to exercise its rights under the regulatory out provision based on the issuance of the Settlement Order. In accordance with the dispute resolution provisions set out in the PPA, an arbitrator acceptable to both parties has been selected and the arbitration of this dispute has commenced (the "MCV Fixed Energy Charge Arbitration"). Consumers is unable to predict the outcome of such arbitration proceedings or of any possible settlement of the issues underlying this dispute. On May 5, 1994, the MCV notified Consumers of its desire to commence a second arbitration proceeding, this one regarding the meaning of Exhibit C to the PPA. That exhibit sets forth the methodology for calculation of the energy charge payable under the PPA. This same exhibit is included in many of Consumers' power purchase agreements with qualifying facilities and has been consistently applied to all agreements. The MCV Partnership maintains that Consumers has misapplied or misinterpreted Exhibit C since commercial operation in March 1990 and has estimated that beginning in 1995 it should receive an increase in energy charge revenues of at least $8 million on an annual basis. Consumers believes that the PPA is clear on the manner in which energy charges are to be calculated and that Consumers has followed the specified procedure correctly throughout the term of the PPA. The parties are in the process of selecting an arbitrator and establishing a schedule. Consumers cannot predict the timing or outcome of this arbitration. (d) Lawsuit Filed by the Lessors of the MCV Facility. The lessors of the MCV Facility have filed a lawsuit in federal district court in New York against CMS Energy, Consumers and CMS Holdings. It alleges breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of an arbitration between the MCV Partnership and Consumers. The action alleges damages in excess of $1 billion and seeks injunctive relief relative to Consumers' payments of the fixed energy charge. CMS Energy and Consumers believe that at all times they and CMS Holdings have conducted themselves properly and that the action is without merit. They also believe that a significant portion of the alleged damages represent fixed energy charges in dispute in the arbitration. On March 28, 1994, Consumers commenced a lawsuit in State Circuit Court in Midland County, Michigan seeking declaratory and injunctive relief with respect to interpretation of the PPA. On July 26, 1994, at the request of the parties, the federal district court in New York transferred the case to the suspense docket pending completion of the MCV Fixed Energy Charge Arbitration. While management believes the possibility of the alleged damages being awarded in this suit is remote, CMS Energy and Consumers are unable to predict the outcome of this action. In addition, on March 23, 1994, CMS Holdings filed suit in Circuit Court in Jackson County, Michigan to obtain a refund of tax indemnity payments owed to CMS Holdings by the other partners in First Midland Limited Partnership pursuant to a partnership tax indemnification agreement. In the suit CMS Holdings is claiming breach of contract, breach of covenant of good faith and fair dealing and that no setoff may be claimed by the other First Midland Partners. One of the partners in First Midland Limited Partnership has paid approximately $1 million of the $8 million originally in dispute, but the remaining partners have failed to pay their proportional parts of the refund and are claiming that retention of the payment is justified as a setoff against the larger amounts claimed by the lessor-plaintiffs in the New York federal court action. Consumers is unable to predict the outcome of this action. (e) Retail Wheeling Proceedings. On April 11, 1994, the MPSC issued an Opinion and Interim Order which approved the framework for a five year experimental retail wheeling program for Consumers and Detroit Edison, and remanded the case to the Administrative Law Judge to determine appropriate rates and charges. The MPSC stated that the purpose of the experiment is to gather and evaluate information regarding whether retail wheeling is in the public interest and should occur on a permanent basis. The experimental program will commence with each utility's next solicitation of additional supply side resources. Under the schedule currently set for proceedings on the appropriate retail wheeling rates and charges, the utilities filed their direct cases in August 1994. Cross examination began in November 1994. Under this schedule, a proposal for decision would not be issued before mid-1995. (f) Stray Voltage Lawsuit. Consumers experienced an increase in complaints during 1993 relating to so-called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electric systems are diverted from their intended path. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of on-farm equipment can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers. On October 27, 1993, a complaint seeking certification as a class action suit was filed against Consumers in a local circuit court. The complaint alleged that in excess of a billion dollars of damages, primarily related to production by certain livestock owned by the purported class, were being incurred as a result of stray voltage from electricity being supplied by Consumers. Consumers believes the allegations to be without merit and vigorously opposed the certification of the class and this suit. On March 11, 1994, the court decided to deny class certification for this complaint and to dismiss, subject to refiling as separate suits, the October lawsuit with respect to all but one of the named plaintiffs. On April 4, 1994, the plaintiffs appealed the court's denial of class certification in this matter to the Court of Appeals. Subsequent to the filing of this appeal and the submission of the plaintiffs brief on this issue, the Court of Appeals on its own motion issued an order which decided that since the lead case in the class action suit had not been dismissed, the trial court's decision to deny class certification was an interlocutory order and therefore not ripe for appeal. The Court of Appeals Order also found that the trial court's decision that the other named plaintiffs had been misjoined was final and ripe for appeal. This issue had not been raised in the plaintiffs appeal or brief. Consumers has addressed both issues in its brief filed with the Court of Appeals on July 14, 1994 in support of the trial court's decision. A number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At November 4, 1994, Consumers had 84 separate stray voltage cases pending. (g) Request for Approval of a Competitive "Rate K" Tariff. On June 15, 1994, Consumers filed an application with the MPSC seeking approval of a competitive contract service tariff. This tariff would allow Consumers to negotiate special rates with certain large customers who would otherwise be likely to terminate or reduce their purchases of electricity from Consumers in favor of some alternative source of power. The tariff would also allow Consumers to sell all or some portion of the 325 MW block of capacity Consumers is obligated to purchase from the MCV Partnership in excess of the 915 MW for which the MPSC has allowed cost recovery. Consumers requested in its application that the sale of the 325 MW block be treated for accounting and ratemaking purposes on a non-jurisdictional basis. On June 30, 1994, the MPSC adopted a hearing schedule for the Rate K request, which has subsequently been extended. In accordance with the current schedule, Consumers filed its direct case on July 21, 1994 and cross-examination of all witnesses is to commence on November 21, 1994. The schedule would allow for a final order in the first quarter of 1995. (h) Palisades Plant - Spent Nuclear Fuel Storage. In April 1993, the NRC amended its regulations, effective May 7, 1993, to license the design of the dry spent fuel storage casks to be used by Consumers at Palisades. In May 1993, the Attorney General and certain other parties commenced litigation to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. The courts have declined to prevent such use and have refused to issue temporary restraining orders or stays. Several appeals related to this matter are now pending at the U.S. Sixth Circuit Court of Appeals where oral argument was held during October 1994. As of October 31, 1994, Consumers had loaded seven dry storage casks with spent nuclear fuel and expects to load six additional casks prior to Palisades' 1995 refueling outage. On August 2, 1994 Consumers announced that it will unload and replace one of the four dry storage casks previously loaded because of minor flaws detected in the welds in the liner of the cask. Although testing following cask loading did not disclose any leakage from the cask, Consumers has nevertheless decided to remove the spent fuel from the cask and insert it in another cask. Consumers has examined the radiographs for all of the casks fabricated for it to date, and has found all other welds acceptable. (i) Ludington Pumped Storage Plant. In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for the continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve recreational areas and convey undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to MPSC approval of Consumers being permitted to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve a lawsuit filed by the Attorney General in 1986 on behalf of the State of Michigan in the Circuit Court of Ingham County, seeking damages from Consumers and Detroit Edison for injuries to fishery resources because of the operation of the Ludington plant. The state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, with the latter amount to be adjusted upon installation of "adequate" fish barriers and other changed conditions. Since 1986 the parties have continued to dispute, in various courts, the amount of actual damages as well as the best alternative to mitigate future damages. (j) Abandoned Midland Project. In 1984, Consumers abandoned construction of its unfinished nuclear power plant located in Midland, Michigan, and subsequently took a series of write-downs. In 1991, the MPSC issued orders permitting recovery of a portion of the plant and Consumers began collecting $35 million pretax annually for the next 10 years. Several parties, including the Attorney General, have filed claims of appeal with the Court of Appeals regarding MPSC orders issued in 1991 that specified the recovery of abandoned investment. In the Step 3A appeal, the Attorney General and ABATE contend that Consumers did not fully comply with the financial stabilization orders. Oral arguments were held on the appeals from the May 7 Sept 3A order in December 1993 and on the Step 3B appeal on October 19, 1994. A decision on the Step 3A appeals has been held in abeyance until a decision is rendered in the Step 3B appeals. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15) - CMS Energy: Letter of independent public accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - Consumers: Financial Data Schedule (b) Reports on Form 8-K Current Reports on Form 8-K dated August 18, 1994 and October 5, 1994 (CMS Energy Corporation and Consumers Power Company) covering matters pursuant to "Item 5. Other Events". 80 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. CMS ENERGY CORPORATION ------------------------- (Registrant) Date: November 14, 1994 By A M Wright ------------------------- Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS POWER COMPANY ------------------------- (Registrant) Date: November 14, 1994 By A M Wright ------------------------- Alan M. Wright Senior Vice President and Chief Financial Officer EX-12 2 CMS ENERGY RATIO OF EARNING TO FIXED CHARGES EXHIBIT (12) CMS ENERGY CORPORATION EXHIBIT (12) Ratio of Earnings to Fixed Charges (Millions of Dollars)
Nine Months Ended Years Ended December 31 Sept. 30, 1994 1993 1992 1991 1990 1989 -------------- ------ ------ ------ ------ ------ (b) (c)(d) (e) Earnings as defined (a) - ----------------------- Net income $ 148 $ 155 $(297) $(262) $(494) $ 312 Income taxes 88 75 (146) (94) 25 170 Exclude equity basis subsidiaries (12) (6) 10 10 13 1 Fixed charges as defined, adjusted to exclude capitalized interest of $5, $5, $3, $5, $38 and $177 million for the nine months ended September 30, 1994 and for the years ended December 31, 1993, 1992, 1991, 1990 and 1989, respectively 173 245 228 364 317 207 ------ ------ ------ ------ ------ ------ Earnings as defined $ 397 $ 469 $(205) $ 18 $(139) $ 690 ====== ====== ====== ====== ====== ====== Fixed charges as defined (a) Interest on long-term debt $ 142 $ 204 $ 169 $ 274 $ 293 $ 314 Estimated interest portion of lease rental 9 12 16 17 18 15 Other interest charges 10 23 35 68 33 33 Include equity basis subsidiaries - - - - - 3 Preferred stock dividend 26 17 16 15 17 28 ------ ------ ------ ------ ------ ------ Fixed charges as defined $ 187 $ 256 $ 236 $ 374 $ 361 $ 393 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.12 1.83 - - - 1.76 ====== ====== ====== ====== ====== ====== 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 pre-tax 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 pre-tax losses of $398 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant, $76 million for potential customer refunds and other reserves, and $51 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.45 excluding these amounts. (e) For the year ended December 31, 1990, fixed charges exceeded earnings by $500 million. Earnings as defined include pre-tax losses of $847 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant. The ratio of earnings to fixed charges would have been 1.96 excluding these amounts.
EX-15 3 ARTHUR ANDERSEN CONSENT TO CMS ENERGY EXHIBIT (15) Exhibit (15) ARTHUR ANDERSEN LLP To CMS Energy Corporation: We are aware that CMS Energy Corporation has incorporated by reference in its Registration Statements No. 33-51877, No. 33-55805, No. 33-9732, No. 33-29681, No. 33-47629, and No. 33-64044 its Form 10-Q for the quarter ended September 30, 1994, which includes our report dated November 8, 1994 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. ARTHUR ANDERSEN LLP Detroit, Michigan, November 10, 1994. EX-27 4 CMS ENERGY FINANCIAL DATA SCHEDULE UT
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET AND STATEMENT OF STOCKHOLDERS' EQUITY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 9-MOS DEC-31-1993 JAN-01-1994 SEP-30-1994 PER-BOOK 4,216 1,004 670 1,271 0 7,161 1 1,695 (608) 1,085 0 356 2,014 401 364 0 200 0 118 38 2,582 7,161 2,705 88 2,297 2,394 311 (8) 312 147 165 17 148 49 0 424 1.73 1.73
EX-27 5 CONSUMERS FINANCIAL DATA SCHEDULE UT
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 QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000201533 CONSUMERS POWER COMPANY 1,000,000 9-MOS DEC-31-1993 JAN-01-1994 SEP-30-1994 PER-BOOK 4,216 631 660 1,211 0 6,718 841 491 107 1,450 0 356 1,556 401 145 0 189 0 109 37 2,486 6,718 2,513 99 2,118 2,227 286 (4) 292 109 183 17 166 113 0 349 0 0
EX-99 6 EXHIBIT COVER AND INDEX - -------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 CMS ENERGY CORPORATION AND CONSUMERS POWER COMPANY FORM 10-Q EXHIBITS FOR QUARTER ENDED SEPTEMBER 30, 1994 - -------------------------------------------------------------------------- EXHIBIT INDEX Exhibit Numbers Description - -------- ---------------------------------------------------- (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 -----END PRIVACY-ENHANCED MESSAGE-----