-----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, S+tXFlGvTmUNuXqqYQFD0ksQtoTy8fXvZUvtoWZmaq29f5TFgFThxss/MRhdaGNH 1PztG+3WrqccnaMGHrnIAw== 0000201533-95-000093.txt : 19950814 0000201533-95-000093.hdr.sgml : 19950814 ACCESSION NUMBER: 0000201533-95-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS POWER CO CENTRAL INDEX KEY: 0000201533 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 380442310 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05611 FILM NUMBER: 95561402 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 382726431 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 95561403 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-9513 CMS ENERGY CORPORATION 38-2726431 (A Michigan Corporation) Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 (313)436-9261 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 --- --- Number of shares outstanding of each of the issuer's classes of common stock at July 31, 1995: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 88,180,694 CMS Energy Class G Common Stock, no par value 7,000,000 Consumers Power Company, $10 par value, privately held by CMS Energy 84,108,789 2 CMS Energy Corporation and Consumers Power Company Quarterly reports on Form 10-Q to the Securities and Exchange Commission for the Quarter Ended June 30, 1995 This combined Form 10-Q is separately filed by CMS Energy Corporation and Consumers Power Company. Information contained herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Consumers Power Company makes no representation as to information relating to any other companies affiliated with CMS Energy Corporation. TABLE OF CONTENTS Page Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 PART I: CMS Energy Corporation Report of Independent Public Accountants. . . . . . . . . . . . . 6 Consolidated Statements of Income . . . . . . . . . . . . . . . . 7 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 8 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 9 Consolidated Statements of Common Stockholders' Equity. . . . . . 11 Condensed Notes to Consolidated Financial Statements. . . . . . . 12 Management's Discussion and Analysis. . . . . . . . . . . . . . . 22 Consumers Power Company Report of Independent Public Accountants. . . . . . . . . . . . . 36 Consolidated Statements of Income . . . . . . . . . . . . . . . . 37 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 38 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 39 Consolidated Statements of Common Stockholder's Equity. . . . . . 41 Condensed Notes to Consolidated Financial Statements. . . . . . . 42 Management's Discussion and Analysis. . . . . . . . . . . . . . . 50 PART II: Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 60 Item 4. Submission of Matters to a Vote of Security Holders. . . 62 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 63 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3 GLOSSARY Certain terms used in the text and financial statements are defined below. ABATE . . . . . . . . . . . . . . Association of Businesses Advocating Tariff Equity ALJ . . . . . . . . . . . . . . . Administrative Law Judge Antrim. . . . . . . . . . . . . . Antrim Limited Partnership Attorney General. . . . . . . . . The Michigan Attorney General bcf . . . . . . . . . . . . . . . Billion cubic feet Board of Directors. . . . . . . . Board of Directors of CMS Energy Class G Common Stock. . . . . . . One of two classes of common stock of CMS Energy, no par value, which reflects the separate performance of the Consumers Gas Group Clean Air Act . . . . . . . . . . Federal Clean Air Act as amended on November 15, 1990 CMS Energy. . . . . . . . . . . . CMS Energy Corporation CMS Energy Common Stock . . . . . One of two classes of common stock of CMS Energy, par value $.01 per share CMS Gas Transmission. . . . . . . CMS Gas Transmission and Storage Company, a subsidiary of Enterprises CMS Generation. . . . . . . . . . CMS Generation Co., a subsidiary of Enterprises CMS Holdings. . . . . . . . . . . CMS Midland Holdings Company, a subsidiary of Consumers CMS Midland . . . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers CMS NOMECO. . . . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of Enterprises Common Stock. . . . . . . . . . . Common Stock of CMS Energy, including CMS Energy Common Stock and Class G Common Stock Consumers . . . . . . . . . . . . Consumers Power Company, a subsidiary of CMS Energy Consumers Gas Group . . . . . . . The gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Court of Appeals. . . . . . . . . Michigan Court of Appeals Credit Facility . . . . . . . . . $400 million unsecured revolving credit and letter of credit facility dated as of July 29, 1994 Detroit Edison. . . . . . . . . . The Detroit Edison Company DNR . . . . . . . . . . . . . . . Michigan Department of Natural Resources DSM . . . . . . . . . . . . . . . Demand-side management Enterprises . . . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy Environmental Response Act. . . . Michigan Environmental Response Act FASB. . . . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . . . Gas cost recovery HYDRA-CO. . . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary of CMS Generation and former independent power production subsidiary of Niagara Mohawk Power Corporation kWh . . . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison MCV . . . . . . . . . . . . . . . Midland Cogeneration Venture MCV 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 pollution control revenue bonds MCV Facility. . . . . . . . . . . A natural gas-fueled, combined cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . . . Midland Cogeneration Venture Limited Partnership MD&A. . . . . . . . . . . . . . . Management's Discussion and Analysis MichCon . . . . . . . . . . . . . Michigan Consolidated Gas Company Michigan Natural Resources and Environmental Protection Act. . . . . . . . . . . . . . . Michigan Natural Resources and Environmental Protection Act Part 201 Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a subsidiary of Consumers MMcf/d. . . . . . . . . . . . . . Million cubic feet per day MMCG. . . . . . . . . . . . . . . Michigan Municipal Cooperative Group MPSC. . . . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . . . Megawatts NEIL. . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd. NML . . . . . . . . . . . . . . . Nuclear Mutual Ltd. NOPR. . . . . . . . . . . . . . . Notice of proposed rulemaking NRC . . . . . . . . . . . . . . . Nuclear Regulatory Commission O&M . . . . . . . . . . . . . . . Other operation and maintenance expense Palisades . . . . . . . . . . . . Palisades nuclear plant, owned by Consumers PPA . . . . . . . . . . . . . . . The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990 Preferred Stock . . . . . . . . . CMS Energy preferred stock PSCR. . . . . . . . . . . . . . . Power supply cost recovery PUHCA . . . . . . . . . . . . . . Public Utility Holding Company Act of 1935 Restated Articles of Incorporation. . . . . . . . . . CMS Energy's restated Articles of Incorporation as filed with the Michigan Department of Commerce June 6, 1995 authorizing the Class G Common Stock and increasing the authorized capital stock SEC . . . . . . . . . . . . . . . Securities and Exchange Commission Settlement Order. . . . . . . . . MPSC Order issued March 31, 1993 in MPSC Case Nos. U-10127, U-8871 and others, and the rehearing order issued May 26, 1993 SGP Partnership . . . . . . . . . A specialty gas processors limited partnership composed of CMS Gas Transmission and Nitrotec Helium Corporation SFAS. . . . . . . . . . . . . . . Statement of Financial Accounting Standards Superfund . . . . . . . . . . . . Comprehensive Environmental Response, Compensation and Liability Act Terra . . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas exploration and production company located in Traverse City, Michigan TGN . . . . . . . . . . . . . . . CMS Gas Transmission's 25 percent ownership in Argentina's Transportadora de Gas del Norte pipeline 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 June 30, 1995 and 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month, six-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is June 9, 1995), we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, August 9, 1995. 7 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 1995 1994 1995 1994 1995 1994 In Millions, Except Per Share Amounts OPERATING REVENUE Electric utility $ 543 $ 549 $1,083 $1,094 $2,179 $2,193 Gas utility 197 183 679 711 1,119 1,184 Oil and gas exploration and production 26 20 60 38 107 76 Independent power production 23 9 46 17 75 28 Natural gas transmission, storage and marketing 43 36 81 78 147 147 Other 5 - 7 1 10 4 ---------------------------------------------------------- Total operating revenue 837 797 1,956 1,939 3,637 3,632 ---------------------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 67 70 134 150 290 302 Purchased power - related parties 121 118 245 240 487 486 Purchased and interchange power 47 55 83 97 148 192 Cost of gas sold 135 123 443 495 733 815 Other 164 154 326 298 653 610 ---------------------------------------------------------- Total operation 534 520 1,231 1,280 2,311 2,405 Maintenance 45 49 91 92 191 199 Depreciation, depletion and amortization 92 84 206 187 398 372 General taxes 42 36 98 97 184 184 ---------------------------------------------------------- Total operating expenses 713 689 1,626 1,656 3,084 3,160 ---------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) Electric utility 83 86 170 174 330 326 Gas utility 17 18 108 102 142 155 Oil and gas exploration and production 7 2 22 4 26 (1) Independent power production 13 3 26 5 42 6 Natural gas transmission, storage and marketing 3 3 6 6 10 9 Other 1 (4) (2) (8) 3 (23) ---------------------------------------------------------- Total pretax operating income 124 108 330 283 553 472 INCOME TAXES 25 24 79 71 112 98 ---------------------------------------------------------- NET OPERATING INCOME 99 84 251 212 441 374 ---------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Income from contractual arrangements (MCV Bonds) - - - - - 16 Accretion income 3 4 6 7 12 13 Accretion expense (Note 2) (8) (9) (16) (18) (32) (36) Other income taxes, net 3 5 5 7 9 10 Other, net 3 1 7 6 17 14 ---------------------------------------------------------- Total other income 1 1 2 2 6 17 ---------------------------------------------------------- FIXED CHARGES Interest on long-term debt 57 47 113 93 212 196 Other interest 4 3 9 6 22 19 Capitalized interest (1) (2) (2) (3) (5) (6) Preferred dividends 7 7 14 10 28 15 ---------------------------------------------------------- Net fixed charges 67 55 134 106 257 224 ---------------------------------------------------------- NET INCOME $ 33 $ 30 $ 119 $ 108 $ 190 $ 167 ========================================================== AVERAGE COMMON SHARES OUTSTANDING 88 86 87 86 87 84 ========================================================== EARNINGS PER AVERAGE COMMON SHARE $ .37 $ .35 $ 1.36 $ 1.27 $ 2.19 $ 1.99 ========================================================== DIVIDENDS DECLARED PER COMMON SHARE $ .21 $ .18 $ .42 $ .36 $ .84 $ .72 ========================================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. /TABLE 8 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended Twelve Months Ended June 30 June 30 1995 1994 1995 1994 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 119 $ 108 $ 190 $ 167 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $24, $24, $49 and $48, respectively) 206 187 398 372 Capital lease and other amortization 19 14 42 28 Debt discount amortization 16 19 34 38 Deferred income taxes and investment tax credit 57 50 63 54 Accretion expense 16 18 32 36 Accretion income - abandoned Midland project (6) (7) (12) (13) MCV power purchases - settlement (Note 2) (70) (45) (112) (82) Other (23) (7) (38) (11) Changes in other assets and liabilities 47 107 (48) (56) ------ ------ ------ ------ Net cash provided by operating activities 381 444 549 533 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (436) (268) (743) (584) Investments in nuclear decommissioning trust funds (24) (24) (49) (48) Investments in partnerships and unconsolidated subsidiaries (20) (24) (49) (108) Cost to retire property, net (19) (14) (43) (33) Deferred demand-side management costs (4) (4) (9) (28) Proceeds from sale of property 1 1 20 2 Proceeds from MCV Bonds - - - 322 Sale of subsidiary - - - (14) Other (6) (3) (8) (6) ------ ------ ------ ------ Net cash used in investing activities (508) (336) (881) (497) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans, notes and bonds 162 122 741 718 Issuance of common stock 39 17 52 149 Issuance of preferred stock - 193 - 193 Payment of common stock dividends (37) (31) (73) (61) Increase (decrease) in notes payable, net (30) (130) 180 (112) Payment of capital lease obligations (19) (12) (42) (24) Retirement of bonds and other long-term debt (13) (147) (145) (740) Repayment of bank loans (9) (102) (380) (203) Retirement of common stock - (1) (1) (4) ------ ------ ------ ------ Net cash provided by (used in) financing activities 93 (91) 332 (84) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (34) 17 - (48) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 79 28 45 93 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 45 $ 45 $ 45 $ 45 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9 CMS Energy Corporation Consolidated Balance Sheets
June 30 June 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions ASSETS PLANT AND PROPERTY (At Cost) Electric $5,899 $5,771 $5,598 Gas 2,146 2,102 2,025 Oil and gas properties (full-cost method) 992 934 899 Other 56 61 70 ----------------------------------- 9,093 8,868 8,592 Less accumulated depreciation, depletion and amortization 4,493 4,299 4,171 ----------------------------------- 4,600 4,569 4,421 Construction work-in-progress 264 245 266 ----------------------------------- 4,864 4,814 4,687 ----------------------------------- INVESTMENTS Independent power production 286 152 121 First Midland Limited Partnership (Note 2) 221 218 215 Midland Cogeneration Venture Limited Partnership (Note 2) 90 74 67 Other 59 56 44 ----------------------------------- 656 500 447 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 45 79 45 Accounts receivable and accrued revenue, less allowances of $4, $5 and $4, respectively (Note 7) 169 156 160 Inventories at average cost Gas in underground storage 155 235 160 Materials and supplies 79 75 78 Generating plant fuel stock 34 37 26 Trunkline settlement 30 30 30 Deferred income taxes 27 34 19 Prepayments and other 111 186 124 ----------------------------------- 650 832 642 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 475 484 499 Nuclear decommissioning trust funds 262 213 191 Abandoned Midland project (Note 3) 139 147 155 Trunkline settlement 40 55 70 Other 402 339 318 ----------------------------------- 1,318 1,238 1,233 ----------------------------------- TOTAL ASSETS $7,488 $7,384 $7,009 ===================================
10
June 30 June 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION (Note 7) Common stockholders' equity $1,229 $1,107 $1,058 Preferred stock of subsidiary 356 356 356 Long-term debt 2,748 2,709 2,407 Non-current portion of capital leases 109 108 124 ----------------------------------- 4,442 4,280 3,945 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 181 64 262 Notes payable 309 339 129 Accounts payable 197 194 175 Accrued taxes 147 216 141 MCV power purchases - settlement (Note 2) 95 95 82 Accounts payable - related parties 50 50 39 Accrued interest 40 40 38 Accrued refunds 30 25 41 Other 166 198 188 ----------------------------------- 1,215 1,221 1,095 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 621 582 556 Postretirement benefits 553 550 560 MCV power purchases - settlement (Note 2) 269 324 363 Deferred investment tax credits 176 181 186 Trunkline settlement 40 55 70 Regulatory liabilities for income taxes, net 33 16 16 Other 139 175 218 ----------------------------------- 1,831 1,883 1,969 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,488 $7,384 $7,009 =================================== 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 Six Months Ended Twelve Months Ended June 30 June 30 June 30 1995 1994 1995 1994 1995 1994 In Millions COMMON STOCK At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 ------------------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 1,734 1,684 1,701 1,672 1,688 1,543 Common Stock reacquired - - - (1) (1) (4) Common Stock issued 6 4 39 17 52 149 Common Stock reissued - - - - 1 - ------------------------------------------------------------------- At end of period 1,740 1,688 1,740 1,688 1,740 1,688 ------------------------------------------------------------------- REVALUATION CAPITAL At beginning of period 1 1 - - (1) - SFAS 115 - unrealized loss, net of tax - (2) 1 (1) 2 (1) ------------------------------------------------------------------- At end of period 1 (1) 1 (1) 1 (1) ------------------------------------------------------------------- RETAINED EARNINGS (DEFICIT) At beginning of period (527) (644) (595) (707) (630) (736) Net income (loss) 33 30 119 108 190 167 Common stock dividends declared (19) (16) (37) (31) (73) (61) ------------------------------------------------------------------- At end of period (513) (630) (513) (630) (513) (630) ------------------------------------------------------------------- TOTAL COMMON STOCKHOLDERS' EQUITY $1,229 $1,058 $1,229 $1,058 $1,229 $1,058 =================================================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
12 CMS Energy Corporation Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the 1994 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure and Basis of Presentation CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas. CMS Energy uses the equity method of accounting for investments in companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating income. For the three, six and twelve month periods ended June 30, 1995, equity earnings were $14 million, $28 million and $52 million, respectively and $4 million, $10 million and $18 million for the three, six and twelve month periods ended June 30, 1994. 2: The Midland Cogeneration Venture The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. At June 30, 1995, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership: Consumers' annual obligation for purchase of contract capacity from the MCV Partnership under the PPA increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs but the MPSC would determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. At the request of the MPSC, the MCV Partnership confirmed that it did not object to the Settlement Order. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. The PPA provides that Consumers is to pay the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all economic energy deliveries above the availability limits to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility, and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries were $46 million for the six months ended June 30, 1995. If Consumers is unable to sell any capacity above the current MPSC-authorized level, future additional after-tax losses and after-tax cash underrecoveries would be incurred. Consumers' estimates of its future after-tax cash underrecoveries, and possible losses for 1995 and the next four years if none of the additional capacity is sold, are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Expected cash underrecoveries $72 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. At June 30, 1995 and December 31, 1994, the after-tax present value of the Settlement Order liability totaled $236 million and $272 million, respectively. The reduction in the liability reflects after-tax cash underrecoveries of $46 million, partially offset by after-tax accretion expense of $10 million. The undiscounted after-tax amount associated with the liability totaled $638 million at June 30, 1995. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility. Additionally, in 1995, Consumers paid $15 million to terminate a power purchase agreement with a proposed 44 MW wood and chipped-tire facility. Consumers plans to seek MPSC approval to substitute less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. This proposed substitution of capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. The capacity substitution represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for similar facilities. As a result, Consumers has recorded a regulatory asset of $45 million, which it believes will ultimately be recoverable in rates. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of the 65 MW of capacity substitution as part of the five year forecast included in the plan case. Although recovery of the costs relating to the substitution was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for substituting capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. If the MPSC adopts the ALJ's recommendation, the regulatory asset may be required to be reduced. MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. The MPSC confirmed the recovery of certain MCV-related costs as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals. As part of its decision in the 1993 PSCR reconciliation case issued February 23, 1995, the MPSC allocated a portion of the costs related to purchases from the MCV to non-jurisdictional customers, reducing the amount allowed for recovery from PSCR customers. Consumers believes this is inconsistent with the terms of the Settlement Order and has appealed the February 23 order on this issue. 3: Rate Matters Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. In late 1994, Consumers filed a request with the MPSC which could further increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes a proposed increase in Consumers' authorized rate of return on equity to 13 percent from the current 11.75 percent, recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. Consumers requested that the MPSC eliminate subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 (see Electric DSM) and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 4). In response to Consumers' requested rate increase, the MPSC staff initially recommended a final annual increase of $45 million to Consumers' base rates, as well as suggested several options for cost recovery of 325 MW of MCV capacity. However, on motions filed by ABATE and the Attorney General, the ALJ struck portions of the MPSC staff's testimony relating to the cost of this capacity and the MPSC staff subsequently withdrew several other portions of its testimony. In May 1995, the MPSC affirmed the ALJ's decision to strike the MPSC staff's testimony and stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. Consumers has filed a petition for rehearing of this order with the MPSC. In June 1995, briefs and reply briefs were filed by all parties in this case. Consumers presented one of its previously filed positions, which assumes retaining certain customers subject to competition and serving these customers from jurisdictional sources, as well as from the uncommitted MCV capacity. If this position is adopted, Consumers' retail electric base rates would increase by $93 million, with a corresponding increase in PSCR revenues of $52 million. The MPSC staff recommended a $43 million increase in Consumers' base rates. This position reflects a different sales forecast than Consumers', as well as a 12- percent return on equity and a lower equity ratio than that included in Consumers' proposed capital structure. The MPSC staff also recommends the elimination of all rate subsidization by primary customers, which include industrial and large commercial customers. In August 1995, the ALJ issued a proposal for decision in this case that recommends a $46 million rate increase. The ALJ generally adopted the MPSC staff's position with adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ also recommended the elimination of rate subsidization. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers (see Special Rates discussion in the MD&A). In January 1995, Consumers filed a request with the MPSC, seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts, which if approved would result in a net decrease in depreciation expense of $7 million for ratemaking purposes. For further information, see Electric Rate Case discussion in the MD&A. Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of the abandoned Midland project and Consumers began collecting $35 million pretax annually for the next 10 years. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. Consumers, ABATE and the Attorney General have filed applications for leave to appeal this decision with the Michigan Supreme Court. Management cannot predict the outcome of this issue. Electric DSM: In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to continue certain DSM programs ($30 million annually) in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from customers in accordance with an MPSC accounting order. The unamortized balance of deferred costs totaled $70 million at June 30, 1995. During 1994, Consumers recognized $11 million in incentive revenue related to an earlier DSM program approved by the MPSC. In June 1995, the MPSC authorized Consumers to collect the $11 million incentive for past program performance. As part of the same order, the MPSC authorized Consumers to discontinue future DSM program expenditures and ceased all new program funding. PSCR Issues: In February 1995, the MPSC issued a final order in the 1993 PSCR reconciliation proceeding that addressed the extended refueling and maintenance outage at Palisades in 1993. The order disallowed $4 million of replacement power costs. Consumers accrued a loss for this issue in 1994. Gas Rates: In 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits against 1994 earnings. The agreement was reached in response to a claim that gas utility business earnings for 1993 were excessive. This charge against earnings partially offsets savings related to reduced state property taxes. The agreement also provides for an additional $4 million of postretirement benefit costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers filed a gas rate case in December 1994. Consumers requested an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. The MPSC staff's recommendation included a lower rate base, a lower return on common equity, a revised capital structure and a lower operating cost forecast than Consumers had projected. Consumers expects an MPSC decision in early 1996. GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced. As a result, Consumers was not allowed to recover $13 million of costs. Consumers accrued a loss prior to 1993 in excess of the disallowed amount. In March 1995, management concluded that the intrastate producers' pending appeals of the MPSC order would not be successful and accordingly reversed $23 million (pretax) of the previously accrued loss, which represented the portion in excess of the disallowed amount. In June 1995, the Court of Appeals affirmed the MPSC's prior decision. The producers have filed a motion for rehearing with the Court of Appeals. In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a gas supply contract pricing dispute with certain intrastate producers. The ALJ agreed with Consumers that certain market based pricing provisions should, on a prospective basis, limit the price paid by Consumers under the three agreements at issue. The ALJ also found that the market based pricing provision required specific MPSC approval before Consumers could apply those prices to purchases under the agreements and found that such approval had not previously been given. Consumers does not agree with the ALJ's findings and conclusions on this point and filed exceptions to the proposal for decision for the MPSC's consideration. If the MPSC issues an order adopting the recommendations of the ALJ, the market based provisions upon which Consumers had paid for gas purchased under these agreements will not be effective prior to such MPSC order. If the producers pursue a court action for amounts owed for previously purchased gas, Consumers could be liable for as much as $44 million (excluding any interest) under the producers' theories. Consumers believes the producers' position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 4: Commitments and Contingencies Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement allows for continued operation of the plant through the end of its FERC license. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million) to the state of Michigan and the Great Lakes Fishery Trust, make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The definitive settlement documents have been completed and were filed with the appropriate Michigan courts and state and federal agencies. The agreement is subject to the MPSC permitting Consumers to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan. In one, the state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, reduced only upon installation of "adequate" fish barriers and other changed conditions. In the other lawsuit, the Attorney General sought to have Ludington's bottomlands lease declared void. Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability for the significant sites will average less than 4 percent of the estimated total site remediation costs, and such liability is expected to be less than $9 million. At June 30, 1995, Consumers has accrued a liability for its estimated losses. Consumers and CMS Energy believe that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites and the DNR has approved three of four plans submitted by Consumers. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites, since there is limited knowledge of manufactured gas plant contamination at these sites at this time. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $112 million. These estimates are based on undiscounted 1994 costs. At June 30, 1995, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recoverable in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC has approved similar deferred accounting requests by several other similar Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. Consumers' coal-fueled electric generating units burn low- sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $25 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and possible modifications at other coal-fired units to be an additional $50 million by the year 2000. Final acid rain program nitrogen oxide regulations specifying the controls to be installed at the other coal-fired units are not expected earlier than 1996. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: CMS Energy estimated capital expenditures, including investment in unconsolidated subsidiaries and new lease commitments, of $1,054 million for 1995, $754 million for 1996 and $644 million for 1997. Capital expenditures for 1995 include approximately $201 million for acquisitions which commenced in 1994 but did not close until 1995. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy could be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. The SEC has not taken action on this matter. Other: Consumers has experienced a number of lawsuits filed against it relating to so-called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the grounding of the customer's service. At June 30, 1995, Consumers had 70 separate stray voltage lawsuits pending. In addition to the matters disclosed in these notes, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies, arising from the ordinary course of business involving personal injury and property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on CMS Energy's financial position or results of operations. 5: Nuclear Matters In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied National Environmental Policy Act requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. As of June 30, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades. In the latter part of 1995, Consumers plans to unload and replace one of the loaded casks. In a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although testing has not disclosed any leakage, Consumers has nevertheless decided to remove the spent fuel and insert it in another cask. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and confirmed that the pad location is acceptable to support the casks. The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan and Consumers stores low-level waste at its nuclear plant sites. Recently, a site in South Carolina announced that it would be available for accepting low-level waste. Consumers plans to begin shipping its low-level waste to this site in the third quarter of 1995. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs for the major portion of prolonged accidental outages for 12 months after a 21 week exclusion with reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $33 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. In April 1995, Consumers received a Safety Evaluation Report from the NRC concurring with this evaluation and requesting submittal of an action plan to provide for operation of the plant beyond 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. 6: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended June 30 were: In Millions Six Months Ended Twelve Months Ended 1995 1994 1995 1994 ---- ---- ---- ---- Cash transactions Interest paid (net of amounts capitalized) $100 $ 77 $185 $170 Income taxes paid (net of refunds) 19 20 35 16 Non-cash transactions Nuclear fuel placed under capital lease $ 23 $ 3 $ 42 $ 8 Other assets placed under capital leases 2 7 10 16 Assumption of debt 12 - - - 7: Capitalization and Other CMS Energy On March 21, 1995, CMS Energy received shareholders' approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy, designated Class G Common Stock which reflects the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, will be attributed to the "Consumers Gas Group"). The existing CMS Energy Common Stock continues to be outstanding and is intended to reflect the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to the outstanding shares of the Class G Common Stock. Prior to the approval of the amendment to the Articles of Incorporation on March 21, 1995, CMS Energy was permitted to issue up to 250 million shares of common stock at $.01 par value and up to 5 million shares of preferred stock at $.01 par value. The filing of the Restated Articles of Incorporation with the Michigan Department of Commerce increased the number of authorized shares of capital stock from 255 million shares to 320 million shares consisting of 250 million shares of CMS Energy Common Stock, par value $.01 per share, 60 million shares of Class G Common Stock, no par value, and 10 million shares of Preferred Stock, par value $.01 per share. CMS Energy filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock of CMS Energy (including Class G Common Stock), Preferred Stock of CMS Energy or a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually evaluates the capital markets and may offer such securities from time to time, at terms to be determined at or prior to the time of the sale. In July 1995, under such shelf registration statement, CMS Energy received net proceeds of approximately $116 million from the issuance of 7 million shares of Class G Common Stock at a price to the public of $17.75 per share representing 21.875% of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds will be invested in the businesses and used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness under the Credit Facility, none of which is attributable to the Consumers Gas Group. On August 9, 1995 CMS Energy received notification that underwriters intend to exercise their option and purchase an additional 520,000 shares of CMS Energy Class G Common Stock at a price to the public of $17.75 per share for the purpose of covering overallotments related to the July 1995 initial public offering. This issuance of the additional shares will increase the common stockholder's equity value attributed to the Consumers Gas Group represented by the outstanding shares of Class G Common Stock to 23.5%. Earnings (Loss) attributable to CMS Energy Class G Common Stock on a per share basis will be determined based on 23.5% of the earnings of the Consumers Gas Group, which reflects the intent of the Board of Directors that the earnings and financial condition of the Consumers Gas Group be the primary basis for determining dividends to be paid on the Class G Common Stock. Stockholders of Class G Common Stock have no direct rights in the equity or assets of the Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of its Board of Directors, dividends will be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. Dividends on the Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of the Consumers Gas Group, and to a lessor extent, CMS Energy as a whole. It is the Board of Directors' current intention that the declaration or payment of dividends with respect to the Class G Common Stock will not be reduced, suspended or eliminated as a result of factors arising out or relating to the electric utility business or the non-utility businesses of CMS Energy unless such factors also require, in the Board of Directors' sole discretion, the omission of the declaration or reduction in payment of dividends on both the CMS Energy Common Stock and the Class G Common Stock. In July 1995, the Board of Directors declared a quarterly dividend of 28 cents per share ($1.12 per share on an annual basis) on Class G Common Stock. Consumers Power Debt Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. At June 30, 1995, Consumers had an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At June 30, 1995 and 1994, Consumers had a total of $309 million and $129 million outstanding under these facilities, respectively. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing the $470 million facility which expired by its own terms. Other Consumers has an established $500-million trade receivables purchase and sale program. At June 30, 1995, receivables sold under the agreement totaled $190 million compared with $205 million at June 30, 1994. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In April 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. CMS NOMECO In February 1995, CMS Energy acquired Walter International, Inc., a Houston-based independent oil company, for approximately $46 million subject to post-closing adjustments. Walter was merged with a wholly- owned subsidiary of CMS NOMECO. In connection with the acquisition, CMS NOMECO delivered $24 million of CMS Energy common stock and assumed $12 million of project financing debt. CMS NOMECO's existing revolving bank credit line, which converts to term loans from November 1996 through November 1999, was increased from $110 million at December 31, 1994 to $130 million at June 30, 1995. $82 million of revolving credit debt was outstanding at a weighted average interest rate of 7.36 percent at June 30, 1995. Senior serial notes amounting to $28 million, with a weighted average interest rate of 9.4 percent, are outstanding from a private placement. On July 6, 1995 CMS NOMECO notified the senior serial note-holders that it intends to prepay entirely the note balances. The notes will be retired with available proceeds from the bank credit line. CMS Generation In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility, for the acquisition of HYDRA-CO. CMS Energy is currently evaluating permanent financing options. Also in connection with the acquisition of HYDRA-CO, CMS Generation, is guaranteeing a letter of credit reimbursement obligation of $48 million. 22 CMS Energy Corporation Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1994 Form 10-K of CMS Energy. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in domestic and international non- utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas. On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' or CMS Energy's consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive. On March 21, 1995, CMS Energy received shareholders' approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy, designated Class G Common Stock which reflects the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, will be attributed to the "Consumers Gas Group"). The existing CMS Energy Common Stock continues to be outstanding and is intended to reflect the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to the outstanding shares of the Class G Common Stock. Prior to the approval of the amendment to the Articles of Incorporation on March 21, 1995, CMS Energy was permitted to issue up to 250 million shares of common stock at $.01 par value and up to 5 million shares of preferred stock at $.01 par value. The filing of the Restated Articles of Incorporation with the Michigan Department of Commerce increased the number of authorized shares of capital stock from 255 million shares to 320 million shares consisting of 250 million shares of CMS Energy Common Stock, par value $.01 per share, 60 million shares of Class G Common Stock, no par value, and 10 million shares of Preferred Stock, par value $.01 per share. CMS Energy filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock of CMS Energy (including Class G Common Stock), Preferred Stock of CMS Energy or a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually evaluates the capital markets and may offer such securities from time to time, at terms to be determined at or prior to the time of the sale. In July 1995, under such shelf registration statement, CMS Energy received net proceeds of approximately $116 million from the issuance of 7 million shares of Class G Common Stock at a price to the public of $17.75 per share representing 21.875% of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds will be invested in the businesses and used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness under the Credit Facility, none of which is attributable to the Consumers Gas Group. On August 9, 1995 CMS Energy received notification that underwriters intend to exercise their option and purchase an additional 520,000 shares of CMS Energy Class G Common Stock at a price to the public of $17.75 per share for the purpose of covering overallotments related to the July 1995 initial public offering. This issuance of the additional shares will increase the common stockholder's equity value attributed to the Consumers Gas Group represented by the outstanding shares of Class G Common Stock to 23.5%. Consolidated earnings for the quarters ended June 30, 1995 and 1994 Consolidated net income totaled $33 million or $.37 per share for the second quarter of 1995, compared to $30 million or $.35 per share for the second quarter of 1994. The increase in net income reflects the growth of the non-utility businesses, an increase in electric utility sales and gas utility deliveries, additional earnings reflecting improved operating results, and increased revenue from the May 1994 electric rate increase. This increase was offset, however, by the 1994 recognition of DSM incentive revenue, and higher depreciation and general tax expenses during 1995. Consolidated earnings for the 6 months ended June 30, 1995 and 1994 Consolidated net income totaled $119 million or $1.36 per share for the six months ended June 30, 1995, compared to $108 million or $1.27 per share for the six months ended June 30, 1994. The increase in net income reflects increased electric utility sales, increased revenue from the May 1994 electric rate increase, reversal of a loss previously recorded for a gas contract contingency (see Note 3), and additional earnings reflecting growth and improved operating results of the nonutility businesses. Partially offsetting these increases were a decrease in gas utility deliveries, higher operating costs and the recognition of DSM incentive revenue in the second quarter of 1994. Consolidated earnings for the 12 months ended June 30, 1995 and 1994 Consolidated net income totaled $190 million or $2.19 per share for the 12 months ended June 30, 1995, compared to $167 million or $1.99 per share for the 12 months ended June 30, 1994. The increase in net income reflects the growth of the non-utility businesses, the impact of the May 1994 electric rate increase, higher electric utility kWh sales and the reversal of losses previously recorded for gas contingencies, partially offset by lower gas utility deliveries, the recognition of DSM incentive revenue in the 1994 period, and higher operating costs and depreciation. Cash Position, Financing and Investing CMS Energy's primary ongoing source of operating cash is dividends from its principal subsidiaries. CMS Energy's consolidated operating cash requirements are met by its operating and financing activities. CMS Energy's consolidated cash from operations continues to primarily reflect Consumers' sale and transportation of natural gas and the generation, sale and transmission of electricity and from CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations for the first six months of 1995 primarily reflects Consumers' increased electric sales and increased electric rates which were approved by the MPSC in mid- 1994, offset by Consumers' greater underrecoveries of power costs associated with purchases from the MCV. Financing and Investing Activities: Capital expenditures, including assets placed under capital lease, deferred DSM costs and investment in unconsolidated subsidiaries totaled $485 million for the first six months of 1995 compared with $306 million for the first six months of 1994. These amounts primarily represent CMS Energy's continued expansion of the non-utility business segments, and capital investments in the electric and gas utility business units. Capital expenditures for 1995 include requirements of $201 million for acquisitions which commenced in 1994 but did not close until 1995. CMS Energy's expenditures for the second quarter of 1995 for its utility and non-utility businesses were $204 million and $281 million, respectively. In January 1995, CMS Energy paid $18 million in cash dividends to CMS Energy shareholders. An $19 million dividend was also paid to CMS Energy shareholders in May 1995. In the second quarter of 1995, Consumers declared and paid a $70 million common dividend to CMS Energy from its first quarter earnings. In July 1995 CMS Energy issued 7 million shares of Class G Common Stock. The net proceeds of $116 million will be invested in the businesses and used for the general corporate purposes of CMS Energy. Initially, such proceeds were be used to repay a portion of CMS Energy's indebtedness under the Credit Facility, which at July 31, 1995 had $174 million principal amount outstanding with an annual interest rate of 7.7 percent. In July 1995, the Board of Directors declared a quarterly dividend of 28 cents per share ($1.12 cents per share on an annual basis) on Class G Common Stock and a quarterly dividend of 24 cents per share ($.96 on an annual basis) on CMS Energy Common Stock. Financing and Investing Outlook: CMS Energy estimates that capital expenditures, including new lease commitments, will total approximately $2.5 billion for the years 1995 through 1997. Cash generated by operations is expected to satisfy a substantial portion of capital expenditures. Additionally, CMS Energy will continue to evaluate capital markets in 1995 as a potential source of financing its subsidiaries' investing activities. In Millions Years Ended December 31 1995 1996 1997 ---- ---- ---- Electric utility $330 $297 $250 Gas utility 129 119 101 Oil and gas exploration and production (a) 188 120 135 Independent power production (b) 222 151 85 Natural gas pipeline, storage and marketing 185 67 73 ---- ---- ---- $1,054 $754 $644 ====== ==== ==== (a)(b) 1995 capital expenditures include requirements of approximately (a)$46 million and (b)$155 million for acquisitions which commenced in 1994 but did not close until 1995. At June 30, 1995, Consumers had several available sources of credit including unsecured, committed lines of credit totaling $185 million and a $470 million unsecured working capital facility. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing the $470 million facility, which expired by its own terms. Consumers also has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. Consumers is continuing efforts toward its goal of increasing the equity portion of its capital structure. In the current gas rate case, the MPSC staff has suggested that Consumers temporarily suspend paying cash dividends to CMS Energy in lieu of CMS Energy making a direct equity infusion of cash into Consumers. Accordingly, CMS Energy is considering using this method to accomplish a planned equity investment in 1995. Any reduction in cash dividends from Consumers as a result of this action will be offset by a reduction in the cash outflows for potential equity infusions from CMS Energy to Consumers. Electric Utility Results of Operations Electric Pretax Operating Income for the quarters ended June 30, 1995 and 1994: During the second quarter of 1995, electric pretax operating income decreased $3 million from the 1994 level. This reduction resulted primarily from the 1994 recognition of DSM incentive revenue and increases in depreciation and general tax expenses during the 1995 period. Partially offsetting the net decrease was higher electric kWh sales (see Electric Sales section), a decrease in other operating expenses, and the positive impact of the May 1994 electric rate increase. Electric Pretax Operating Income for the six months ended June 30, 1995 and 1994: Electric pretax operating income for the six months ended June 30, 1995 decreased $4 million from the comparable 1994 period. This decrease primarily reflects the 1994 recognition of DSM incentive revenue, and higher operating expenses, depreciation and general taxes during 1995. The decrease was partially offset by increased electric kWh sales (see Electric Sales section) and the impact of the May 1994 electric rate increase, which included the recovery of higher postretirement benefit costs. Electric Pretax Operating Income for the 12 months ended June 30, 1995 and 1994: The $4 million improvement in electric pretax operating income for the 12 months ended June 30, 1995 compared with the corresponding 1994 level is primarily the result of the impact of the May 1994 electric rate increase, which included the recovery of the higher postretirement benefit costs, and increased electric kWh sales (see Electric Sales section), which contributed $38 million and $17 million, respectively. These increases were partially offset by higher operating costs and depreciation, along with the impact of the 1994 recognition of DSM incentive revenue. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended June 30: In Millions Impact on Pretax Operating Income Quarter ended Six months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Sales $ 8 $ 9 $17 Rate increases and other regulatory issues (6) 5 24 O&M, general taxes and depreciation (a) (5) (18) (37) ------- ------- ------ Total change $(3) $(4) $ 4 ======= ======= ====== (a) Includes $11 million and $29 million of increased postretirement benefit costs for the six month and 12 month comparative periods, respectively. Electric Sales: Electric sales during the second quarter of 1995 totaled 8.5 billion kWh, a 2.6 percent increase from 1994 levels. The increase occurred in all customer classes. Consumers' electric sales have benefited from improved employment and other economic conditions. Electric sales during the six months ended June 30, 1995 totaled 17.2 billion kWh, a 2.0 percent increase from 1994 levels. This increase reflects continued strength in the industrial and commercial sectors, somewhat offset by weather impacts. During the six months ended 1995 period, commercial and industrial sales increased 3.3 percent and 4.2 percent respectively, while residential sales showed a slight decrease. Electric sales during the 12 months ended June 30, 1995 totaled 34.8 billion kWh, a 3.4 percent increase from 1994 levels. During the 12 months ended 1995 period, commercial and industrial sales increased 2.7 percent and 5.2 percent respectively, while residential sales showed a slight decrease from 1994 levels. The industrial segments of chemicals and transportation equipment accounted for the largest share of the growth in industrial kWh sales. Power Costs: Power costs for the three month period ended June 30, 1995 totaled $235 million, an $8 million decrease from the corresponding 1994 period. This decrease primarily reflects increased generation at Consumers' nuclear power plants and a corresponding reduction in generation at the more costly oil- and coal-fired plants. Power costs for the six month period ended June 30, 1995 totaled $462 million, a $25 million decrease from the corresponding 1994 period. Power costs for the 12 month period ended June 30, 1995 totaled $925 million, a $55 million decrease from the corresponding 1994 period. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership increased to 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Additional losses may occur if actual future experience materially differs from the 1992 estimates. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $46 million for the first six months of 1995. Estimated future after-tax cash underrecoveries, and possible losses for 1995 and the next four years if none of the additional capacity is sold, are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Expected cash underrecoveries $72 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In July 1994 and February 1995, Consumers terminated power purchase agreements with a 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. Consumers plans to seek MPSC approval to substitute 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of the 65 MW of capacity substitution as part of the five year forecast included in the plan case. Although recovery of the costs relating to the substitution was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for substituting capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. For further information, see Note 2. Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. Consumers filed a request with the MPSC in late 1994, to further increase its retail electric rates. As part of this case, in May 1995, the MPSC stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. In August 1995, the ALJ recommended a final annual rate increase of $46 million. For further information regarding Consumers' request and the staff's recommendation, see Note 3. Additionally, in January 1995, Consumers filed a request with the MPSC, seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease. If both aspects of the request are approved, the net result would be a decrease in electric depreciation expense of $7 million for ratemaking purposes. In April 1995, the MPSC staff's filing did not support Consumers' requested increase in depreciation expense, but instead proposed a decrease of $24 million. In addition, the MPSC staff also did not support the reallocation of plant investment as proposed by Consumers but suggested several alternatives which could partially address this issue. A final order is expected in late 1995. Special Rates: In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers, and that have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility, and allow use of MCV contract capacity above the level currently authorized by the MPSC, to respond to customers' alternative energy options. In May 1995, the MPSC issued an order stating that it has legal authority to approve a range of rates under which Consumers could negotiate prices with customers that have competitive energy alternatives. However, the MPSC dismissed from consideration, in this proceeding, the issues related to Consumers' proposed use of the additional 325 MW of MCV contract capacity to serve these customers. In June 1995, Consumers filed a petition for rehearing of this decision with the MPSC. PSCR Matters: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. In February 1995, the MPSC issued a final order in the 1993 PSCR reconciliation, disallowing $4 million of replacement power costs related to the 1993 outage. Consumers accrued a loss for this issue in 1994. Electric Conservation Efforts: Over the past few years, Consumers has participated in several MPSC-authorized DSM programs designed to encourage the efficient use of energy. During 1994, Consumers recognized $11 million in incentive revenue, related to Consumers' achievement of certain DSM program objectives approved by the MPSC in 1992. In June 1995, the MPSC issued an order that authorized Consumers to collect the full $11 million incentive. The MPSC also authorized Consumers to discontinue future DSM program expenditures and ceased all new program funding. For further information, see Note 3. Electric Capital Expenditures: CMS Energy estimates capital expenditures, including deferred DSM costs and new lease commitments, related to Consumers electric utility operations of $330 million for 1995, $297 million for 1996 and $250 million for 1997. These amounts include an attributed portion of anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. For further information regarding electric environmental matters, see Note 4. Electric Outlook Competition: Consumers currently expects customer demand for electricity within its service territory will increase by approximately 1.6 percent per year over the next five years. Economic growth and an increasing customer base are expected to lead to consistently higher annual sales. However, Consumers (along with the electric utility industry) is experiencing increased competitive pressures which may result in a negative impact on Consumers' sales growth. The primary sources of this competition include: the installation of cogeneration or other self- generation facilities by Consumers' larger industrial customers; the formation of municipal utilities which would displace retail service by Consumers to an entire community; and competition from neighboring utilities which offer flexible rate arrangements designed to encourage movement to their respective service areas. Several of Consumers' industrial customers are studying these options. Consumers is pursuing several strategies to retain its current "at-risk" customers. These strategies include a request that the MPSC allow Consumers to offer special competitive service rates to current industrial customers which have demonstrated an ability to seek alternate electric supplies and to attract new customers which are considering locating or expanding facilities in Michigan. As part of its current electric rate case, Consumers has requested that the MPSC eliminate the rate subsidization of residential customers. If approved, commercial and industrial customers' electric costs would decrease by a total of approximately $80 million, or approximately 6 percent, per year. Consumers is committed to holding operation and maintenance costs level and continuing to improve customer service. Consumers is also working with large customers to identify ways to improve the efficiency with which energy is used. In 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers has sought rehearing regarding a number of issues included in the order. Consumers does not expect this short-term experiment to have a material impact on its financial position or results of operations. In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose changes in the wholesale electric industry. Among the most significant proposals, is a requirement that utilities provide open access to the domestic interstate transmission grid. Under the FERC's proposal, all utilities would be required to use these tariffs for their own wholesale sales of electric energy, and the utilities would be allowed the opportunity to recover wholesale stranded costs (including those applicable to municipalization situations). Nuclear Matters: In 1994, Consumers filed a report with the NRC that included short- and long-term enhancements designed to improve performance at Palisades. The report was filed in response to an NRC-conducted diagnostic evaluation inspection that found certain deficiencies at the plant. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures, which have been included in Consumers' total planned level of expenditures. The Systematic Assessment of Licensee Performance report issued by the NRC in June 1995 recognized some improvement in Palisades' performance. Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued a decision, effectively allowing Consumers to continue using dry cask storage at Palisades. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 5. Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At June 30, 1995, Consumers had 70 separate stray voltage lawsuits pending. Consumers believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. For further information, see Note 4. Consumers Gas Group Results of Operations Gas Pretax Operating Income for the quarters ended June 30, 1995 and 1994: During the second quarter of 1995, gas pretax operating income decreased $1 million from the 1994 level. The decreased pretax operating income reflects higher operating costs, depreciation and general taxes. Partially offsetting this decrease was a 12.9 percent increase in gas deliveries (see Gas Deliveries section). Gas Pretax Operating Income for the six months ended June 30, 1995 and 1994: The $6 million increase in gas pretax operating income for the six months ended June 30, 1995 compared with the same 1994 period reflects the reversal of a loss previously recorded for a gas contract contingency (see Note 3), partially offset by lower gas deliveries (see Gas Deliveries section), higher gas operating costs and depreciation. Gas Pretax Operating Income for the 12 months ended June 30, 1995 and 1994: The $13 million decrease in 1995 gas pretax operating income compared with 1994 reflects lower gas deliveries (see Gas Deliveries section) and higher operating costs, depreciation, and general taxes, partially offset by the reversal of losses previously recorded for gas contingencies. Increased operating costs included $14 million of postretirement benefit costs (see Note 3). The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended June 30: In Millions Impact on Pretax Operating Income Quarter ended Six months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Deliveries $ 5 $(14) $(31) Recovery of gas costs and other regulatory issues - 26 35 O&M, general taxes and depreciation (6) (6) (17) ----- ----- ----- Total change $ (1) $ 6 $(13) ===== ===== ===== Gas Deliveries: During the second quarter of 1995, gas sales and gas transported, excluding transport to the MCV and off-system transportation, totaled 55.2 bcf, a 12.9 percent increase from the corresponding 1994 level. Gas sales and gas transported increased 4.0 bcf and 2.3 bcf, respectively, with the majority of the change attributable to increased usage. For the six months ended June 30, 1995, gas sales and gas transported for all customer classes totaled 223.8 bcf, a 9.7 percent decrease from the corresponding 1994 level. Gas sales decreased 9.7 bcf while transport deliveries increased 2.5 bcf. The decrease in firm sales occurred primarily due to warmer temperatures. For the 12 months ended June 30, 1995, gas sales and gas transported for all customer classes totaled 385.1 bcf, a 9.4 percent decrease from the corresponding 1994 level, reflecting record cold winter weather during the 12 months ended June 30, 1994 and a return to more normal weather during the 12 months ended June 30, 1995. Cost of Gas Sold: The utility cost of gas sold for the second quarter of 1995 increased $9 million from the 1994 level. The utility cost of gas sold for the six months ended June 30, 1995 decreased $44 million from the 1994 level as a result of reduced deliveries and the reversal of gas contract loss contingency. The utility cost of gas sold for the 12 months ended June 30, 1995 decreased $70 million from the corresponding 1994 level which was also the result of reduced gas deliveries and the gas contract loss contingency reversal. Consumers Gas Group Issues Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates by $21 million. The requested increase in revenue reflects increased expenditures, including those associated with postretirement benefits, and proposes a 13 percent return on equity. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. A final order from the MPSC is expected in early 1996. For further information regarding Consumers' current gas rate case, see Note 3. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to by-pass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Issues: In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a gas supply contract pricing dispute with certain intrastate producers. The ALJ agreed with Consumers that certain market based pricing provisions should, on a prospective basis, limit the price paid by Consumers under the three agreements at issue. The ALJ also found that the market based pricing provision required specific MPSC approval before Consumers could apply those prices to purchases under the agreements and found that such approval had not previously been given. Consumers does not agree with the ALJ's findings and conclusions on this point and will file exceptions to the proposal for decision for the MPSC's consideration. If the MPSC issues an order adopting the recommendations of the ALJ, the market based provisions upon which Consumers had paid for gas purchased under these agreements will not be effective prior to such an MPSC order. If the producers pursue a court action for amounts owed for previously purchased gas, Consumers could be liable for as much as $44 million (excluding any interest) under the producers' theories. Consumers believes the producers' position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. Gas Capital Expenditures: CMS Energy estimates capital expenditures, including new lease commitments, related to Consumers' gas utility operations of $129 million for 1995, $119 million for 1996 and $101 million for 1997. These amounts include an attributed portion of anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Gas Environmental Matters: The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $112 million. These estimates are based on undiscounted 1994 costs. At June 30, 1995, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in December 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recovered in rates, prudent costs must be approved in a rate case. The MPSC has approved similar deferred accounting requests by several other Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 4. Consumers Gas Group Outlook Consumers currently anticipates gas deliveries to grow approximately 2.3 percent per year (excluding MCV transportation and off-system deliveries) over the next five years, primarily due to a steadily growing customer base. Additionally, Consumers has several strategies which will support increased load requirements in the future. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. New technologies being developed on a national level, such as the emerging use of natural gas vehicles, also provide Consumers with sales growth opportunities. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Low Income Energy Assistance Program funding currently provides approximately $71 million in heating assistance to approximately 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. However, recent actions by the U. S. House of Representatives Committee on Appropriations has put restoration of funding for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to maintain this funding. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three months ended June 30, 1995 increased $5 million from the same period in 1994, reflecting higher oil and gas sales volumes, partially offset by lower average market prices for oil and gas. Pretax operating income for the six and twelve months ended June 30, 1995 increased $18 million and $27 million, respectively over the comparable 1994 periods primarily due to gains from the assignment of gas supply contracts and higher sales volumes, partially offset by lower average market prices for oil and gas. Capital Expenditures: In February 1995, CMS NOMECO closed on the acquisition of Walter for approximately $46 million, consisting of approximately $24 million of CMS Energy common stock and $22 million in both cash and assumed debt. Post-closing adjustments may result in the issuance of approximately $3 million of additional CMS Energy common stock. CMS NOMECO's acquisition of Walter added net production of 5,500 barrels per day in 1995 and proven reserves of approximately 20 million barrels of oil. In June 1995, CMS NOMECO signed a letter of intent to purchase Terra Energy Ltd. for $54 million plus working capital. The acquisition will add about 81 billion cubic feet of proven gas reserves. A merger agreement is expected to be signed and closing to occur in the third quarter of 1995. Other capital expenditures for the six months ended June 30, 1995 approximated $32 million, primarily for development of existing oil and gas reserves. These expenditures were made both domestically ($11 million) and internationally ($21 million), including $10 million in Ecuador development drilling and facilities construction. CMS Energy currently plans to invest $443 million, including the Walter and Terra acquisitions, from 1995 to 1997 relating to its oil and gas exploration and production operations. These capital expenditures will be concentrated in North and South America and Africa. Independent Power Production Pretax Operating Income: Pretax operating income for the three months ended June 30, 1995 increased $10 million, primarily reflecting higher capacity sales from the MCV partnership, as well as additional equity earnings by CMS Generation subsidiaries primarily due to additional electric generating capacity. Pretax operating income increased $21 million and $36 million for the six and twelve months ended June 30, 1995, respectively as compared to the comparable 1994 periods, primarily reflecting additional electric generating capacity and improved equity earnings and operating efficiencies. Capital Expenditures: In January 1995, CMS Generation completed its acquisition of HYDRA-CO. CMS Generation purchased 100 percent of HYDRA- CO's stock for $207 million, including approximately $52 million of current assets. CMS Generation partially financed the acquisition with a one year $118 million bridge credit facility supplied by a consortium of four banks led by Union Bank of California. CMS Energy is currently evaluating permanent financing options. With the acquisition, CMS Generation assumed ownership in 735 MW of gross capacity and 224 MW of net ownership. CMS Generation will manage and operate eight plants previously managed by HYDRA-CO and will also assume construction management responsibility for a 60 MW diesel-fueled plant which has begun in Jamaica. The plant is scheduled to go into service in the third quarter of 1996. The Moroccan government has selected a consortium of CMS Generation and Asea Brown Boveri Energy Ventures to exclusively negotiate a definitive agreement for the privatization and expansion of a Moroccan power plant. The privatization of the coal-fired Jorf Lasfar plant, Southwest of Casablanca, includes the transfer of possession and the right to operate two 330 MW generating units which are nearing completion, and the construction and operation of another two 330 MW units. The output of the plants will be sold to the Moroccan national utility. The total cost of the initial concession to operate the facilities and construct the two additional units will be in excess of $1.4 billion. In April 1995, CMS Generation signed a letter of intent to divest its interest in the Argentine thermal electric generation plant, Centrales Termicas San Nicolas. The divestiture was completed early in the third quarter 1995, under which CMS Generation received securities, which contain an option to put, exercisable in fifteen years and was repaid for funds CMS Generation previously loaned to the plant. CMS Energy currently plans to invest $458 million (including the HYDRA-CO acquisition) relating to its independent power production operations over the next three years. CMS Generation will pursue acquisitions and development of electric generating plants in the United States, Latin America, southern Asia and the Pacific Rim region. Natural Gas Transmission, Storage and Marketing Pretax Operating Income: Pretax operating income for the three and six months ended June 30, 1995 remained unchanged and for the twelve months ended June 30, 1995 increased $1 million, respectively over the same periods for 1994, reflecting earnings growth from existing and new gas pipeline and storage projects and gas marketed to end-users. Capital Expenditures: Effective January 1, 1995, CMS Gas Transmission increased its ownership of The Antrim Limited Partnership to 100 percent by acquiring its partner's remaining 40 percent interest. Under a new agreement with MichCon, CMS Gas Transmission will provide a gas treating service for up to 260 MMcf/d of Antrim gas. CMS Gas Transmission currently plans to expand its existing 190 MMcf/d treating complex to accommodate new Antrim production. An additional $9 million facility 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. In July 1995, CMS Gas Transmission was the successful bidder in acquiring a 25 percent ownership interest in TGN pipeline, for $142 million. TGN, which has current annual revenues of about $150 million, owns and operates 2600 miles of pipelines that provide natural gas transmission service to the northern and central parts of Argentina, with almost one billion cubic feet per day of existing pipeline capacity. Also in July 1995, CMS Gas Transmission received final regulatory approval to construct, at a cost of $3 million, a 3.1 mile pipeline from its natural gas transmission system to an interconnection with an existing pipeline at the St. Clair River, south of Port Huron, Michigan. Construction, which will commence in August 1995, is expected to be completed by November 1995. The pipeline will provide significantly increased gas supply flexibilities in the U.S. and Canada. CMS Gas Transmission, through its 50 percent ownership in the SGP Partnership, currently has three helium recovery plants under construction and scheduled to be in service by year-end. The total estimated capital cost for these three plants, located in Colorado and Kansas, is $12.5 million. CMS Energy currently plans to invest $325 million over the next three years relating to its non-utility gas operations, continuing to pursue development of natural gas storage and gathering and pipeline operations both domestically and internationally. CMS Energy also plans to work toward the development of a Midwest "market center" for natural gas through strategic alliances and asset acquisition and development. Other Other Income: Other income for the 12 months ended June 30, 1995 decreased $11 million when compared with the corresponding 1994 period, reflecting the sale of the remaining MCV Bonds in December 1993 which eliminated the bond interest income. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. In April 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. The SEC has not taken action on this matter. In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) a repeal of PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff stated that PUHCA was restrictive in many regards and may prevent companies from responding effectively to the changes now occurring in the utility industry. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. New Accounting Standard: In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996 financial statements, requires that an asset be reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable. The statement also requires that a loss be recognized whenever a regulator excludes a portion of an asset's cost from a company's rate base. CMS Energy does not expect the application of this statement to have a material impact on its financial position or results of operations. 36 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 June 30, 1995 and 1994, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month, six-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Power Company and subsidiaries as of December 31, 1994, and the related consolidated statements of income, common stockholder's equity and cash flows for the year then ended (not presented herein), and, in our report dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995), we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, August 9, 1995. 37 Consumers Power Company Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 1995 1994 1995 1994 1995 1994 In Millions OPERATING REVENUE Electric $ 543 $ 549 $1,083 $1,094 $2,179 $2,193 Gas 197 183 679 711 1,119 1,184 Other 10 2 21 3 33 6 --------------------------------------------------------- Total operating revenue 750 734 1,783 1,808 3,331 3,383 --------------------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 67 70 134 150 290 302 Purchased power - related parties 121 118 245 240 487 486 Purchased and interchange power 47 55 83 97 148 192 Cost of gas sold 102 93 383 427 617 687 Other 139 137 276 262 574 533 --------------------------------------------------------- Total operation 476 473 1,121 1,176 2,116 2,200 Maintenance 45 48 89 91 187 196 Depreciation, depletion and amortization 79 74 181 169 347 324 General taxes 41 34 95 94 179 179 --------------------------------------------------------- Total operating expenses 641 629 1,486 1,530 2,829 2,899 --------------------------------------------------------- PRETAX OPERATING INCOME Electric 83 86 170 174 330 326 Gas 17 18 108 102 142 155 Other 9 1 19 2 30 3 --------------------------------------------------------- Total pretax operating income 109 105 297 278 502 484 INCOME TAXES 28 26 85 79 125 126 --------------------------------------------------------- NET OPERATING INCOME 81 79 212 199 377 358 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) MCV Bond income - - - - - 16 Dividends from affiliates 4 4 8 8 17 16 Accretion income 3 4 6 7 12 13 Accretion expense (Note 2) (8) (9) (16) (18) (32) (36) Other income taxes, net 3 3 6 7 11 15 Other, net 1 - 3 - 9 4 --------------------------------------------------------- Total other income 3 2 7 4 17 28 --------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 36 33 71 67 139 145 Other interest 4 2 9 5 21 17 Capitalized interest (1) - (1) - (1) (1) --------------------------------------------------------- Net interest charges 39 35 79 72 159 161 --------------------------------------------------------- Net Income 45 46 140 131 235 225 Preferred Stock Dividends 7 7 14 10 28 15 --------------------------------------------------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 38 $ 39 $ 126 $ 121 $ 207 $ 210 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38 Consumers Power Company Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended Twelve Months Ended June 30 June 30 1995 1994 1995 1994 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 140 $ 131 $ 235 $ 225 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $24, $24, $49 and $48, respectively) 181 169 347 324 Capital lease and other amortization 19 12 42 26 Deferred income taxes and investment tax credit 42 46 52 54 Accretion expense 16 18 32 36 Accretion income - abandoned Midland project (6) (7) (12) (13) MCV power purchases - settlement (Note 2) (70) (45) (112) (82) Other (16) (2) (27) (3) Changes in other assets and liabilities 38 48 15 (120) ------ ------ ------ ------ Net cash provided by operating activities 344 370 572 447 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (175) (194) (427) (451) Investments in nuclear decommissioning trust funds (24) (24) (49) (48) Cost to retire property, net (19) (14) (43) (33) Deferred demand-side management costs (4) (4) (9) (28) Proceeds from sale of property 1 1 12 2 Other (5) 2 (5) 1 Proceeds from Midland-related assets - - - 322 Sale of subsidiary - - - (14) ------ ------ ------ ------ Net cash used in investing activities (226) (233) (521) (249) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Payment of common stock dividends (70) (82) (164) (158) Increase (decrease) in notes payable, net (30) (130) 180 (112) Payment of capital lease obligations (18) (11) (41) (23) Payment of preferred stock dividends (14) (6) (28) (11) Retirement of bonds and other long-term debt (1) (107) (26) (702) Repayment of bank loans - (94) (375) (125) Proceeds from preferred stock - 193 - 193 Contribution from stockholder - 100 - 100 Proceeds from bonds and bank loans - - 400 586 ------ ------ ------ ------ Net cash used in financing activities (133) (137) (54) (252) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (15) - (3) (54) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 13 13 67 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 10 $ 13 $ 10 $ 13 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39 Consumers Power Company Consolidated Balance Sheets
June 30 June 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions ASSETS PLANT (At original cost) Electric $5,899 $5,771 $5,598 Gas 2,097 2,064 1,988 Other 30 30 26 ----------------------------------- 8,026 7,865 7,612 Less accumulated depreciation, depletion and amortization 3,968 3,794 3,687 ----------------------------------- 4,058 4,071 3,925 Construction work-in-progress 263 241 265 ----------------------------------- 4,321 4,312 4,190 ----------------------------------- INVESTMENTS Stock of affiliates 321 317 310 First Midland Limited Partnership (Note 2) 221 218 215 Midland Cogeneration Venture Limited Partnership (Note 2) 90 74 67 Other 8 8 7 ----------------------------------- 640 617 599 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 10 25 13 Accounts receivable and accrued revenue, less allowances of $3, $4 and $4, respectively (Note 7) 83 100 121 Accounts receivable - related parties 49 12 67 Inventories at average cost Gas in underground storage 155 235 160 Materials and supplies 75 75 78 Generating plant fuel stock 34 37 26 Trunkline settlement 30 30 30 Deferred income taxes 28 35 20 Postretirement benefits 25 25 25 Prepayments and other 72 143 82 ----------------------------------- 561 717 622 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 469 478 493 Nuclear decommissioning trust funds 262 213 191 Abandoned Midland Project (Note 3) 139 147 155 Trunkline settlement 40 55 70 Other 275 270 273 ----------------------------------- 1,185 1,163 1,182 ----------------------------------- TOTAL ASSETS $6,707 $6,809 $6,593 ===================================
40
June 30 June 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 491 491 491 Revaluation capital 19 15 12 Retained earnings since December 31, 1992 136 80 93 ----------------------------------- 1,487 1,427 1,437 Preferred stock 356 356 356 Long-term debt 1,955 1,953 1,746 Non-current portion of capital leases 109 108 116 ----------------------------------- 3,907 3,844 3,655 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 49 45 249 Notes payable 309 339 129 Accrued taxes 130 173 116 Accounts payable 158 165 153 MCV power purchases - settlement (Note 2) 95 95 82 Accounts payable - related parties 53 51 42 Accrued interest 34 37 35 Accrued refunds 30 25 41 Other 156 187 180 ----------------------------------- 1,014 1,117 1,027 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 594 568 536 Postretirement benefits 534 532 543 MCV power purchases - settlement (Note 2) 269 324 363 Deferred investment tax credit 174 179 184 Trunkline settlement 40 55 70 Regulatory liabilities for income taxes, net 33 16 16 Other (Note 4) 142 174 199 ----------------------------------- 1,786 1,848 1,911 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,707 $6,809 $6,593 =================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
41 Consumers Power Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 1995 1994 1995 1994 1995 1994 In Millions COMMON STOCK At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841 --------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 491 391 491 391 491 391 Stockholder's contribution - 100 - 100 - 100 --------------------------------------------------------- At end of period 491 491 491 491 491 491 --------------------------------------------------------- REVALUATION CAPITAL At beginning of period 17 15 15 - 12 - Implementation of SFAS 115 - January 1, 1994 - - - 20 - 20 Change in unrealized loss, net of tax 2 (3) 4 (8) 7 (8) --------------------------------------------------------- At end of period 19 12 19 12 19 12 --------------------------------------------------------- RETAINED EARNINGS At beginning of period 168 120 80 54 93 41 Net income 45 46 140 131 235 225 Common stock dividends declared (70) (66) (70) (82) (164) (158) Preferred stock dividends declared (7) (7) (14) (10) (28) (15) --------------------------------------------------------- At end of period 136 93 136 93 136 93 --------------------------------------------------------- TOTAL COMMON STOCKHOLDER'S EQUITY $1,487 $1,437 $1,487 $1,437 $1,487 $1,437 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
42 Consumers Power Company Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the 1994 Form 10-K of Consumers Power Company that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. 2: The Midland Cogeneration Venture The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. At June 30, 1995, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility. Power Purchases from the MCV Partnership: Consumers' annual obligation for purchase of contract capacity from the MCV Partnership under the PPA increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs but the MPSC would determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. At the request of the MPSC, the MCV Partnership confirmed that it did not object to the Settlement Order. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. The PPA provides that Consumers is to pay the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all economic energy deliveries above the availability limits to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility, and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries were $46 million for the six months ended June 30, 1995. If Consumers is unable to sell any capacity above the current MPSC-authorized level, future additional after-tax losses and after-tax cash underrecoveries would be incurred. Consumers' estimates of its future after-tax cash underrecoveries, and possible losses for 1995 and the next four years if none of the additional capacity is sold, are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Expected cash underrecoveries $72 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. At June 30, 1995 and December 31, 1994, the after-tax present value of the Settlement Order liability totaled $236 million and $272 million, respectively. The reduction in the liability reflects after-tax cash underrecoveries of $46 million, partially offset by after-tax accretion expense of $10 million. The undiscounted after-tax amount associated with the liability totaled $638 million at June 30, 1995. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility. Additionally, in 1995, Consumers paid $15 million to terminate a power purchase agreement with a proposed 44 MW wood and chipped-tire facility. Consumers plans to seek MPSC approval to substitute less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. This proposed substitution of capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. The capacity substitution represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for similar facilities. As a result, Consumers has recorded a regulatory asset of $45 million, which it believes will ultimately be recoverable in rates. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of the 65 MW of capacity substitution as part of the five year forecast included in the plan case. Although recovery of the costs relating to the substitution was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for substituting capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. If the MPSC adopts the ALJ's recommendation, the regulatory asset may be required to be reduced. MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. The MPSC confirmed the recovery of certain MCV-related costs as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals. As part of its decision in the 1993 PSCR reconciliation case issued February 23, 1995, the MPSC allocated a portion of the costs related to purchases from the MCV to non-jurisdictional customers, reducing the amount allowed for recovery from PSCR customers. Consumers believes this is inconsistent with the terms of the Settlement Order and has appealed the February 23 order on this issue. 3: Rate Matters Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. In late 1994, Consumers filed a request with the MPSC which could further increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes a proposed increase in Consumers' authorized rate of return on equity to 13 percent from the current 11.75 percent, recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. Consumers requested that the MPSC eliminate subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 (see Electric DSM) and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 4). In response to Consumers' requested rate increase, the MPSC staff initially recommended a final annual increase of $45 million to Consumers' base rates, as well as suggested several options for cost recovery of 325 MW of MCV capacity. However, on motions filed by ABATE and the Attorney General, the ALJ struck portions of the MPSC staff's testimony relating to the cost of this capacity and the MPSC staff subsequently withdrew several other portions of its testimony. In May 1995, the MPSC affirmed the ALJ's decision to strike the MPSC staff's testimony and stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. Consumers has filed a petition for rehearing of this order with the MPSC. In June 1995, briefs and reply briefs were filed by all parties in this case. Consumers presented one of its previously filed positions, which assumes retaining certain customers subject to competition and serving these customers from jurisdictional sources, as well as from the uncommitted MCV capacity. If this position is adopted, Consumers' retail electric base rates would increase by $93 million, with a corresponding increase in PSCR revenues of $52 million. The MPSC staff recommended a $43 million increase in Consumers' base rates. This position reflects a different sales forecast than Consumers', as well as a 12- percent return on equity and a lower equity ratio than that included in Consumers' proposed capital structure. The MPSC staff also recommends the elimination of all rate subsidization by primary customers, which include industrial and large commercial customers. In August 1995, the ALJ issued a proposal for decision in this case that recommends a $46 million rate increase. The ALJ generally adopted the MPSC staff's position with adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ also recommended the elimination of rate subsidization. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers (see Special Rates discussion in the MD&A). In January 1995, Consumers filed a request with the MPSC, seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts, which if approved would result in a net decrease in depreciation expense of $7 million for ratemaking purposes. For further information, see Electric Rate Case discussion in the MD&A. Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of the abandoned Midland project and Consumers began collecting $35 million pretax annually for the next 10 years. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. Consumers, ABATE and the Attorney General have filed applications for leave to appeal this decision with the Michigan Supreme Court. Management cannot predict the outcome of this issue. Electric DSM: In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to continue certain DSM programs ($30 million annually) in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from customers in accordance with an MPSC accounting order. The unamortized balance of deferred costs totaled $70 million at June 30, 1995. During 1994, Consumers recognized $11 million in incentive revenue related to an earlier DSM program approved by the MPSC. In June 1995, the MPSC authorized Consumers to collect the $11 million incentive for past program performance. As part of the same order, the MPSC authorized Consumers to discontinue future DSM program expenditures and ceased all new program funding. PSCR Issues: In February 1995, the MPSC issued a final order in the 1993 PSCR reconciliation proceeding that addressed the extended refueling and maintenance outage at Palisades in 1993. The order disallowed $4 million of replacement power costs. Consumers accrued a loss for this issue in 1994. Gas Rates: In 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits against 1994 earnings. The agreement was reached in response to a claim that gas utility business earnings for 1993 were excessive. This charge against earnings partially offsets savings related to reduced state property taxes. The agreement also provides for an additional $4 million of postretirement benefit costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers filed a gas rate case in December 1994. Consumers requested an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. The MPSC staff's recommendation included a lower rate base, a lower return on common equity, a revised capital structure and a lower operating cost forecast than Consumers had projected. Consumers expects an MPSC decision in early 1996. GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced. As a result, Consumers was not allowed to recover $13 million of costs. Consumers accrued a loss prior to 1993 in excess of the disallowed amount. In March 1995, management concluded that the intrastate producers' pending appeals of the MPSC order would not be successful and accordingly reversed $23 million (pretax) of the previously accrued loss, which represented the portion in excess of the disallowed amount. In June 1995, the Court of Appeals affirmed the MPSC's prior decision. The producers have filed a motion for rehearing with the Court of Appeals. In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a gas supply contract pricing dispute with certain intrastate producers. The ALJ agreed with Consumers that certain market based pricing provisions should, on a prospective basis, limit the price paid by Consumers under the three agreements at issue. The ALJ also found that the market based pricing provision required specific MPSC approval before Consumers could apply those prices to purchases under the agreements and found that such approval had not previously been given. Consumers does not agree with the ALJ's findings and conclusions on this point and filed exceptions to the proposal for decision for the MPSC's consideration. If the MPSC issues an order adopting the recommendations of the ALJ, the market based provisions upon which Consumers had paid for gas purchased under these agreements will not be effective prior to such MPSC order. If the producers pursue a court action for amounts owed for previously purchased gas, Consumers could be liable for as much as $44 million (excluding any interest) under the producers' theories. Consumers believes the producers' position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 4: Commitments and Contingencies Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement allows for continued operation of the plant through the end of its FERC license. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million) to the state of Michigan and the Great Lakes Fishery Trust, make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The definitive settlement documents have been completed and were filed with the appropriate Michigan courts and state and federal agencies. The agreement is subject to the MPSC permitting Consumers to recover all such settlement costs from electric customers, and approval by the FERC. The proposed settlement would resolve two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan. In one, the state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, reduced only upon installation of "adequate" fish barriers and other changed conditions. In the other lawsuit, the Attorney General sought to have Ludington's bottomlands lease declared void. Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates its total liability for the significant sites will average less than 4 percent of the estimated total site remediation costs, and such liability is expected to be less than $9 million. At June 30, 1995, Consumers has accrued a liability for its estimated losses. Consumers believes that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites and the DNR has approved three of four plans submitted by Consumers. The findings for the first remedial investigation indicate that the expenditures for remedial action at this site are likely to be minimal. However, Consumers does not believe that a single site is representative of all of the sites, since there is limited knowledge of manufactured gas plant contamination at these sites at this time. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $112 million. These estimates are based on undiscounted 1994 costs. At June 30, 1995, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recoverable in rates, prudent costs must be approved in a rate case. Any costs amortized in years prior to filing a rate case may not be recoverable. The MPSC has approved similar deferred accounting requests by several other similar Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. Consumers' coal-fueled electric generating units burn low- sulfur coal and are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $25 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and possible modifications at other coal-fired units to be an additional $50 million by the year 2000. Final acid rain program nitrogen oxide regulations specifying the controls to be installed at the other coal-fired units are not expected earlier than 1996. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $459 million for 1995, $416 million for 1996 and $351 million for 1997. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy could be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. The SEC has not taken action on this matter. Other: Consumers has experienced a number of lawsuits filed against it relating to so-called stray voltage. Claimants contend that stray voltage results when small electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the grounding of the customer's service. At June 30, 1995, Consumers had 70 separate stray voltage lawsuits pending. In addition to the matters disclosed in these notes, Consumers and certain of its subsidiaries are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies, arising from the ordinary course of business involving personal injury and property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 5: Nuclear Matters In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied National Environmental Policy Act requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. As of June 30, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel at Palisades. In the latter part of 1995, Consumers plans to unload and replace one of the loaded casks. In a review of the cask manufacturer's quality assurance program, Consumers detected indications of minor flaws in welds in the steel liner of one of the loaded casks. Although testing has not disclosed any leakage, Consumers has nevertheless decided to remove the spent fuel and insert it in another cask. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC each analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed, and confirmed that the pad location is acceptable to support the casks. The Low-Level Radioactive Waste Policy Act encourages the respective states, individually or in cooperation with each other, to be responsible for the disposal of low-level radioactive waste. Currently, a low-level waste site does not exist in Michigan and Consumers stores low-level waste at its nuclear plant sites. Recently, a site in South Carolina announced that it would be available for accepting low-level waste. Consumers plans to begin shipping its low-level waste to this site in the third quarter of 1995. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs for the major portion of prolonged accidental outages for 12 months after a 21 week exclusion with reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $33 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. In April 1995, Consumers received a Safety Evaluation Report from the NRC concurring with this evaluation and requesting submittal of an action plan to provide for operation of the plant beyond 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. 6: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended June 30 were: In Millions Six Months Ended Twelve Months Ended 1995 1994 1995 1994 ---- ---- ---- ---- Cash transactions Interest paid (net of amounts capitalized) $ 77 $ 73 $151 $159 Income taxes paid (net of refunds) 46 55 25 53 Non-cash transactions Nuclear fuel placed under capital lease $ 23 $ 3 $ 42 $ 8 Other assets placed under capital leases 2 7 10 16 7: Short-term and Long-term Financings Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. At June 30, 1995, Consumers had an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At June 30, 1995 and 1994, Consumers had a total of $309 million and $129 million outstanding under these facilities, respectively. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing the $470 million facility which expired by its own terms. Consumers has an established $500-million trade receivables purchase and sale program. At June 30, 1995, receivables sold under the agreement totaled $190 million compared with $205 million at June 30, 1994. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In April 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. 50 Consumers Power Company Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1994 Form 10-K of Consumers. Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive. Consolidated earnings for the quarters ended June 30, 1995 and 1994 Consolidated net income after dividends on preferred stock totaled $38 million for the second quarter of 1995 and $39 million for the second quarter of 1994. This small net income decrease reflects the 1994 recognition of DSM incentive revenue, and higher depreciation and general tax expenses during 1995. Partially offsetting this decrease, however, were higher electric sales and gas deliveries, improved operating results from Consumers' interest in the MCV Facility and increased revenue from the May 1994 electric rate increase, which benefited the entire 1995 quarter. Consolidated earnings for the six months ended June 30, 1995 and 1994 Consolidated net income after dividends on preferred stock totaled $126 million for the six months ended June 30, 1995, compared with $121 million for the six months ended June 30, 1994. The increase in net income reflects increased electric sales, increased revenue from the May 1994 electric rate increase, reversal of a loss previously recorded for a gas contract contingency (see Note 3), and improved operating results from Consumers' interest in the MCV Facility. Partially offsetting these increases were a decrease in gas deliveries, higher operating costs and the recognition of DSM incentive revenue in the second quarter of 1994. Consolidated earnings for the 12 months ended June 30, 1995 and 1994 Consolidated net income after dividends on preferred stock totaled $207 million for the 12 months ended June 30, 1995, compared with $210 million for the 12 months ended June 30, 1994. The decrease in net income reflects lower gas deliveries, the recognition of DSM incentive revenue in the 1994 period, and higher operating costs and depreciation, partially offset by the impact of the May 1994 electric rate increase, higher electric kWh sales and the reversal of losses previously recorded for gas contingencies. Cash Position, Financing and Investing Consumers' operating cash requirements are met by its operating and financing activities. Cash from operations continues to reflect Consumers' sale and transportation of natural gas and the generation, sale and transmission of electricity. Cash from operations for the first six months of 1995 reflects increased electric sales and increased electric rates which were approved by the MPSC in mid-1994, offset by greater underrecoveries of power costs associated with purchases from the MCV. Financing and Investing Activities: Capital expenditures, including assets placed under capital lease and deferred DSM costs, totaled $204 million for the first six months of 1995 compared with $208 million for the first six months of 1994. These amounts primarily represent capital investments in Consumers' electric and gas utility business units. In the second quarter of 1995, Consumers declared and paid a $70 million common dividend from its first quarter earnings. Financing and Investing Outlook: Consumers estimates that capital expenditures, including new lease commitments, related to its electric and gas utility operations will total approximately $1.2 billion over the next three years. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures. In Millions Years Ended December 31 1995 1996 1997 Consumers Construction $418 $373 $343 Nuclear fuel lease 28 39 4 Capital leases other than nuclear fuel 10 2 2 Michigan Gas Storage 3 2 2 ---- ---- ---- $459 $416 $351 ==== ==== ==== At June 30, 1995, Consumers had several available sources of credit including unsecured, committed lines of credit totaling $185 million and a $470 million unsecured working capital facility. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing the $470 million facility, which expired by its own terms. Consumers also has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At June 30, 1995, receivables sold under the agreement totaled $190 million. Consumers is continuing efforts toward its goal of increasing the equity portion of its capital structure. In the current gas rate case, the MPSC staff has suggested that Consumers temporarily suspend paying dividends to CMS Energy in lieu of CMS Energy making a direct equity infusion of cash into Consumers. Accordingly, CMS Energy is considering using this method to accomplish a planned equity investment in 1995. Any increases in Consumers' retained earnings as a result of this action will be offset by a reduction in potential equity infusions from CMS Energy. Electric Utility Results of Operations Electric Pretax Operating Income for the quarters ended June 30, 1995 and 1994: During the second quarter of 1995, electric pretax operating income decreased $3 million from the 1994 level. This reduction resulted primarily from the 1994 recognition of DSM incentive revenue and increases in depreciation and general tax expenses during the 1995 period. Partially offsetting the net decrease was higher electric kWh sales (see Electric Sales section), a decrease in other operating expenses, and the positive impact of the May 1994 electric rate increase. Electric Pretax Operating Income for the six months ended June 30, 1995 and 1994: Electric pretax operating income for the six months ended June 30, 1995 decreased $4 million from the comparable 1994 period. This decrease primarily reflects the 1994 recognition of DSM incentive revenue, and higher operating expenses, depreciation and general taxes during 1995. The decrease was partially offset by increased electric kWh sales (see Electric Sales section) and the impact of the May 1994 electric rate increase, which included the recovery of higher postretirement benefit costs. Electric Pretax Operating Income for the 12 months ended June 30, 1995 and 1994: The $4 million improvement in electric pretax operating income for the 12 months ended June 30, 1995 compared with the corresponding 1994 level is primarily the result of the impact of the May 1994 electric rate increase, which included the recovery of the higher postretirement benefit costs, and increased electric kWh sales (see Electric Sales section), which contributed $38 million and $17 million, respectively. These increases were partially offset by higher operating costs and depreciation, along with the impact of the 1994 recognition of DSM incentive revenue. The following table quantifies the impact of the major reasons for the changes in electric pretax operating income for the periods ended June 30: In Millions Impact on Pretax Operating Income Quarter ended Six months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Sales $ 8 $ 9 $17 Rate increases and other regulatory issues (6) 5 24 O&M, general taxes and depreciation (a) (5) (18) (37) ------- ------- ------ Total change $(3) $(4) $ 4 ======= ======= ====== (a) Includes $11 million and $29 million of increased postretirement benefit costs for the six month and 12 month comparative periods, respectively. Electric Sales: Electric sales during the second quarter of 1995 totaled 8.5 billion kWh, a 2.6 percent increase from 1994 levels. The increase occurred in all customer classes. Consumers' electric sales have benefited from improved employment and other economic conditions. Electric sales during the six months ended June 30, 1995 totaled 17.2 billion kWh, a 2.0 percent increase from 1994 levels. This increase reflects continued strength in the industrial and commercial sectors, somewhat offset by weather impacts. During the six months ended 1995 period, commercial and industrial sales increased 3.3 percent and 4.2 percent respectively, while residential sales showed a slight decrease. Electric sales during the 12 months ended June 30, 1995 totaled 34.8 billion kWh, a 3.4 percent increase from 1994 levels. During the 12 months ended 1995 period, commercial and industrial sales increased 2.7 percent and 5.2 percent respectively, while residential sales showed a slight decrease from 1994 levels. The industrial segments of chemicals and transportation equipment accounted for the largest share of the growth in industrial kWh sales. Power Costs: Power costs for the three month period ended June 30, 1995 totaled $235 million, an $8 million decrease from the corresponding 1994 period. This decrease primarily reflects increased generation at Consumers' nuclear power plants and a corresponding reduction in generation at the more costly oil- and coal-fired plants. Power costs for the six month period ended June 30, 1995 totaled $462 million, a $25 million decrease from the corresponding 1994 period. Power costs for the 12 month period ended June 30, 1995 totaled $925 million, a $55 million decrease from the corresponding 1994 period. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership increased to 1,240 MW in 1995. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Additional losses may occur if actual future experience materially differs from the 1992 estimates. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $46 million for the first six months of 1995. Estimated future after-tax cash underrecoveries, and possible losses for 1995 and the next four years if none of the additional capacity is sold, are shown in the table below. After-tax, In Millions 1995 1996 1997 1998 1999 Expected cash underrecoveries $72 $56 $55 $ 8 $ 9 Possible additional underrecoveries and losses (a) $20 $20 $22 $72 $72 (a) If unable to sell any capacity above the MPSC's authorized level. Consumers and the MCV Partnership engaged in arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV Partnership is being properly calculated. In July 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to additional amounts. In July 1994 and February 1995, Consumers terminated power purchase agreements with a 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. Consumers plans to seek MPSC approval to substitute 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. In April 1995, an ALJ issued a proposal for decision related to the 1995 PSCR case that agreed with objections, raised by certain parties, as to the inclusion of the 65 MW of capacity substitution as part of the five year forecast included in the plan case. Although recovery of the costs relating to the substitution was not being requested in this case, the ALJ concluded that additional capacity should be competitively bid and recommended that the MPSC state in its order that cost recovery for substituting capacity absent a competitive bid is unlikely to be approved. Consumers has filed exceptions to the ALJ's recommendation. For further information, see Note 2. Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. Consumers filed a request with the MPSC in late 1994, to further increase its retail electric rates. As part of this case, in May 1995, the MPSC stated that the remaining 325 MW of MCV capacity will be considered only as part of a competitive capacity solicitation, and not as part of the electric rate case. In August 1995, the ALJ recommended a final annual rate increase of $46 million. For further information regarding Consumers' request and the staff's recommendation, see Note 3. Additionally, in January 1995, Consumers filed a request with the MPSC, seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease. If both aspects of the request are approved, the net result would be a decrease in electric depreciation expense of $7 million for ratemaking purposes. In April 1995, the MPSC staff's filing did not support Consumers' requested increase in depreciation expense, but instead proposed a decrease of $24 million. In addition, the MPSC staff also did not support the reallocation of plant investment as proposed by Consumers but suggested several alternatives which could partially address this issue. A final order is expected in late 1995. Special Rates: In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers, and that have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility, and allow use of MCV contract capacity above the level currently authorized by the MPSC, to respond to customers' alternative energy options. In May 1995, the MPSC issued an order stating that it has legal authority to approve a range of rates under which Consumers could negotiate prices with customers that have competitive energy alternatives. However, the MPSC dismissed from consideration, in this proceeding, the issues related to Consumers' proposed use of the additional 325 MW of MCV contract capacity to serve these customers. In June 1995, Consumers filed a petition for rehearing of this decision with the MPSC. PSCR Matters: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. In February 1995, the MPSC issued a final order in the 1993 PSCR reconciliation, disallowing $4 million of replacement power costs related to the 1993 outage. Consumers accrued a loss for this issue in 1994. Electric Conservation Efforts: Over the past few years, Consumers has participated in several MPSC-authorized DSM programs designed to encourage the efficient use of energy. During 1994, Consumers recognized $11 million in incentive revenue, related to Consumers' achievement of certain DSM program objectives approved by the MPSC in 1992. In June 1995, the MPSC issued an order that authorized Consumers to collect the full $11 million incentive. The MPSC also authorized Consumers to discontinue future DSM program expenditures and ceased all new program funding. For further information, see Note 3. Electric Capital Expenditures: Consumers estimates capital expenditures, including deferred DSM costs and new lease commitments, related to its electric utility operations of $330 million for 1995, $297 million for 1996 and $250 million for 1997. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected. The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations. For further information regarding electric environmental matters, see Note 4. Electric Outlook Competition: Consumers currently expects customer demand for electricity within its service territory will increase by approximately 1.6 percent per year over the next five years. Economic growth and an increasing customer base are expected to lead to consistently higher annual sales. However, Consumers (along with the electric utility industry) is experiencing increased competitive pressures which may result in a negative impact on Consumers' sales growth. The primary sources of this competition include: the installation of cogeneration or other self- generation facilities by Consumers' larger industrial customers; the formation of municipal utilities which would displace retail service by Consumers to an entire community; and competition from neighboring utilities which offer flexible rate arrangements designed to encourage movement to their respective service areas. Several of Consumers' industrial customers are studying these options. Consumers is pursuing several strategies to retain its current "at-risk" customers. These strategies include a request that the MPSC allow Consumers to offer special competitive service rates to current industrial customers which have demonstrated an ability to seek alternate electric supplies and to attract new customers which are considering locating or expanding facilities in Michigan. As part of its current electric rate case, Consumers has requested that the MPSC eliminate the rate subsidization of residential customers. If approved, commercial and industrial customers' electric costs would decrease by a total of approximately $80 million, or approximately 6 percent, per year. Consumers is committed to holding operation and maintenance costs level and continuing to improve customer service. Consumers is also working with large customers to identify ways to improve the efficiency with which energy is used. In 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers has sought rehearing regarding a number of issues included in the order. Consumers does not expect this short-term experiment to have a material impact on its financial position or results of operations. In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose changes in the wholesale electric industry. Among the most significant proposals, is a requirement that utilities provide open access to the domestic interstate transmission grid. Under the FERC's proposal, all utilities would be required to use these tariffs for their own wholesale sales of electric energy, and the utilities would be allowed the opportunity to recover wholesale stranded costs (including those applicable to municipalization situations). Nuclear Matters: In 1994, Consumers filed a report with the NRC that included short- and long-term enhancements designed to improve performance at Palisades. The report was filed in response to an NRC-conducted diagnostic evaluation inspection that found certain deficiencies at the plant. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures, which have been included in Consumers' total planned level of expenditures. The Systematic Assessment of Licensee Performance report issued by the NRC in June 1995 recognized some improvement in Palisades' performance. Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued a decision, effectively allowing Consumers to continue using dry cask storage at Palisades. In June 1995, the U.S. Supreme Court refused to hear an appeal of this decision as requested by the Attorney General and other parties. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel can be safely operated through late 1999. Consumers is developing plans to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million. This repair would allow for operation of the plant to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 5. Stray Voltage: Consumers has experienced a number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At June 30, 1995, Consumers had 70 separate stray voltage lawsuits pending. Consumers believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. For further information, see Note 4. Gas Utility Results of Operations Gas Pretax Operating Income for the quarters ended June 30, 1995 and 1994: During the second quarter of 1995, gas pretax operating income decreased $1 million from the 1994 level. The decreased pretax operating income reflects higher operating costs, depreciation and general taxes. Partially offsetting this decrease was a 12.9 percent increase in gas deliveries (see Gas Deliveries section). Gas Pretax Operating Income for the six months ended June 30, 1995 and 1994: The $6 million increase in gas pretax operating income for the six months ended June 30, 1995 compared with the same 1994 period reflects the reversal of a loss previously recorded for a gas contract contingency (see Note 3), partially offset by lower gas deliveries (see Gas Deliveries section), higher gas operating costs and depreciation. Gas Pretax Operating Income for the 12 months ended June 30, 1995 and 1994: The $13 million decrease in 1995 gas pretax operating income compared with 1994 reflects lower gas deliveries (see Gas Deliveries section) and higher operating costs, depreciation, and general taxes, partially offset by the reversal of losses previously recorded for gas contingencies. Increased operating costs included $14 million of postretirement benefit costs (see Note 3). The following table quantifies the impact of the major reasons for the changes in gas pretax operating income for the periods ended June 30: In Millions Impact on Pretax Operating Income Quarter ended Six months ended 12 months ended 1995 compared 1995 compared 1995 compared with 1994 with 1994 with 1994 Deliveries $ 5 $(14) $(31) Recovery of gas costs and other regulatory issues - 26 35 O&M, general taxes and depreciation (6) (6) (17) ----- ----- ----- Total change $ (1) $ 6 $(13) ===== ===== ===== Gas Deliveries: During the second quarter of 1995, gas sales and gas transported, excluding transport to the MCV and off-system transportation, totaled 55.2 bcf, a 12.9 percent increase from the corresponding 1994 level. Gas sales and gas transported increased 4.0 bcf and 2.3 bcf, respectively, with the majority of the change attributable to increased usage. For the six months ended June 30, 1995, gas sales and gas transported for all customer classes totaled 223.8 bcf, a 9.7 percent decrease from the corresponding 1994 level. Gas sales decreased 9.7 bcf while transport deliveries increased 2.5 bcf. The decrease in firm sales occurred primarily due to warmer temperatures. For the 12 months ended June 30, 1995, gas sales and gas transported for all customer classes totaled 385.1 bcf, a 9.4 percent decrease from the corresponding 1994 level, reflecting record cold winter weather during the 12 months ended June 30, 1994 and a return to more normal weather during the 12 months ended June 30, 1995. Cost of Gas Sold: The cost of gas sold for the second quarter of 1995 increased $9 million from the 1994 level. The cost of gas sold for the six months ended June 30, 1995 decreased $44 million from the 1994 level as a result of reduced deliveries and the reversal of gas contract loss contingency. The cost of gas sold for the 12 months ended June 30, 1995 decreased $70 million from the corresponding 1994 level which was also the result of reduced gas deliveries and the gas contract loss contingency reversal. Gas Utility Issues Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates by $21 million. The requested increase in revenue reflects increased expenditures, including those associated with postretirement benefits, and proposes a 13 percent return on equity. In June 1995, the MPSC staff filed its position in this case, recommending an $11 million rate decrease. A final order from the MPSC is expected in early 1996. For further information regarding Consumers' current gas rate case, see Note 3. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to by-pass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Issues: In April 1995, an ALJ issued a proposal for decision in a proceeding that had been initiated by Consumers regarding a gas supply contract pricing dispute with certain intrastate producers. The ALJ agreed with Consumers that certain market based pricing provisions should, on a prospective basis, limit the price paid by Consumers under the three agreements at issue. The ALJ also found that the market based pricing provision required specific MPSC approval before Consumers could apply those prices to purchases under the agreements and found that such approval had not previously been given. Consumers does not agree with the ALJ's findings and conclusions on this point and will file exceptions to the proposal for decision for the MPSC's consideration. If the MPSC issues an order adopting the recommendations of the ALJ, the market based provisions upon which Consumers had paid for gas purchased under these agreements will not be effective prior to such an MPSC order. If the producers pursue a court action for amounts owed for previously purchased gas, Consumers could be liable for as much as $44 million (excluding any interest) under the producers' theories. Consumers believes the producers' position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this issue. Gas Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its gas utility operations of $129 million for 1995, $119 million for 1996 and $101 million for 1997. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Gas Environmental Matters: The Michigan Natural Resources and Environmental Protection Act (formerly the Environmental Response Act) was substantially amended in June 1995. The Michigan law bears similarities to the federal Superfund law. The purpose of the 1995 amendments was generally to encourage development of industrial sites and to remove liability from some parties who were not responsible for activities causing contamination. Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $112 million. These estimates are based on undiscounted 1994 costs. At June 30, 1995, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could impact the estimate of remedial action costs for the sites. Consumers requested recovery and deferral of certain investigation and remedial action costs in its gas rate case filed in December 1994. Consumers believes that remedial action costs are recoverable in rates as the MPSC in 1993 addressed the question of recovery of investigation and remedial action costs for another Michigan gas utility as part of a gas rate case. In order to be recovered in rates, prudent costs must be approved in a rate case. The MPSC has approved similar deferred accounting requests by several other Michigan utilities relative to investigation and remedial action costs. In June 1995, as part of Consumers' rate case, the MPSC staff recommended that the MPSC adopt the same accounting and cost recovery previously provided to other Michigan utilities. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites. For further information, see Note 4. Gas Outlook Consumers currently anticipates gas deliveries to grow approximately 2.3 percent per year (excluding MCV transportation and off-system deliveries) over the next five years, primarily due to a steadily growing customer base. Additionally, Consumers has several strategies which will support increased load requirements in the future. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. New technologies being developed on a national level, such as the emerging use of natural gas vehicles, also provide Consumers with sales growth opportunities. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Low Income Energy Assistance Program funding currently provides approximately $71 million in heating assistance to approximately 400,000 Michigan households, with approximately 18 percent of funds going to Consumers' customers. However, recent actions by the U. S. House of Representatives Committee on Appropriations has put restoration of funding for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to maintain this funding. Other Other Income: Other income for the 12 months ending June 30, 1995 decreased $11 million when compared with the corresponding 1994 period, reflecting the sale of the remaining MCV Bonds in December 1993 which eliminated the bond interest income. Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, in 1991, the Attorney General and the MMCG asked the SEC to revoke this exemption. In April 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA. The SEC has not taken action on this matter. In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) a repeal of PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff stated that PUHCA was restrictive in many regards and may prevent companies from responding effectively to the changes now occurring in the utility industry. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. New Accounting Standard: In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement, which is effective for 1996 financial statements, requires that an asset be reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable. The statement also requires that a loss be recognized whenever a regulator excludes a portion of an asset's cost from a company's rate base. Consumers does not expect the application of this statement to have a material impact on its financial position or results of operations. 60 PART II. OTHER INFORMATION Item 1. Legal Proceedings The discussion below is limited to an update of developments that have occurred in various judicial and administrative proceedings, many of which are more fully described in CMS Energy's and Consumers' 1994 Forms 10-K for the year ended December 31, 1994 and Forms 10-Q for the quarter ended March 31, 1995. Reference is made to the Notes to the Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating and environmental matters. Rate Case Proceedings Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant Investment In 1991, the MPSC issued an order in the Midland-related proceeding designated as Step 3A finding that Consumers was not in compliance with certain financial stabilization orders. Upon appeal by several parties, including the Attorney General, the Court of Appeals affirmed the MPSC determinations in Step 3A in an order issued in April 1995. In May 1995, ABATE filed an application for leave to appeal this decision with the Michigan Supreme Court. 1994 Electric Rate Case Filing In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. Briefs and reply briefs have been filed in this case. Consumers' position on brief assumed retaining certain customers subject to competition and serving those customers from jurisdictional sources as well as from the uncommitted MCV capacity. Consumers' position, if adopted, would increase Consumers' retail electric base rates by $93 million. In its brief, the MPSC staff recommended a rate increase in the annual amount of $43 million. This recommendation reflects a different sales forecast than Consumers, an authorized return on equity of 12% (versus Consumers' requested 13%) and a lower equity ratio than that included in Consumers' proposed capital structure. In August 1995, the ALJ issued a proposal for decision in this case recommending the MPSC authorize a $46 million rate increase. The ALJ generally adopted the MPSC staff's position with adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ also recommended the elimination of cross subsidies among residential, commercial and industrial rate classes. As a part of its testimony in this case, the MPSC staff recommended that the MPSC permit varying levels of cost recovery for some of the MCV contract capacity above 915 MW. The ALJ struck this testimony on the grounds that the multiple positions of the staff were confusing. The MPSC upheld the ALJ's action, stating that the remaining 325 MW of MCV capacity will be considered only as part of a competitive solicitation. On June 8, 1995, Consumers filed a petition for rehearing with the MPSC of this ruling. 1994 Gas Rate Case Filing In June 1995, the MPSC staff filed its position in this case recommending an $11 million rate decrease. The MPSC staff's recommendation included a lower rate base, a lower return on common equity, a revised capital structure and a lower expense sales forecast than Consumers had projected. Under MPSC rate case scheduling policies, a final order in this case is expected in early 1996. Palisades Plant -- Spent Nuclear Fuel Storage In May 1993, the Attorney General and certain other parties commenced litigation to block Consumers' use of dry spent fuel storage casks at Palisades. In June 1995, the U.S. Supreme Court denied the opposing parties' petition for a Writ of Certiorari to seek further review of the Sixth Circuit decision against their positions As of June 30, 1995, Consumers had loaded 13 dry storage casks with spent nuclear fuel. Stray Voltage Lawsuits Consumers has a number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. At June 30, 1995, Consumers had 70 separate stray voltage cases pending. MPSC Case No. U-10029 - Intrastate Gas Supply On February 8, 1993, the MPSC issued an order granting Consumers' request to lower the price to be paid to one of its intrastate gas suppliers, North Michigan, under its contract for which North Michigan filed an appeal with the Court of Appeals. In June 1995, the Court of Appeals affirmed the MPSC's decision. The producers have filed a motion for reconsideration with the Court of Appeals. Collateral suits claiming relief based on a theory of breach of contract, among other things, were filed by the producers in the Grand Traverse County Circuit Court and in the Clinton County Circuit Court, which was subsequently transferred to Jackson County Circuit Court. The Grand Traverse County Circuit Court suit was dismissed June 12, 1995, and Consumers' motion to dismiss the Jackson County Circuit Court suit will be argued August 11, 1995. Request for Approval of a Competitive Tariff for Certain Industrial Customers In May 1995, the MPSC issued an order stating that it has legal authority to approve a range of rates under which Consumers could negotiate prices with customers that have competitive energy alternatives. However, the MPSC dismissed from consideration, in this proceeding, the issues related to Consumers' proposed use of additional 325 MW of MCV contract capacity to serve these customers. In June 1995, Consumers filed a petition for rehearing of this decision with the MPSC. Hearings are expected to be completed in August 1995 with briefs filed in September 1995. MCV - Related Proceedings On May 5, 1994, the MCV Partnership notified Consumers of its desire to commence a second arbitration proceeding, this one regarding the methodology for calculation of the energy charge payable under the PPA. In August 1995, an arbitrator ruled that Consumers correctly calculated the energy charges and that the MCV Partnership is not entitled to recovery of additional amounts. Retail Wheeling Proceedings In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers and ABATE filed a petition for rehearing regarding a number of issues included in the order. Detroit Edison has filed a claim of appeal of the MPSC order with the Court of Appeals. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders held on May 26, 1995, the shareholders ratified the appointment of Arthur Andersen LLP as independent auditors of CMS Energy and Consumers for the year ended December 31, 1995. The vote at CMS Energy was 74,357,609 in favor, and 439,478 against, with 504,146 abstaining. The vote at Consumers was 85,193,425 in favor, and 7,665 against, with 20,004 abstaining. At the same meeting for CMS Energy, the shareholders approved an amendment to the CMS Energy Performance Incentive Stock Plan to provide that shares awarded or subject to options may not be more than 3% of the outstanding shares of each class of common stock of CMS Energy on January 1 of any year less the number of shares awarded or subject to options granted under the plan during the previous four years. The vote was 49,949,915 in favor, and 15,649,673 against, with 1,479,234 abstaining. At the same meeting, shareholders elected all twelve nominees for the office of director for both CMS Energy and Consumers. The total number of votes cast at CMS Energy was 75,301,242. The votes for individual nominees were as follows: CMS ENERGY CORPORATION Number of Votes For Withheld Total William T. McCormick, Jr. 74,135,763 1,165,479 75,301,242 James J. Duderstadt 74,220,612 1,080,630 75,301,242 Kathleen R. Flaherty 74,195,508 1,105,734 75,301,242 Victor J. Fryling 74,207,069 1,094,173 75,301,242 Earl D. Holton 74,264,967 1,036,275 75,301,242 Lois A. Lund 74,193,451 1,107,791 75,301,242 Frank K. Merlotti 74,250,133 1,051,109 75,301,242 William U. Parfet 74,258,097 1,043,145 75,301,242 Percy A. Pierre 74,243,096 1,058,146 75,301,242 S. Kinnie Smith, Jr. 74,227,510 1,073,732 75,301,242 Kenneth Whipple 74,257,813 1,043,429 75,301,242 John B. Yasinsky 74,256,036 1,045,206 75,301,242 The total number of votes cast at Consumers was 85,221,094. The votes for individual nominees were as follows: CONSUMERS POWER COMPANY Number of Votes For Withheld Total William T. McCormick, Jr. 85,193,609 27,485 85,221,094 James J. Duderstadt 85,190,369 30,725 85,221,094 Kathleen R. Flaherty 85,189,806 31,288 85,221,094 Victor J. Fryling 85,195,080 26,014 85,221,094 Earl D. Holton 85,195,260 25,834 85,221,094 Lois A. Lund 85,195,883 28,211 85,221,094 Frank K. Merlotti 85,193,713 27,381 85,221,094 William U. Parfet 85,195,047 26,047 85,221,094 Percy A. Pierre 85,193,028 28,066 85,221,094 S. Kinnie Smith, Jr. 85,195,025 26,069 85,221,094 Kenneth Whipple 85,195,415 25,679 85,221,094 John B. Yasinsky 85,195,245 25,849 85,221,094 Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits (10) - Consumers: Credit Agreement dated as of July 14, 1995 among Consumers Power Company, the Banks named therein and the First National Bank of Chicago, as Administrative Agent. (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15) - CMS Energy: Letter of independent public accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - Consumers: Financial Data Schedule (99) - CMS Energy: Consumers Gas Group Financials (b) Reports on Form 8-K There have been no Current Reports on Form 8-K filed since the filing of CMS Energy Corporation's and Consumers Power Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 64 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: August 11, 1995 By A M Wright ------------------------------------- Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS POWER COMPANY (Registrant) Date: August 11, 1995 By A M Wright ------------------------------------- Alan M. Wright Senior Vice President and Chief Financial Officer EX-10 2 CONSUMERS CREDIT AGREEMENT DATED JULY 14, 1995 EXHIBIT (10) ************************************************************************** $425,000,000 CONSUMERS POWER COMPANY ________________________________________ CREDIT AGREEMENT AND RELATED DOCUMENTS ************************************************************************** CREDIT AGREEMENT DATED AS OF JULY 14, 1995 AMONG CONSUMERS POWER COMPANY, THE BANKS AND THE FIRST NATIONAL BANK OF CHICAGO, AS ADMINISTRATIVE AGENT TABLE OF CONTENTS Page ARTICLE I DEFINITIONS 1 ARTICLE II THE ADVANCES 11 2.1. Commitment 11 2.2. Drawings 11 2.2.1. Form of Drafts 11 2.2.2. Powers of Attorney 12 2.2.3. Payment of Drafts at Maturity 12 2.2.4. Committed Drawings 12 (a) Request for Committed Drawing 12 (b) Mechanics of Committed Drawings 12 2.3. Loans 13 2.3.1. Committed Loans 13 2.3.1.1. Rate Options; Payment on Last Day of Interest Period 13 2.3.1.2. Method of Selecting Rate Options and Interest Periods 13 2.3.1.3. Committed Notes 13 2.3.1.4. Interest Payment Dates; Interest Basis 13 2.3.2. Competitive Bid Advances 14 2.3.2.1. Competitive Bid Option 14 2.3.2.2. Competitive Bid Quote Request 14 2.3.2.3. Invitation for Competitive Bid Quotes 15 2.3.2.4. Submission and Contents of Competitive Bid Quotes 15 2.3.2.5. Notice to Company 16 2.3.2.6. Acceptance and Notice by Company 16 2.3.2.7. Allocation by Agent 17 2.4. Method of Making Advances 17 2.5. Minimum Amount of Advances 17 2.6. Optional Principal Payments 17 2.7. Commitment Fee and Reduction of Commitment 17 2.8. Agency Fee 18 2.9. Rate after Maturity 18 2.10. Method of Payment 18 2.11. Telephonic Notices 18 2.12. Lending Installations 18 2.13. Non-Receipt of Funds by the Agent 19 ARTICLE III RESERVED 19 ARTICLE IV CHANGE IN CIRCUMSTANCES 19 4.1. Yield Protection 19 4.2. Replacement Bank 20 4.3. Availability of Rate Options 21 4.4. Availability of Drawings 21 4.5. Funding Indemnification 21 4.6. Bank Certificates; Survival of Indemnity 21 ARTICLE V REPRESENTATIONS AND WARRANTIES 22 5.1. Incorporation and Good Standing 22 5.2. Corporate Power and Authority; No Conflicts 22 5.3. Governmental Approvals 22 5.4. Legally Enforceable Agreements 22 5.5. Financial Statements 22 5.6. Litigation 23 5.7. Margin Stock 23 5.8. ERISA 23 ARTICLE VI AFFIRMATIVE COVENANTS 23 6.1. Payment of Taxes, Etc 23 6.2. Maintenance of Insurance 24 6.3. Preservation of Corporate Existence, Etc 24 6.4. Compliance with Laws, Etc 24 6.5. Visitation Rights 24 6.6. Keeping of Books 24 6.7. Reporting Requirements 24 ARTICLE VII NEGATIVE COVENANTS 26 7.1. Liens 26 7.2. Sale of Assets 27 7.3. Mergers, Etc 27 7.4. Compliance with ERISA 27 7.5. Change in Nature of Business 27 ARTICLE VIII FINANCIAL COVENANTS 28 8.1. Debt to Capital Ratio 28 ARTICLE IX EVENTS OF DEFAULT 28 9.1. Events of Default 28 9.2. Remedies 29 ARTICLE X WAIVERS, AMENDMENTS AND REMEDIES 30 10.1. Amendments 30 10.2. Preservation of Rights 30 ARTICLE XI CONDITIONS PRECEDENT 31 11.1. Initial Advance 31 11.2. Initial Committed Loan; Initial Competitive Bid Loan 31 11.3. Initial Drawing 31 11.4. Each Advance (other than a Refinancing Advance) 31 11.5. Refinancing Advances 32 ARTICLE XII GENERAL PROVISIONS 32 12.1. Successors and Assigns 32 12.2. Survival of Representations 33 12.3. Governmental Regulation 33 12.4. Taxes 33 12.5. Choice of Law 34 12.6. Headings 34 12.7. Entire Agreement 34 12.8. Expenses; Indemnification 34 12.9. Accounting 34 12.10. Severability of Provisions 34 12.11. Setoff 35 12.12. Ratable Payments 35 12.13. Nonliability of Bank 35 12.14. Waiver Under Prior Agreement 35 ARTICLE XIII THE AGENT 35 13.1. Appointment 35 13.2. Powers 36 13.3. General Immunity 36 13.4. No Responsibility for Loans, Recitals, etc 36 13.5. Action on Instructions of Banks 36 13.6. Employment of Agents and Counsel 36 13.7. Reliance on Documents; Counsel 36 13.8. Agent's Reimbursement and Indemnification 36 13.9. Rights as a Lender 37 13.10. Bank Credit Decision 37 13.11. Successor Agent 37 ARTICLE XIV NOTICES 37 14.1. Giving Notice 37 14.2. Change of Address 38 ARTICLE XV COUNTERPARTS 38 EXHIBIT "A" - Note 48 EXHIBIT "B" - Opinion of Counsel 50 EXHIBIT "C" - Committed Drawing Request 52 EXHIBIT "D" - Power of Attorney 54 EXHIBIT "E" - Competitive Bid Note 55 EXHIBIT "F" - Competitive Bid Quote 57 EXHIBIT "G" - Competitive Bid Quote Request 59 EXHIBIT "H" - Invitation for Competitive Bid Quotes 60 EXHIBIT "I" - Form of Certificate as to Debt-Capital Ratio 61 EXHIBIT "J" - Assignment Agreement 63 EXHIBIT "I" - Notice of Assignment 70 CREDIT AGREEMENT ---------------- This Credit Agreement, dated as of July 14, 1995, is among Consumers Power Company, a Michigan corporation (the "Company"), certain banks listed on the signature pages hereto (the "Banks") and The First National Bank of Chicago, a national banking association, as Administrative Agent (the "Agent"). W I T N E S S E T H: WHEREAS, the Company, certain banks and The First National Bank of Chicago, as agent for the banks, entered into a Credit Agreement dated as of July 16, 1993 (as amended, the "1993 Agreement"), which provided a $470,000,000 revolving credit facility to the Company; WHEREAS, the Company has requested, and the Banks have agreed to enter into, a revolving credit facility with the Banks in an aggregate amount of $425,000,000, providing for loans to the Company at committed rate options including eurodollar and corporate base rates, and, in addition, a committed facility under which the Banks may create drafts for the Company to be discounted at banker's acceptance rates; and WHEREAS, in addition to the committed facilities for loans and the creation of discounted drafts, the Banks have agreed to provide a competitive bid option for loans; WHEREAS, this Agreement shall document the facility described above and shall replace the 1993 Agreement; NOW THEREFORE, the Company, the Banks and the Agent hereby agree as follows: ARTICLE I DEFINITIONS ----------- As used in this Agreement: "Absolute Rate" means, with respect to a Competitive Bid Loan made by a given Bank for the relevant Absolute Rate Interest Period, the rate of interest per annum (rounded to the nearest 1/100 of 1%) (set either at a specific rate or at a margin over or under the Base Eurodollar Rate) offered by such Bank and accepted by the Company. "Absolute Rate Interest Period" means, with respect to a Competitive Bid Advance, a period of not less than 7 and not more than 180 days commencing on a Business Day selected by the Company pursuant to this Agreement. If such Absolute Rate Interest Period would end on a day which is not a Business Day, such Absolute Rate Interest Period shall end on the next succeeding Business Day. "Advances" means any borrowings hereunder, including all Loans and Drawings. "Agent" means The First National Bank of Chicago in its capacity as administrative agent for the Banks pursuant to Article XIII, and not in its individual capacity as a Bank, and any successor Agent appointed pursuant to Article XIII. "Aggregate Commitment" means the aggregate of the Commitments of the Banks hereunder. "Agreement" means this Credit Agreement, as it may be amended from time to time. "Alternate Base Rate" means a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (a) the corporate base rate of interest announced publicly by First Chicago from time to time (which rate is based upon various factors including costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate); or (b) 1/2 of one percent per annum above the Federal Funds Rate from time to time. Each change in the Alternate Base Rate shall take effect concurrently with any change in such base rate or the Federal Funds Rate. "Applicable Commission Percentage" means, at any date of determination, whichever of the following is applicable at such time: (i) 0.30% per annum in the event that, and at all times during which, the First Mortgage Bonds (the "Senior Debt") are rated A/A2 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such commission shall be either S&P or Moody's; (ii) 0.35% per annum in the event that, and at all times during which, the Senior Debt is not rated A/A2 or higher by any two of D&P, Fitch, Moody's and S&P but is rated A-/A3 or BBB+/Baa1 or higher by any two of D&P, Fitch, Moody's and S&P, provided that at least one of the two rating agencies used in determining such commission shall be either S&P or Moody's; (iii) 0.45% per annum in the event that, and at all times during which, the Senior Debt is not rated A-/A3 or BBB+/Baa1 or higher by any two of D&P, Fitch, Moody's and S&P but is rated BBB/Baa2 or BBB-/Baa3 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such commission shall be either S&P or Moody's; or (iv) 0.75% per annum in the event that, and at all times during which, the Senior Debt is not rated BBB/Baa2 or BBB-/Baa3 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such commission shall be either S&P or Moody's. The Applicable Commission Percentage shall be redetermined as noted above upon any change in the rating of the Senior Debt by D&P, Fitch, Moody's or S&P, which would cause it to change. "Applicable Margin" means at any date of determination, whichever of the following is applicable at such time: (i) either 0.30% per annum with respect to a Eurodollar Rate Loan or 0.0% with respect to a Floating Rate Loan, in the event that, and at all times during which, the Senior Debt is rated A/A2 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such margin shall be either S&P or Moody's; (ii) 0.35% per annum with respect to a Eurodollar Rate Loan or 0.0% with respect to a Floating Rate Loan, in the event that, and at all times during which, the Senior Debt is not rated A/A2 or higher by any two of D&P, Fitch, Moody's and S&P but is rated A-/A3 or BBB+/Baa1 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such margin shall be either S&P or Moody's; (iii) either 0.45% per annum with respect to a Eurodollar Rate Loan or 0.0% with respect to a Floating Rate Loan, in the event that, and at all times during which, the Senior Debt is not rated A-/A3 or BBB+/Baa1 or higher by any two of D&P, Fitch, Moody's and S&P but is rated BBB/Baa2 or BBB-/Baa3 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such margin shall be either S&P or Moody's; or (iv) either 0.75% per annum with respect to a Eurodollar Rate Loan or 0.25% with respect to a Floating Rate Loan, in the event that, and at all times during which, the Senior Debt is not rated BBB/Baa2 or BBB-/Baa3 or higher by any two of D&P, Fitch, Moody's and S&P, provided, that at least one of the two rating agencies used in determining such margin shall be either S&P or Moody's. The Applicable Margin shall be redetermined as noted above upon any change in the rating of the Senior Debt by D&P, Fitch, Moody's or S&P, which would cause it to change. "Article" means an article of this Agreement unless another document is specifically referenced. "BA Reference Banks" shall mean First Chicago, Bank of America Illinois, and CIBC Inc. "Banker's Acceptance Reference Rate" means, for any Borrowing Date, the sum of (a) the rate determined by the Agent to be the arithmetic average of the Discount Rate for such Borrowing Date for the BA Reference Banks, rounded to the next highest 5/100ths of 1% plus (b) 1/10 of 1%. If any of the BA Reference Banks fails to provide such quotation to the Agent, then the Agent shall determine the Banker's Acceptance Reference Rate on the basis of the quotations of the remaining BA Reference Banks. "Banks" means the banks listed on the signature pages of this Agreement and their respective successors and assigns. "Base Eurodollar Rate" means, with respect to a Eurodollar Rate Loan for the relevant Eurodollar Interest Period, the rate determined by the Agent to be the arithmetic average of the rates reported to the Agent by each Loan Reference Bank as the rate at which deposits in U.S. Dollars are offered to such Loan Reference Bank by first-class banks in the London interbank market at 11 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the amount of such Loan Reference Bank's Eurodollar Rate Loan and having a maturity equal to such Eurodollar Interest Period. If any Loan Reference Bank fails to provide such quotation to the Agent, then the Agent shall determine the Base Eurodollar Rate on the basis of the quotations of the remaining Loan Reference Banks. "Borrowing Date" means a date on which an Advance is made hereunder. "Business Day" means (i) with respect to borrowing, payment or rate selection of Eurodollar Rate Loans, a day on which banks are open for business in Chicago, New York and Los Angeles and on which dealings in U.S. Dollars are carried on in the London interbank market and (ii) for all other purposes, a day on which banks are open for business in Chicago. "Capital Lease" means any lease which has been or would be capitalized on the books of the lessee in accordance with GAAP. "Commission" means, with respect to a Draft pursuant to a Committed Drawing, an amount equal to (a) the face amount of the Draft times (b) the Applicable Commission Percentage times (c) a fraction the numerator of which is the number of days from and including the date of discount of the Draft to but excluding the maturity date of such Draft and the denominator of which is 360. "Commitment" means, for each Bank, the obligation of such Bank to make Committed Loans and create and discount Committed Drawings not exceeding the amount set forth opposite its signature below, as such amount may be modified from time to time. "Commitment Fee" means, at any date of determination, whichever of the following is applicable at such time: (i) 0.10% per annum in the event that, and at all times during which, the Senior Debt is rated A/A2 or higher by any two of D&P, Fitch, Moody's and S&P, provided that at least one of the two rating agencies used in determining such commitment fee shall be either S&P or Moody's; (ii) 0.125% per annum in the event that, and at all times during which, the Senior Debt is not rated A/A2 or higher by any two of D&P, Fitch, Moody's and S&P but is rated A-/A3 or BBB+/Baa1 or higher by any two of D&P, Fitch, Moody's and S&P, provided that at least one of the two rating agencies used in determining such commitment fee shall be either S&P or Moody's; (iii) 0.175% per annum in the event that, and at all times during which, the Senior Debt is not rated A-/A3 or BBB+/Baa1 or higher by any two of D&P, Fitch, Moody's and S&P but is rated BBB/Baa2 or BBB-/Baa3 or higher by any two of D&P, Fitch, Moody's and S&P, provided that at least one of the two rating agencies used in determining such commitment fee shall be either S&P or Moody's; or (iv) 0.25% per annum in the event that, and at all times during which, the Senior Debt is not rated BBB/Baa2 or BBB-/Baa3 or higher by any two of D&P, Fitch, Moody's and S&P, provided that at least one of the two rating agencies used in determining such commitment fee shall be either S&P or Moody's. "Committed Drawing" means a borrowing hereunder pursuant to Section 2.2.4. made through the Banks' discounting of Drafts. "Committed Drawing Request" has the meaning set forth for such term in Section 2.2.4. hereof. "Committed Loan" means a borrowing hereunder pursuant to Section 2.3.1. "Committed Note" means a promissory note in substantially the form of Exhibit "A" hereto, duly executed and delivered to the Agent by the Company and payable to the order of a Bank in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Company" means Consumers Power Company, a Michigan corporation, and its successors and assigns. "Competitive Bid Advance" means a borrowing hereunder consisting of the aggregate amount of the Competitive Bid Loans made by some or all of the Banks to the Company at the same time and for the same Interest Period. "Competitive Bid Borrowing Notice" is defined in Section 2.3.2.6. "Competitive Bid Loan" means a Loan which bears interest at the Absolute Rate. "Competitive Bid Note" means a promissory note in substantially the form of Exhibit "E" hereto, with appropriate insertions, duly executed and delivered to the Agent by the Company for the account of a Bank and payable to the order of such Bank, including any amendment, modification, renewal or replacement of such promissory note. "Competitive Bid Quote" means a Competitive Bid Quote substantially in the form of Exhibit "F" hereto completed and delivered by a Bank to the Agent in accordance with Section 2.3.2.4. "Competitive Bid Quote Request" means a Competitive Bid Quote Request substantially in the form of Exhibit "G" hereto completed and delivered by the Company to the Agent in accordance with Section 2.3.2.2. "Competitive Bid Reduction" means, for each Bank at any time, such Bank's ratable portion (determined according to the Banks' respective Commitments) of the aggregate principal amount of all Competitive Bid Advances then outstanding (which shall be determined irrespective of whether such Bank has Competitive Bid Advances outstanding). "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Company in accordance with GAAP. "Credit Documents" means this Agreement, the Notes, the Drafts, the Drawing Requests and the Powers of Attorney. "Debt" means, with respect to any Person, and without duplication, (a) all indebtedness of such Person for borrowed money, (b) all indebtedness of such Person for the deferred purchase price of property or services, (c) all Unfunded Vested Liabilities of such Person (if such Person is not the Company, determined in a manner analogous to that of determining Unfunded Vested Liabilities of the Company), (d) all obligations of such Person arising under acceptance facilities, (e) all obligations of such Person as lessee under Capital Leases, and (f) all guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to assure a creditor against loss (whether by the purchase of goods or services, the provision of funds for payment, the supply of funds to invest in any Person or otherwise) in respect of indebtedness or obligations of any other Person of the kinds referred to in clauses (a) through (e) above. "Default" means an event which but for the giving of notice or lapse of time, or both, would constitute an Event of Default. "Designated Officer" means the Chief Financial Officer, the Treasurer, an Assistant Treasurer, any Vice President in charge of financial or accounting matters or the principal accounting officer of the Company. "Discount" means, with respect to any Draft discounted by a Bank on the date of creation and discount thereof, an amount equal to (a) such Bank's Discount Rate for such Draft times (b) the face amount of such Draft times (c) a fraction the numerator of which is the number of days from and including the date of discount to but excluding the maturity date of such Draft and the denominator of which is 360. "Discount Rate" means, with respect to a Drawing evidenced by a Draft discounted by a Bank, the bid rate in effect at such Bank on the relevant Borrowing Date for discounting of commercial drafts or bills eligible for discount in the same denomination with Federal Reserve Banks and having maturities on the same date as the maturity date of such Draft, provided, that no Discount Rate used by any Bank shall be greater than the Banker's Acceptance Reference Rate. "Drafts" means the drafts drawn by the Company on a Bank pursuant to Section 2.2 hereof and discounted by such Bank and which evidence Drawings under this Agreement. "Drawing Request" means a Committed Drawing Request. "Drawings" means Committed Drawings and "Drawing" means a single such Drawing. "D & P" means Duff & Phelps, Inc. or any successor thereto. "Eligible Draft" means any Draft which, if it were to be accepted by a Bank hereunder, (i) would be eligible for discount by Federal Reserve Banks and (ii) would not require such Bank to maintain reserves under Regulation D or any other law or regulation against the liability of such Bank under such Draft. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company, or is under common control (within the meaning of Section 414(c) of the Code) with the Company. "Eurodollar Interest Period" means, with respect to a Eurodollar Rate Loan, a period of one, two, three or six months commencing on a Business Day selected by the Company pursuant to this Agreement. Such Eurodollar Interest Period shall end on the day in the first, second, third or sixth succeeding calendar month which corresponds numerically to the beginning day of such Eurodollar Interest Period, provided, that if there is no such numerically corresponding day in such first, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such first, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. "Eurodollar Rate" means, with respect to a Eurodollar Rate Loan for the relevant Eurodollar Interest Period, the sum of (i) the Base Eurodollar Rate applicable to that Eurodollar Interest Period plus (ii) the Applicable Margin. The Eurodollar Rate shall be rounded, if necessary, to the next higher 1/16 of 1%. "Eurodollar Rate Loan" means a Loan which bears interest at a Eurodollar Rate. "Event of Default" means an event described in Article IX. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors and assigns. "First Mortgage Bonds" means those bonds issued by the Company pursuant to the Indenture. "Fitch" means Fitchs Investor Services, Inc. or any successor thereto. "Fixed Rate" means the Absolute Rate or the Eurodollar Rate. "Fixed Rate Loan" means a Loan which bears interest at a Fixed Rate. "Floating Rate" means a rate per annum equal to (i) the Alternate Base Rate plus (ii) the Applicable Margin, changing when and as the Alternate Base Rate changes. "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "Floating Rate Interest Period" means, with respect to a Floating Rate Loan, a period of 90 days commencing on a Business Day selected by the Company in accordance with Section 2.3.1.2, provided, that with respect to a Floating Rate Loan to be made less than 90 days prior to the Termination Date, the Company may select a Floating Rate Interest Period which ends on the Termination Date. If such Floating Rate Interest Period would end on a day which is not a Business Day, such Floating Rate Interest Period shall end on the next succeeding Business Day. "GAAP" means generally accepted accounting principles in the United States of America as in effect on the date hereof, applied on a basis consistent with those used in the preparation of the financial statements referred to in Section 5.5 (except, for purposes of the financial statements required to be delivered pursuant to Sections 6.7(c) and (d), for changes concurred in by the Company's independent public accountants). "Indenture" means that certain Indenture, dated as of September 1, 1945, as supplemented and amended from time to time, from the Company to Chemical Bank, as successor Trustee. "Interest Period" means an Absolute Rate Interest Period, a Eurodollar Interest Period or a Floating Rate Interest Period. "Invitation for Competitive Bid Quotes" means an Invitation for Competitive Bid Quotes substantially in the form of Exhibit "H" hereto, completed and delivered by the Agent to the Banks in accordance with Section 2.3.2.3. "Lending Installation" means any office, branch, subsidiary or affiliate of a Bank. "Lien" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, financing lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loan" means a borrowing (i) pursuant to Section 2.3.1 of this Agreement which bears interest at the Eurodollar Rate or the Floating Rate or (ii) pursuant to Section 2.3.2 of this Agreement which bears interest at the Absolute Rate. "Loan Reference Banks" means First Chicago, Bank of America Illinois, and CIBC Inc. "Loan Request" is defined in Section 2.3.1.2. "Majority Banks" means Banks in the aggregate having at least 66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Banks in the aggregate holding at least 66-2/3% of the aggregate unpaid principal amount of the outstanding Advances. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Notes" means the Competitive Bid Notes and the Committed Notes. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes and the Drafts, all accrued and unpaid commitment fees and all other obligations of the Company to the Banks arising under the Credit Documents. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan" means any employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Company or any ERISA Affiliate and covered by Title IV of ERISA. "Powers of Attorney" shall have the meaning set forth for such term in Section 2.2.2 hereof. "Prior Agreement" means that certain Credit Agreement dated as of July 16, 1993, among the Company, First Chicago as agent, and the banks party thereto, as amended from time to time. "Rate Option" means the Eurodollar Rate or the Floating Rate. "Refinancing Advance" means an Advance which, after giving effect to the Advance and the application of the proceeds thereof, does not increase the aggregate amount of outstanding Advances, except that a Refinancing Advance shall not include Advances made upon the maturity of a Competitive Bid Advance. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System from time to time in effect and shall include any successor or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System from time to time in effect and shall include any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Reportable Event" has the meaning assigned to that term in Title IV of ERISA. "S&P" means Standard & Poor's Ratings Group or any successor thereto. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Single Employer Plan" means a Plan maintained by the Company or any member of the Controlled Group for employees of the Company or any member of the Controlled Group. "Subsidiary" means, as to any Person, any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other Persons performing similar functions are at the time owned directly or indirectly by such Person. "Termination Date" means the earlier of (i) the fourth anniversary of the date of this Agreement or (ii) any earlier date on which the obligation of the Banks to make Committed Loans and Committed Drawings hereunder is terminated. "Termination Event" means (a) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), or (b) the withdrawal of the Company or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001 (a) (2) of ERISA, or (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate a Plan by the PBGC or to appoint a trustee to administer any Plan. "Total Consolidated Capitalization" means, at any date of determination, the sum of (a) Total Consolidated Debt, (b) equity of the common stockholders of the Company, (c) equity of the preference stockholders of the Company and (d) equity of the preferred stockholders of the Company, in each case determined at such date. "Total Consolidated Debt" means, at any date of determination, the aggregate Debt of the Company and its Consolidated Subsidiaries. "Unfunded Vested Liabilities" means, (i) in the case of Single Employer Plans, the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, and (ii) in the case of Multiemployer Plans, the withdrawal liability of the Company and Subsidiaries. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE ADVANCES ------------ 2.1. Commitment. From and including the date of this Agreement through and including the Termination Date, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to extend credit to the Company from time to time by making Committed Loans and creating and discounting Committed Drawings in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment, provided, that the Commitment of each Bank shall be deemed utilized from time to time by the amount of such Bank's Competitive Bid Reduction. Subject to the terms of this Agreement, the Company may borrow, repay and reborrow at any time prior to the Termination Date. Each Advance hereunder (other than Competitive Bid Advances) shall consist of Advances made from the several Banks ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. The total amount of Committed Loans, Committed Drawings, and Competitive Bid Loans outstanding at any one time may not exceed the Aggregate Commitment in effect at such time. The Company shall (a) use the proceeds from the discounting of Drafts by the Banks to finance the current shipment of fossil fuels within the United States, including, without limitation, natural gas and coal and (b) use the proceeds of the Loans for general corporate purposes. 2.2. Drawings. 2.2.1. Form of Drafts. Drawings shall be created severally by each Bank hereunder by creating and discounting Drafts at such Bank's Discount Rate. Each Draft shall be drawn on the Bank discounting such Draft and dated the date such Draft is presented for discount hereunder, shall be an Eligible Draft and shall mature and be payable by the Company on a Business Day which is (i) not less than 30 nor more than 180 days after the date thereof and (ii) not later than the Termination Date in effect at the time of the creation of such Draft. 2.2.2. Powers of Attorney. The Company will furnish each Bank a limited Power of Attorney substantially in the form of Exhibit "D" hereto (together, the "Powers of Attorney"), which will authorize such Bank to complete and execute the Drafts on behalf of the Company in accordance with the information to be furnished for each Draft. 2.2.3. Payment of Drafts at Maturity. The Company shall pay each Bank an amount equal to the face amount of each Draft discounted by such Bank on the maturity date thereof to the account indicated on the signature pages to this Agreement for such Bank. 2.2.4. Committed Drawings. (a) Request for Committed Drawing. Each Committed Drawing shall be made on telephone notice received by the Agent from the Company not later than 11:00 A.M. (Chicago time) two Business Days prior to the Borrowing Date of such Drawing, confirmed by a written notice received by the Agent by 3:00 P.M. (Chicago time) on such Business Day, substantially in the form of Exhibit "C" hereto and incorporated herein (each a "Committed Drawing Request"), specifying, among other things, (i) the Borrowing Date of such Committed Drawing, (ii) the dates of maturity of the Drafts (each of which must be a Business Day), (iii) with respect to each maturity within each Committed Drawing, the aggregate face amount of the Drafts to be created and discounted and (iv) a description of the goods, the shipment of which is to be financed by the Committed Drawing. The Agent shall promptly notify each of the Banks of its ratable proportion of the Committed Drawing, based on the ratio that such Bank's Commitment bears to the Aggregate Commitment. By 9:00 A.M. (Chicago time) on the Borrowing Date for such Committed Drawing, each Bank shall notify the Agent of such Bank's Discount Rate to be used in the discounting of the Drafts by such Bank pursuant to such requested Committed Drawing. The Agent shall calculate the Banker's Acceptance Reference Rate and shall notify the Company of such rate by 9:30 a.m. (Chicago time) on such Borrowing Date. If any Bank's Discount Rate is greater than the Banker's Acceptance Reference Rate for such requested Drawing, the Agent shall notify such Bank by 9:30 A.M. (Chicago time) on such Borrowing Date and such Bank shall use the Banker's Acceptance Reference Rate in discounting the Draft for such requested Drawing as set forth below. (b) Mechanics of Committed Drawings. Not later than 11:00 A.M. (Chicago time) on each Borrowing Date for a Committed Drawing and upon fulfillment of the applicable conditions set forth herein, each Bank will (i) prepare on behalf of the Company a Draft or Drafts having a face amount in the aggregate equal to the amount of such Bank's ratable proportion of the Committed Drawing, each such Draft being dated such Borrowing Date and having the maturity date specified by the Company, (ii) execute such Draft or Drafts on behalf of the Company pursuant to the Powers of Attorney and (iii) discount each Draft by transferring to the Agent at its address specified on the signature page hereof an amount in immediately available funds equal to (a) the face amount of such Draft minus (b) the sum of (x) such Bank's Discount for such Draft plus (y) the Commission applicable to such Draft. The Agent will make the funds so received from the Banks available to the Company at the Agent's aforesaid address. 2.3. Loans. 2.3.1. Committed Loans. 2.3.1.1. Rate Options; Payment on Last Day of Interest Period. The Loans may be Floating Rate Loans or Eurodollar Rate Loans, or a combination thereof, selected by the Company in accordance with Section 2.3.1.2. Each Loan shall be paid in full by the Company on the last day of the Interest Period applicable thereto. 2.3.1.2. Method of Selecting Rate Options and Interest Periods. The Company shall select the Rate Option and Interest Period applicable to each Loan from time to time. The Company shall give the Agent irrevocable notice (a "Loan Request") not later than 11:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate Loan and three Business Days before the Borrowing Date of each Eurodollar Rate Loan, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Loan, (ii) the aggregate amount of such Loan, (iii) the Rate Option selected for such Loan, and (iv) in the case of each Fixed Rate Loan, the Interest Period applicable thereto. Each Fixed Rate Loan shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Fixed Rate Loan. The Company shall not select an Interest Period with respect to any Loan which ends subsequent to the earlier of (x) the date of maturity of the Committed Notes in effect at the time of the making of such Loan and (y) the Termination Date in effect at the time of the making of such Loan. 2.3.1.3. Committed Notes. Each Bank is hereby authorized to record the principal amount of each of the Loans and each repayment on the schedule attached to its Committed Note, provided, that the failure to so record shall not affect the Company's obligations under such Committed Note. On or before each of the first, second and third anniversaries of the date of this Agreement, the Company shall execute and deliver to the Agent new Committed Notes dated, respectively, the date of the first, second and third anniversaries of the date of this Agreement and maturing, respectively, on the second, third and fourth anniversaries of the date of this Agreement. 2.3.1.4. Interest Payment Dates; Interest Basis. Interest accrued on each Loan shall be payable on the last day of its applicable Interest Period and on any date on which the Loan is prepaid, whether due to acceleration or otherwise. Interest accrued on each Fixed Rate Loan having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Fixed Rate Loans and Drawings shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Floating Rate Loans shall be calculated for actual days elapsed on the basis of a 365/366 day year. Interest shall be payable for the day a Loan is made but not for the day of any payment on the amount paid if payment is received prior to 5:00 p.m. (Chicago time) at the place of payment. If any payment of principal or interest on a Loan shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.3.2. Competitive Bid Advances. 2.3.2.1. Competitive Bid Option. In addition to the Loans pursuant to Section 2.3.1, but subject to the terms and conditions of this Agreement (including, without limitation, the limitation set forth in Section 2.1 as to the maximum aggregate principal amount of all outstanding Advances hereunder), the Company may, as set forth in this Section 2.3.2, request the Banks, prior to the Termination Date, to make offers to make Competitive Bid Advances to the Company. Each Bank may, but shall have no obligation to, make such offers and the Company may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.3.2. Competitive Bid Advances shall be evidenced by the Competitive Bid Notes. 2.3.2.2. Competitive Bid Quote Request. When the Company wishes to request offers to make Competitive Bid Loans under this Section 2.3.2, it shall transmit to the Agent by telex or telecopy a Competitive Bid Quote Request substantially in the form of Exhibit "G" hereto so as to be received no later than 9:00 a.m. (Chicago time) at least two Business Days prior to the Borrowing Date proposed therein, specifying: (a) the proposed Borrowing Date, which shall be a Business Day, for the proposed Competitive Bid Advance, (b) the aggregate principal amount of such Competitive Bid Advance, and (c) the Interest Period applicable thereto (which may not be greater than 180 days and may not end after the Termination Date). The Company may request offers to make Competitive Bid Loans for more than one Interest Period in a single Competitive Bid Quote Request. A Competitive Bid Quote Request that does not conform substantially to the format of Exhibit "G" hereto shall be rejected, and the Agent shall promptly notify the Company of such rejection by telex or telecopy. 2.3.2.3. Invitation for Competitive Bid Quotes. Promptly, and in any event before the close of business (Chicago time) on the same Business Day of receipt of a Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2.2, the Agent shall send to each of the Banks by telex or telecopy an Invitation for Competitive Bid Quotes substantially in the form of Exhibit "H" hereto, which shall constitute an invitation by the Company to each Bank to submit Competitive Bid Quotes offering to make the Competitive Bid Loans to which such Competitive Bid Quote Request relates in accordance with this Section 2.3.2. 2.3.2.4. Submission and Contents of Competitive Bid Quotes. (i) Each Bank may, in its sole discretion, submit a Competitive Bid Quote containing an offer or offers to make Competitive Bid Loans in response to any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must comply with the requirements of this Section 2.3.2.4 and must be submitted to the Agent by telex or telecopy at its offices specified in or pursuant to Article XIII not later than 9:00 a.m. (Chicago time) on the proposed Borrowing Date (or, upon reasonable prior notice to the Banks, such other time and date as the Company and the Agent may agree), provided, that Competitive Bid Quotes submitted by First Chicago may only be submitted if the Agent or First Chicago (in either capacity) notifies the Company of the terms of the offer or offers contained therein not later than 15 minutes prior to the latest time at which the relevant Competitive Bid Quotes must be submitted by the other Banks. Subject to Articles IX and XI, any Competitive Bid Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Company. (ii) Each Competitive Bid Quote shall be in substantially the form of Exhibit "F" hereto and shall in any case specify: (a) the proposed Borrowing Date, which shall be the same as that set forth in the applicable Invitation for Competitive Bid Quotes, (b) the principal amount of the Competitive Bid Loan for which each such offer is being made, which principal amount (1) may be greater than, less than or equal to the Commitment of the quoting Bank, (2) must be at least $10,000,000 and an integral multiple of $1,000,000, and (3) may not exceed the principal amount of Competitive Bid Loans for which offers were requested, (c) the Absolute Rate offered for each such Competitive Bid Loan, (d) the Interest Period applicable to each such Competitive Bid Loan, and (e) the identity of the quoting Bank. (iii) The Agent shall reject any Competitive Bid Quote that: (a) is not substantially in the form of Exhibit "F" hereto or does not specify all of the information required by this Section 2.3.2.4(ii); (b) contains qualifying, conditional or similar language, other than any such language contained in Exhibit "F" hereto; (c) proposes terms other than or in addition to those set forth in the applicable Invitation for Competitive Bid Quotes; or (d) arrives after the time set forth in Section 2.3.2.4(i). If any Competitive Bid Quote shall be rejected pursuant to this Section 2.3.2.4(iii), then the Agent shall notify the relevant Bank of such rejection as soon as practical. 2.3.2.5. Notice to Company. Not later than 9:30 a.m. (Chicago time) on the proposed Borrowing Date, the Agent shall notify the Company of the terms (i) of any Competitive Bid Quote submitted by a Bank that is in accordance with Section 2.3.2.4 and (ii) of any Competitive Bid Quote that amends, modifies or is otherwise inconsistent with a previous Competitive Bid Quote submitted by such Bank with respect to the same Competitive Bid Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded by the Agent unless such subsequent Competitive Bid Quote specifically states that it is submitted solely to correct a manifest error in such former Competitive Bid Quote. The Agent's notice to the Company shall specify the aggregate principal amount of Competitive Bid Loans for which offers have been received for each Interest Period specified in the related Competitive Bid Quote Request and the respective principal amounts and Absolute Rates so offered. 2.3.2.6. Acceptance and Notice by Company. Not later than 10:00 a.m. (Chicago time) on the proposed Borrowing Date (or, upon reasonable prior notice to the Banks, such other time and date as the Company and the Agent may agree), the Company shall notify the Agent of its acceptance or rejection of the offers so notified to it pursuant to Section 2.3.2.5, provided, that the failure by the Company to give such notice to the Agent shall be deemed to be a rejection of all such offers. In the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall specify the aggregate principal amount of offers that are accepted for each Interest Period and shall be followed promptly by a confirming telecopy of such Competitive Bid Borrowing Notice. The Company may accept any Competitive Bid Quote in whole or in part, provided, that: (a) the Company may choose to accept Competitive Bid Quotes in an aggregate principal amount in excess of the amount of the related Competitive Bid Quote Request, (b) the Company shall be required to accept the lowest Competitive Bid Quotes submitted in response to such Competitive Bid Quote Request, and (c) the Company may not accept any offer that is described in Section 2.3.2.4(iii) or that otherwise fails to comply with the requirements of this Agreement. 2.3.2.7. Allocation by Agent. If offers are made by two or more Banks with the same Absolute Rates for a greater aggregate principal amount than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Competitive Bid Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in such multiples, not greater than $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amount of such offers. Allocations by the Agent of the amounts of Competitive Bid Loans shall be conclusive in the absence of manifest error. The Agent shall promptly, but in any event on the same Business Day, notify each Bank of its receipt of a Competitive Bid Borrowing Notice and the aggregate principal amount of such Competitive Bid Advance allocated to each participating Bank. 2.4. Method of Making Advances. Not later than noon (Chicago time) on each Borrowing Date, each Bank will make the funds available to the Company at such reasonable location as shall be specified by the Company in its Loan Request, Competitive Bid Quote Request or Drawing Request. Notwithstanding the foregoing provisions of this Section, to the extent that a Loan made by a Bank matures on the Borrowing Date of a requested Loan, such Bank shall apply the proceeds of the Loan it is then making to the repayment of the maturing Loan. 2.5. Minimum Amount of Advances. Each Advance shall be in the minimum amount of $10,000,000 (and in multiples of $1,000,000 if in excess thereof), provided, that any Floating Rate Loan may be in the amount of the unused Aggregate Commitment. 2.6. Optional Principal Payments. The Company may from time to time pay all outstanding Floating Rate Loans, or, in a minimum aggregate amount of $10,000,000 (and in multiples of $1,000,000 if in excess thereof), any portion of the outstanding Floating Rate Loans upon one Business Day's notice to the Agent. A Fixed Rate Loan paid prior to the last day of the applicable Interest Period shall be subject to the provisions of Section 4.5. A Drawing may not be paid prior to the maturity date thereof. 2.7. Commitment Fee and Reduction of Commitment. The Company agrees to pay to the Agent for the account of each Bank a Commitment Fee on the daily unborrowed portion of such Bank's Commitment from the date hereof to and including the Termination Date payable in arrears on the last day of each March, June, September and December during the term of the Bank's Commitment, commencing on September 30, 1995, and on the Termination Date. The commitment fee shall be calculated for actual days elapsed on the basis of a 365/366 day year. For purposes of this commitment fee only, each Bank's Commitment shall not be deemed utilized by the amount of such Bank's Competitive Bid Reduction. The Company may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Banks in the minimum amount of $10,000,000 (and in multiples of $1,000,000 if in excess thereof), upon at least ten Business Days' written notice to the Agent, which shall specify the amount of any such reduction, provided, that the amount of the Aggregate Commitment may not be reduced below the aggregate outstanding principal amount of the Advances. All accrued commitment fees shall be payable on the effective date of any termination of the obligation of the Banks to make Advances hereunder. 2.8. Agency Fee. The Company shall pay an agency fee to the Agent in an amount to be separately documented between the Company and the Agent. 2.9. Rate after Maturity. Except as provided in the next sentence, any Advance not paid by the Company at maturity, whether by acceleration or otherwise, shall bear interest until paid in full at a rate per annum equal to the Floating Rate plus 1% per annum. In the case of a Fixed Rate Loan the maturity of which is accelerated, such Fixed Rate Loan shall bear interest for the remainder of the applicable Interest Period, at the higher of the rate otherwise applicable to such Interest Period plus 1% per annum or the Floating Rate plus 1% per annum. 2.10. Method of Payment. All payments of principal and interest hereunder for Loans and Drawings and all payments of fees hereunder shall be made in immediately available funds to the Agent at its address specified on the signature page of this Agreement or at any other Lending Installation of the Agent specified in writing by the Agent to the Company by noon (Chicago time) on the date when due and shall be applied (i) first, ratably among the Banks with respect to any principal and interest due in connection with Loans pursuant to Section 2.3.1 or Committed Drawings, (ii) second, after all amounts described in clause (i) have been satisfied, ratably among those Banks for whom any payment of principal and interest is due in connection with any Competitive Bid Loans and (iii) third, after all amounts described in clauses (i) and (ii) have been satisfied, ratably to any other Obligations then due. Each payment delivered to the Agent for the account of any Bank shall be delivered promptly by the Agent to such Bank in the same type of funds which the Agent received at its address specified on the signature pages of this Agreement or at any Lending Installation specified in a notice received by the Agent from such Bank. The Agent is hereby authorized to charge the account of the Company maintained with First Chicago, if any, for each payment of principal or interest for Loans and Drawings and all fees as such payment becomes due hereunder. 2.11. Telephonic Notices. The Company hereby authorizes the Banks and the Agent to make Advances and effect Rate Option selections based on telephonic notices made by any person or persons the Agent or any Bank in good faith believes to be acting on behalf of the Company. The Company agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by a Designated Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Banks, the records of the Agent and the Banks shall govern absent manifest error. 2.12. Lending Installations. Subject to the provisions of Section 4.6 hereof, each Bank may book its Advances at any Lending Installation selected by such Bank and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes and the Drafts shall be deemed held by each Bank for the benefit of such Lending Installation. Each Bank may, by written or telex notice to the Company, designate a Lending Installation through which Advances will be made by it and for whose account payments on the Advances are to be made. 2.13. Non-Receipt of Funds by the Agent. Unless the Company or a Bank, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Bank, the proceeds of a Loan or (ii) in the case of the Company, a payment of principal, interest or fees to the Agent for the account of the Banks, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Bank or the Company, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Bank, the Federal Funds Rate for such day (as determined by the Agent) or (ii) in the case of payment by the Company, the interest rate applicable to the relevant Loan. ARTICLE III RESERVED ARTICLE IV CHANGE IN CIRCUMSTANCES ----------------------- 4.1. Yield Protection. (a) If any change in law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof by any agency or authority having jurisdiction over any Bank, (i) subjects any Bank or any applicable Lending Installation to any increased tax, duty, charge or withholding on or from payments due from the Company (excluding taxation measured by or attributable to the overall net income of the Bank or applicable Lending Installation, whether overall or in any geographic area), or changes the rate of taxation of payments to any Bank in respect of its Advances or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank or any applicable Lending Installation (including, without limitation, (i) any reserve costs under Regulation D with respect to Eurocurrency liabilities (as defined in Regulation D) and (ii) a higher discount rate, increased reserve requirements or additional premium liability to the Federal Deposit Insurance Corporation resulting from any Draft discounted hereunder not being an Eligible Draft at the time of its creation, but excluding reserves and assessments already taken into account in determining the interest rate applicable to Fixed Rate Loans and discount rates already taken into account in discounting existing Drafts), or (iii) imposes any other condition the result of which is to increase the cost to any Bank or any applicable Lending Installation of making, funding or maintaining loans or bankers acceptances, or reduces any amount receivable by any Bank or any applicable Lending Installation in connection with loans or bankers acceptances, or requires any Bank or any applicable Lending Installation to make any payment calculated by reference to the amount of loans or bankers acceptances held or interest received by it, by an amount deemed material by any Bank, or (iv) affects the amount of capital required or expected to be maintained by any Bank or any corporation controlling any Bank and such Bank determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make Advances hereunder or of commitments of this type, then, upon presentation by such Bank to the Company of a certificate (as referred to in the immediately succeeding sentence of this Section 4.1) setting forth the basis for such determination and the additional amounts reasonably determined by such Bank, for the period of up to 90 days prior to the date on which such certificate is delivered to the Company and the Agent, to be sufficient to compensate such Bank in light of such circumstances, the Company shall within 30 days of such delivery of such certificate pay to the Agent for the account of such Bank the specified amounts set forth on such certificate. The affected Bank shall deliver to the Company and the Agent a certificate setting forth the basis of the claim and specifying in reasonable detail the calculation of such increased expense, which certificate shall be prima facia evidence as to such increase and such amounts. An affected Bank may deliver more than one certificate to the Company during the term of this Agreement. In making the determinations contemplated by the above-referenced certificate, such Bank may make such reasonable estimates, assumptions, allocations and the like that such Bank in good faith determines to be appropriate, and such Bank's selection thereof in accordance with this Section 4.1 shall be conclusive and binding on the Company, absent manifest error. (b) No Bank shall be entitled to demand compensation or be compensated hereunder to the extent that such compensation relates to any period of time more than 90 days prior to the date upon which such Bank first notified the Company of the occurrence of the event entitling such Bank to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Company). 4.2. Replacement Bank. (a) If any Bank shall make a demand for payment under Section 4.1, then within 30 days after such demand, the Company may, with the approval of the Agent (which approval shall not be unreasonably withheld) and provided that no Default or Event of Default shall then have occurred and be continuing, demand that such Bank assign to one or more financial institutions designated by the Company and approved by the Agent all (but not less than all) of such Bank's Commitment and the Advances owing to it within the period ending on the later of such 30th day and the last day of the longest of the then current Interest Periods or maturity dates for such Advances. It is understood that such assignment shall be consummated on terms satisfactory to the assigning Bank, provided, that such Bank's consent to such an assignment shall not be unreasonably withheld. (b) In the event that the Company shall elect to replace a Bank as referred to in clause (a) above, the Company shall prepay all Advances outstanding of such Bank, and the bank or banks selected by the Company shall replace such Bank as a Bank hereunder pursuant to an instrument satisfactory to the Company, the Agent and the Bank being replaced by making Loans to the Company in the amount of the Loans previously made by such assigning Bank and discounting Drafts for the Company having the aggregate face amount and maturities previously discounted by such assigning Bank, and assuming all the same rights and responsibilities hereunder as such assigning Bank and having the same Commitment as such assigning Bank. 4.3. Availability of Rate Options. If any Bank determines that maintenance of the Eurodollar Rate Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Majority Banks determine that (i) deposits of a type and maturity appropriate to match fund Fixed Rate Loans are not available or (ii) a Fixed Rate does not accurately reflect the cost of making or maintaining a Fixed Rate Loan, then the Agent shall suspend the availability of the affected Rate Option and require any Fixed Rate Loans outstanding under an affected Rate Option to be promptly converted to Floating Rate Loans. 4.4. Availability of Drawings. If (i) a determination shall be made by any regulatory body or any instrumentality thereof (including, without limitation, any Federal Reserve Bank or any bank examiner) or there is a change in, or change in interpretation of, any applicable law, rule, regulation or directive, in either case whether or not having the force of law, and in either case to the effect that any Draft will not be an Eligible Draft (or if already discounted is not or, at the time of its creation, was not an Eligible Draft) with Federal Reserve Banks or (ii) a restriction (including, without limitation, any change in bankers acceptance limits imposed on any Bank) is imposed on any Bank by act of government or of any regulatory body or any in instrumentality thereof (including, without limitation, any Federal Reserve Bank or any bank examiner) which would prevent such Bank from extending Advances or creating Eligible Drafts then, in any such event, the Agent shall suspend the availability of Drawings hereunder and require any outstanding Drawings to be promptly converted to Floating Rate Loans. 4.5. Funding Indemnification. If any payment of a Fixed Rate Loan occurs on a date which is not the last day of the applicable Interest Period or any payment of a Draft occurs on a date which is not its specified maturity date, whether because of prepayment or otherwise, or a Fixed Rate Loan or a Drawing is not made on the date specified by the Company for any reason other than default by the Banks, the Company will indemnify each Bank for any loss or cost (but not lost profits) incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Fixed Rate Loan or Drawing; provided, however, that the Company shall not be liable for any of the foregoing to the extent they arise because of acceleration by any Bank. 4.6. Bank Certificates; Survival of Indemnity. To the extent reasonably possible, each Bank shall designate an alternate Lending Installation with respect to the Fixed Rate Loans to reduce any liability of the Company to such Bank under Section 4.1 or to avoid the unavailability of a Rate Option under Section 4.3, so long as such designation is not disadvantageous to such Bank. A certificate of such Bank as to the amount due under Section 4.1 or 4.5 shall be final, conclusive and binding on the Company in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Fixed Rate Loan shall be calculated as though each Bank funded its Fixed Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Fixed Rate applicable to such Loan whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the certificate shall be payable on demand after receipt by the Company of the certificate. The obligations of the Company under Sections 4.1 and 4.5 shall survive payment of the Obligations and termination of this Agreement, provided, that no Bank shall be entitled to compensation to the extent that such compensation relates to any period of time more than 90 days after the termination of this Agreement. ARTICLE V REPRESENTATIONS AND WARRANTIES ------------------------------ The Company hereby represents and warrants that: 5.1. Incorporation and Good Standing. The Company is duly incorporated, validly existing and in good standing under the laws of the State of Michigan. 5.2. Corporate Power and Authority; No Conflicts. The execution, delivery and performance by the Company of the Credit Documents to which it is a party are within the Company's corporate powers, have been duly authorized by all necessary corporate action and do not (i) violate the Company's charter, by-laws or any applicable law, or (ii) breach or result in an event of default under any indenture or material agreement, and do not result in or require the creation of any Lien upon or with respect to any of its properties. 5.3. Governmental Approvals. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of any Credit Document to which it is a party, except for the authorization to issue, sell or guarantee secured and/or unsecured short-term debt granted by the Federal Energy Regulatory Commission. 5.4. Legally Enforceable Agreements. This Agreement and the other Credit Documents except the Notes and Drafts are, and the Notes and Drafts when delivered hereunder will be legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally, and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). 5.5. Financial Statements. The audited balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 1994, and the related statements of income and changes in financial position of the Company and its Consolidated Subsidiaries for the fiscal year then ended, as set forth in the Company's Annual Report on Form 10-K (copies of which have been furnished to each Bank), and the unaudited balance sheet of the Company and its Consolidated Subsidiaries as at March 31, 1995 (copies of which have been furnished to each Bank), fairly present the financial condition of the Company and its Consolidated Subsidiaries as at such date and the results of operations of the Company and its Consolidated Subsidiaries for the period ended on such date, all in accordance with GAAP, and since March 31, 1995, there has been no material adverse change in such financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole (except to the extent described in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 as filed with the Securities and Exchange Commission, copies of which have been furnished to each Bank), that would materially adversely affect the Company's ability to perform its obligations under any Credit Document to which it is a party. 5.6. Litigation. Except to the extent described in the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, as filed with the Securities and Exchange Commission, copies of which have been furnished to each Bank, there is no pending or threatened action or proceeding against the Company or any of its Consolidated Subsidiaries before any court, governmental agency or arbitrator, which, if adversely determined, might reasonably be expected to materially adversely affect the financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, that would materially adversely affect the Company's ability to perform its obligations under any Credit Document to which it is a party. 5.7. Margin Stock. The Company is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U), and no proceeds of any Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. 5.8. ERISA. No Termination Event has occurred or is reasonably expected to occur with respect to any Plan. Neither the Company nor any of its ERISA Affiliates is an employer under a Multiemployer Plan. ARTICLE VI AFFIRMATIVE COVENANTS --------------------- So long as any Advance shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Company shall: 6.1. Payment of Taxes, Etc. Pay and discharge before the same shall become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its property, and (b) all lawful claims which, if unpaid, might by law become a Lien upon its property, provided, that the Company shall not be required to pay or discharge any such tax, assessment, charge or claim (i) which is being contested by it in good faith and by proper procedures, or (ii) the non-payment of which will not materially adversely affect the financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole. 6.2. Maintenance of Insurance. Maintain insurance in such amounts and covering such risks with respect to its business and properties as is usually carried by companies engaged in similar businesses and owning similar properties, either with reputable insurance companies or, in whole or in part, by establishing reserves or one or more insurance funds, either alone or with other corporations or associations. 6.3. Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights and franchises, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary in view of its business and operations or the ownership of its properties, provided, that the Company shall not be required to preserve any such right or franchise or to remain so qualified unless the failure to do so would have a material adverse effect on the financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, or the ability of the Company to enter into, or to perform its obligations under, any Credit Document. 6.4. Compliance with Laws, Etc. Comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, the non-compliance with which would materially adversely affect the financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, or the ability of the Company to perform its obligations under any Credit Document. 6.5. Visitation Rights. Subject to any necessary approval from the Nuclear Regulatory Commission, at any reasonable time and from time to time, permit the Agent, any of the Banks or any agents or representatives thereof to examine and make copies of and abstracts from its records and books of account, visit its properties and discuss its affairs, finances and accounts with any of its officers. 6.6. Keeping of Books. Keep, and cause each Consolidated Subsidiary to keep, adequate records and books of account, in which full and correct entries shall be made of all of its financial transactions and its assets and business so as to permit the Company and its Consolidated Subsidiaries to present financial statements in accordance with GAAP. 6.7. Reporting Requirements. Furnish to the Agent, with sufficient copies for each of the Banks: (a) as soon as practicable and in any event within five Business Days after becoming aware of the occurrence of any Default or Event of Default, a statement of a Designated Officer as to the nature thereof, and as soon as practicable and in any event within five Business Days thereafter, a statement of a Designated Officer as to the action which the Company has taken, is taking or proposes to take with respect thereto; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, a copy of the Quarterly Report on Form 10-Q (or any successor form) for the Company for such quarter, including therein the consolidated balance sheet of the Company and its Consolidated Subsidiaries as at the end of such quarter, and the related consolidated statements of income, cash flows and common stockholder's equity of the Company and its Consolidated Subsidiaries as at the end of and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, or statements providing substantially similar information, all in reasonable detail and duly certified (subject to year-end audit adjustments) by a Designated Officer as having been prepared in accordance with GAAP consistent with GAAP applied in the preparation of the financial statements referred to in clause (d) below (except as disclosed in the notes to such balance sheet and financial statements), together with (i) a certificate of a Designated Officer (which certificate shall also accompany the financial statements delivered pursuant to clause (d) below) stating that he has no knowledge (having made due inquiry with respect thereto) that a Default or Event of Default has occurred and is continuing, or, if such Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the actions which the Company has taken, is taking or proposes to take with respect thereto, and (ii) a certificate of a Designated Officer, in substantially the form of Exhibit "I" hereto, setting forth the Company's computation of the financial ratio specified in Sections 8.1 as of the end of the immediately preceding fiscal quarter or year, as the case may be, of the Company; (c) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, a copy of the Annual Report on Form 10-K (or any successor form) for the Company for such year, including therein the consolidated balance sheet of the Company and its Consolidated Subsidiaries as at the end of such year and the consolidated statements of income, cash flows and common stockholder's equity of the Company and its Consolidated Subsidiaries as at the end of and for such year, or statements providing substantially similar information, in each case certified by Arthur Andersen & Co. or other independent public accountants of recognized national standing selected by the Company (and not objected to by the Majority Banks), together with a certificate of such accounting firm addressed to the Banks stating that, in the course of its examination of the consolidated financial statements of the Company and its Consolidated Subsidiaries, which examination was conducted by such accounting firm in accordance with GAAP, (1) such accounting firm has obtained no knowledge that an Event of Default, insofar as such Event of Default related to accounting or financial matters, has occurred and is continuing, or if, in the opinion of such accounting firm, such an Event of Default has occurred and is continuing, a statement as to the nature thereof, and (2) such accounting firm has examined a certificate prepared by the Company setting forth the computations made by the Company in determining, as of the end of such fiscal year, the ratio specified in Sections 8.1, which certificates shall be attached to the certificate of such accounting firm, and such accounting firm confirms that such computations accurately reflect such ratios; (d) promptly after the sending or filing thereof, copies of all proxy statements which the Company sends to its stockholders, and copies of all regular, periodic and special reports and all final prospectuses (other than those which relate solely to employee benefit plans) which the Company files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor; (e) as soon as possible and in any event (i) within 30 days after the Company or any of its ERISA Affiliates knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within ten days after the Company or any of its ERISA Affiliates knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer of the Company describing such Termination Event and the action, if any, which the Company or such ERISA Affiliate, as the case may be, proposes to take with respect thereto; (f) promptly upon becoming aware thereof, notice of any upgrading or downgrading of the rating of the Company's Senior Debt by D&P, Fitch, Moody's or S&P; and (g) such other information respecting the business, properties, or financial condition of the Company as the Agent or any Bank through the Agent may from time to time reasonably request. ARTICLE VII NEGATIVE COVENANTS ------------------ So long as any Advance shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Company shall not: 7.1. Liens. Create, incur, assume or suffer to exist any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, securing Debt owing to any Person, except: (a) Liens created pursuant to the Indenture securing the First Mortgage Bonds; (b) Liens securing pollution control bonds, or bonds issued to refund or refinance pollution control bonds (including Liens securing obligations (contingent or otherwise) of the Company under letter of credit agreements or other reimbursement or similar agreements), provided, however, that the aggregate face amount of any such bonds so issued shall not exceed the aggregate face amount of such pollution control bonds, as the case may be, so refunded or refinanced; (c) Liens in (and only in) assets acquired to secure Debt incurred to finance the acquisition of such assets; (d) Statutory and common law banker's Liens on bank deposits; (e) Liens in respect of accounts receivable sold, transferred or assigned by the Company; (f) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (g) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books; (h) Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (i) Judgment Liens in existence less than 30 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered (subject to a customary deductible) by insurance; (j) Zoning restrictions, easements, licenses, covenants, reservations, utility company rights, restrictions on the use of real property or minor irregularities of title incident thereto which do not in the aggregate materially detract from the value of the property or assets of the Company and its Subsidiaries taken as a whole, or materially impair the operation of their business, taken as a whole. (k) Liens arising in connection with the financing of the Company's fuel resources, including, but not limited to, nuclear fuel; (l) Other Liens securing debt in an aggregate principal amount not in excess of $150,000,000. 7.2. Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of all or substantially all of its assets. 7.3. Mergers, Etc. Merge with or into or consolidate with or into any other Person, except that the Company may merge with any other Person, provided, that, in each case, immediately after giving effect thereto, (a) no event shall occur and be continuing which constitutes a Default or Event of Default, (b) the Company is the surviving corporation and (c) the Company shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement on the date of such transaction. 7.4. Compliance with ERISA. Permit to exist any occurrence of any Reportable Event, or any other event or condition, which presents a material (in the reasonable opinion of the Majority Banks) risk of a termination by the PBGC of any Plan of the Company or any ERISA Affiliate, which termination will result in any material (in the reasonable opinion of the Majority Banks) liability of the Company or such ERISA Affiliate to the PBGC. 7.5. Change in Nature of Business. Make any material change in the nature of its business as carried on at the date hereof. ARTICLE VIII FINANCIAL COVENANT ------------------ So long as any of the Advances shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Company shall: 8.1. Debt to Capital Ratio. At all times, maintain a ratio of Total Consolidated Debt to Total Consolidated Capitalization of not greater than .75 to 1.0. ARTICLE IX EVENTS OF DEFAULT ----------------- 9.1. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default": (a) The Company shall fail to pay any installment of the principal of any Advance (including the failure to pay a Draft upon maturity thereof) when due and payable, or any interest on any Advance or any fee or other Obligation payable hereunder within five days after such interest or fee or other Obligation becomes due and payable; (b) Any representation or warranty made by the Company (or any of its officers) in this Agreement or in any other Credit Document to which it is a party or in any certificate, document, report, financial or other written statement furnished at any time pursuant to any such Credit Document shall prove to have been incorrect in any material respect on or as of the date made; (c) The Company shall fail to perform or observe any term, covenant or agreement contained in Article VII or Article VIII; or the Company shall fail to perform or observe any other term, covenant or agreement on its part to be performed or observed in this Agreement or in any other Credit Document to which it is a party and such failure shall continue for 30 consecutive days after notice thereof by means of telex, facsimile, telegraph, regular mail or written notice delivered in person (or telephonic notice thereof confirmed in writing) shall have been given to the Company by the Agent or the Majority Banks; (d) The Company shall: (i) fail to pay any Debt (other than the payment obligations described in subsection (a) above), in excess of $25,000,000, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the instrument or agreement relating to such Debt; or (ii) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, the maturity of such Debt, unless the obligee under or holder of such Debt shall have waived in writing such circumstances, or such circumstance has been cured, so that such circumstance is no longer continuing; or (iii) or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), in each case in accordance with the terms of such agreement or instrument, prior to the stated maturity thereof; or (iv) generally not, or shall admit in writing its inability to, pay its debts as such debts become due; (e) The Company: (i) shall make an assignment for the benefit of creditors, or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (ii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (iii) shall have had any such petition or application filed or any such proceeding shall have been commenced, against it, in which an adjudication or appointment is made or order for relief is entered, or which petition, application or proceeding remains undismissed for a period of 30 consecutive days or more; or (iv) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (v) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of 30 days or more; or (vi) shall take any corporate action to authorize any of the actions set forth above in this subsection (e); (f) One or more judgments, decrees or orders for the payment of money in excess of $25,000,000 in the aggregate shall be rendered against the Company and either (i) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order or (ii) there shall be any period of more than 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) Any Termination Event with respect to a Plan shall have occurred, and 30 days after notice thereof shall have been given to the Company by the Agent, (i) such Termination Event (if correctable) shall not have been corrected, and (ii) the then present value of such Plan's vested benefits exceeds the then current value of the assets accumulated in such Plan by more than the amount of $25,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(A)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount). 9.2. Remedies. If any Event of Default shall occur and be continuing, the Agent shall, upon the request, or may with the consent of the Majority Banks, by notice to the Company, (a) declare the Commitments to be terminated, whereupon the same shall forthwith terminate and (b) declare the Obligations to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, whereupon the Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company, provided, that in the case of an Event of Default referred to in Section 9.1(e) above, the Commitments shall automatically be terminated, and the Obligations shall automatically be due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. ARTICLE X WAIVERS, AMENDMENTS AND REMEDIES -------------------------------- 10.1. Amendments. Subject to the provisions of this Article X, the Majority Banks (or the Agent with the consent in writing of the Majority Banks) and the Company may enter into written agreements supplemental hereto for the purpose of adding or modifying any provisions to the Credit Documents or changing in any manner the rights of the Banks or the Company hereunder or waiving any Event of Default hereunder, provided, that no such supplemental agreement shall, without the consent of all of the Banks: (a) Extend the maturity of any Note or Draft or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon or fees under this Agreement. (b) Modify the percentage specified in the definition of Majority Banks. (c) Extend the Termination Date or increase the amount of the Commitment of any Bank hereunder, or permit the Company to assign its rights under this Agreement. (d) Amend this Section 10.1. (e) Any change in an express right in this Agreement of a single Bank to give its consent, make a request or give a notice. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. 10.2. Preservation of Rights. No delay or omission of the Banks or the Agent to exercise any right under the Credit Documents shall impair such right or be construed to be a waiver of any Event of Default or an acquiescence therein, and the making of an Advance notwithstanding the existence of a Event of Default or the inability of the Company to satisfy the conditions precedent to such Advance shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Credit Documents whatsoever shall be valid unless in writing signed by the Banks required pursuant to Section 10.1, and then only to the extent in such writing specifically set forth. All remedies contained in the Credit Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Banks until the Obligations have been paid in full. ARTICLE XI CONDITIONS PRECEDENT -------------------- 11.1. Initial Advance. The Banks shall not be required to make the initial Advance hereunder (whether a Loan or a Drawing) unless the Company has furnished to the Agent with sufficient copies for the Banks: (a) Copies of the Restated Articles of Incorporation of the Company, together with all amendments, certified by the Secretary or Assistant Secretary of the Company, and a certificate of good standing, certified by the appropriate governmental officer in its jurisdiction of incorporation. (b) Copies, certified by the Secretary or Assistant Secretary of the Company, of its By-Laws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Bank) authorizing the execution of the Credit Documents. (c) An incumbency certificate, executed by the Secretary or Assistant Secretary of the Company, which shall identify by name and title and bear the original or facsimile signature of the officers of the Company authorized to sign the Credit Documents and the officers or other employees authorized to make borrowings hereunder, upon which certificate the Banks shall be entitled to rely until informed of any change in writing by the Company. (d) A certificate, signed by a Designated Officer of the Company, stating that on the initial Borrowing Date no Default or Event of Default has occurred and is continuing. (e) A written opinion of the Company's counsel, addressed to the Banks in substantially the form of Exhibit "B" hereto. (f) Evidence satisfactory to the Agent of the termination of the Prior Agreement and payment of all obligations outstanding thereunder. (g) Such other documents as any Bank or its counsel may have reasonably requested. 11.2. Initial Committed Loan; Initial Competitive Bid Loan. The Banks shall not be required to make the initial Loan hereunder unless the Company has duly executed and delivered the Committed Notes to the Agent for the benefit of the Banks. No Bank shall be required to make its initial Competitive Bid Loan hereunder unless the Company has duly executed and delivered such Bank's Competitive Bid Note to the Agent for the benefit of such Bank. 11.3. Initial Drawing. The Banks shall not be required to make the initial Drawing hereunder unless the Company has furnished to the Agent the duly executed Powers of Attorney. 11.4. Each Advance (other than a Refinancing Advance). (a) The Banks shall not be required to make any Advance (other than a Refinancing Advance), unless on the applicable Borrowing Date (i) there exists no Default or Event of Default, and (ii) the representations and warranties contained in Article V and, in the case of a Drawing, the statements made by the Company in the related Drawing Request, are true and correct as of such Borrowing Date and (iii) all legal matters incident to the making of such Advance shall be satisfactory to the Banks and their counsel. Each Drawing Request and Loan Request with respect to each such Advance shall constitute a representation and warranty by the Company that the conditions contained in Sections 11.4(a)(i) and (ii) have been satisfied. (b) The Banks shall not be required to create any Drawing unless the Company shall have supplied all invoices, contracts or shipping documents related to such Drawing, if requested by the Agent or a Bank. 11.5. Refinancing Advances. The Banks shall not be required to make any Refinancing Advance, unless on the Borrowing Date, (i) the representations and warranties contained in Article V (other than Sections 5.5 and 5.6) and, in the case of a Drawing, the statements made by the Company in the related Drawing Request, are true and correct as of such Borrowing Date, and (ii) there exists no Default or Event of Default. Each Borrowing Notice with respect to such Refinancing Advance shall constitute a representation and warranty by the Company that the conditions contained in Sections 11.5 have been satisfied. ARTICLE XII GENERAL PROVISIONS ------------------ 12.1. Successors and Assigns. (a) The terms and provisions of the Credit Documents shall be binding upon and inure to the benefit of the Company and the Banks and their respective successors and assigns, except that the Company shall not have the right to assign its rights under the Credit Documents. Any Bank may sell participations in all or a portion of its rights and obligations under this Agreement pursuant to Section 12.1(b) below and any Bank may assign all or any part of its rights and obligations under this Agreement pursuant to Section 12.1(c) below. (b) Any Bank may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it), provided, that (i) such Bank's obligations under this Agreement (including, without limitation, its Commitment to the Company hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of the Note or Notes issued to such Bank for all purposes of this Agreement, and (iv) the Company shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. In addition to, and not in limitation of the preceding sentence, any Bank may from time to time in its sole discretion finance transactions contemplated by Drawings hereunder by selling, rediscounting or otherwise disposing of the related Drafts to third parties as the Company's primary obligation to pay such third parties, whether or not such Bank has accepted any such Draft, and, in connection with any such disposition, by transferring possession and title to any such Draft to such third party or its agent, provided, that no such disposition shall in and of itself affect the eligibility of any such Draft. (c) Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time assign to one or more financial institutions all or any part of its rights and obligations under this Agreement, provided, that such Bank has received the Company's prior written consent to such assignment, which consent shall not be unreasonably withheld, and that the minimum principal amount of any such assignment (other than assignments to a Federal Reserve Bank) shall be $10,000,000. Notwithstanding the foregoing sentence, any Bank may at any time, without the consent of the Company or the Agent, assign all or any portion of its rights under this Agreement and its Notes to (i) a Federal Reserve Bank, provided, however, that no such assignment shall release the transferor Bank from its obligations hereunder; and (ii) to any affiliate of such assigning Bank, provided, however, that the creditworthiness of such affiliate (as determined in accordance with customary standards of the banking industry) is no less than that of the assigning Bank. (d) Any Bank may, in connection with any sale or participation or proposed sale or participation pursuant to this Section 12.1, disclose to the purchaser or participant or proposed purchaser or participant, any information relating to the Company furnished to such Bank by or on behalf of the Company, provided, that, prior to any such disclosure of non-public information, the purchaser or participant or proposed purchaser or participant (which purchaser or participant is not an affiliate of a Bank) shall agree to preserve the confidentiality of any confidential information (except any such disclosure as may be required by law or regulatory process) relating to the Company received by it from such Bank. (e) Assignments under this Section 12.1 shall be substantially in the form of Exhibit "J" hereto or in such other form as may be agreed to by the parties thereto and shall not be effective until a $2,500 fee has been paid to the Agent by the assignee, which fee shall cover the cost of processing such assignment, provided, that such fee shall not be incurred in the event of an assignment by any Bank of all or a portion of its rights under this Agreement and its Notes and Drafts to a Federal Reserve Bank or to an affiliate of the assigning Bank. 12.2. Survival of Representations. All representations and warranties of the Company contained in this Agreement shall survive deliveries of the Notes and the Drafts and the making of the Advances herein contemplated. 12.3. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Bank shall be obligated to extend credit to the Company in violation of any limitation or prohibition provided by any applicable statute or regulation. 12.4. Taxes. Any taxes (excluding income taxes) payable or ruled payable by Federal or State authority in respect of the execution of the Credit Documents shall be paid by the Company, together with interest and penalties, if any. 12.5. Choice of Law. THE CREDIT DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDINGS ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENTS AND THE COMPANY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY ACTION ARISING HEREUNDER. 12.6. Headings. Section headings in the Credit Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Credit Documents. 12.7. Entire Agreement. The Credit Documents embody the entire agreement and understanding between the Company and the Banks and supersede all prior agreements and understandings between the Company and the Banks relating to the subject matter thereof. 12.8. Expenses; Indemnification. The Company shall reimburse the Agent for (a) any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent) paid or incurred by the Agent in connection with the preparation, review, execution, delivery, amendment, and modification of the Credit Documents and (b) any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys) paid or incurred by the Agent on its own behalf or on behalf of any Bank in connection with the collection and enforcement of the Credit Documents. The Company further agrees to indemnify the Agent and each Bank, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and reasonable expenses (including, without limitation, all material expenses of litigation or preparation therefor whether or not the Agent or any such Bank is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Credit Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Advance hereunder, provided, that the Company shall not be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent or any such Bank. The obligations of the Company under this Section shall survive the termination of this Agreement. 12.9. Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. 12.10. Severability of Provisions. Any provision in any Credit Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Credit Documents are declared to be severable. 12.11. Setoff. In addition to, and without limitation of, any rights of the Banks under applicable law, if the Company becomes insolvent, however evidenced, or any Default or Event of Default occurs, any indebtedness from any Bank to the Company (including all account balances, whether provisional or final and whether or not collected or available) may be offset and applied toward the payment of the Obligations owing to such Bank, whether or not the Obligations, or any part hereof, shall then be due. The Company agrees that any purchaser or participant under Section 12.1 may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such purchase or participation as if it were the direct creditor of the Company in the amount of the purchase or participation. 12.12. Ratable Payments. If any Bank, whether by setoff or otherwise, has payment made to it upon its Advances in a greater proportion than that received by any other Bank, such Bank agrees, promptly upon demand, to purchase a portion of the Advances held by the other Banks so that after such purchase each Bank will hold its ratable proportion of Advances. If any Bank, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to set off, such Bank agrees, promptly upon demand, to take such action necessary such that all Banks share in the benefits of such collateral ratably in proportion to their Advances. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. 12.13. Nonliability of Bank. The relationship between the Company and the Banks and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Bank shall have any fiduciary responsibilities to the Company. Neither the Agent nor any Bank undertakes any responsibility to the Company to review or inform the Company of any matter in connection with any phase of the Company's business or operations. The Company shall rely entirely upon its own judgment with respect to its business, and any review, inspection, supervision or information supplied to the Company by the Banks is for the protection of the Banks and neither the Company nor any third party is entitled to rely thereon. 12.14. Waiver Under Prior Agreement. By its execution of this Agreement, each Bank that is a "Bank" party to the Prior Agreement hereby agrees to waive the requirement of ten Business Days' written notice to the Agent prior to termination thereof set forth in Section 2.7 thereof. Such waiver shall become effective upon execution of counterparts of this Agreement by sufficient Banks to constitute the "Majority Banks" as that term is defined in the Prior Agreement. ARTICLE XIII THE AGENT --------- 13.1. Appointment. The First National Bank of Chicago is hereby appointed Agent hereunder, and each of the Banks irrevocably authorizes the Agent to act as the agent of such Bank. The Agent agrees to act as such upon the express conditions contained in this Article XIII. The Agent shall not have a fiduciary relationship in respect of any Bank by reason of this Agreement. 13.2. Powers. The Agent shall have and may exercise such powers hereunder as are specifically delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Banks, or any obligation to the Banks to take any action hereunder except any action specifically provided by this Agreement to be taken by the Agent. 13.3. General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Banks or any Bank for any action taken or omitted to be taken by it or them hereunder or in connection herewith except for its or their own gross negligence or willful misconduct. 13.4. No Responsibility for Loans, Recitals, etc. The Agent shall not be responsible to the Banks for any recitals, reports, statements, warranties or representations herein or in any Credit Document or be bound to ascertain or inquire as to the performance or observance of any of the terms of this Agreement. 13.5. Action on Instructions of Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with written instructions signed by the Majority Banks (or all of the Banks if required by Section 10.1), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Banks and on all holders of Notes. 13.6. Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Banks, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder. 13.7. Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 13.8. Agent's Reimbursement and Indemnification. The Banks agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (i) for any amounts not reimbursed by the Company for which the Agent is entitled to reimbursement by the Company under the Credit Documents, (ii) for any other expenses reasonably incurred by the Agent on behalf of the Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Credit Documents, and for which the Agent is not entitled to reimbursement by the Company under the Credit Documents, and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other document delivered in connection with this Agreement or the transactions contemplated hereby or the enforcement of any of the terms hereof or of any such other documents, and for which the Agent is not entitled to reimbursement by the Company under the Credit Documents, provided, that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. 13.9. Rights as a Lender. With respect to its Commitment, Loans made by it, Drawings created by it and the Note or Notes issued to it, the Agent shall have the same rights and powers hereunder as any Bank and may exercise the same as though it were not the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking or trust business with the Company or any Subsidiary as if it were not the Agent. 13.10. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements prepared by the Company and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Credit Documents. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Credit Documents. 13.11. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by written notice received by the Agent from the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint, on behalf of the Banks, a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within thirty days after the retiring Agent's giving notice of resignation, then the retiring Agent may appoint, on behalf of the Banks, a successor Agent. Such successor Agent shall be a commercial bank having capital and retained earnings of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article XIII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. ARTICLE XIV NOTICES ----------- 14.1. Giving Notice. Any notice required or permitted to be given under this Agreement may be, and shall be deemed, given when deposited in the United States mail, postage prepaid, or by telegraph, telex or telecopy when delivered to the appropriate office for transmission, charges prepaid, addressed to the Company, the Agent or the Banks at the addresses indicated below their signatures to this Agreement or, where indicated in this Agreement, by telephone, confirmed in writing on the same Business Day. 14.2. Change of Address. The Company, the Agent and any Bank may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XV COUNTERPARTS ------------ This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Company, the Agent and the Banks and each party has notified the Agent by telex or telephone, that it has taken such action. IN WITNESS WHEREOF, the Company, the Banks and the Agent have executed this Agreement as of the date first above written. CONSUMERS POWER COMPANY By: /s/ Doris Galvin ------------------------------- Title: Vice President & Treasurer -------------------------------- 212 West Michigan Avenue Jackson, Michigan 49201 Attention: Vice President & Treasurer COMMITMENTS: - ----------- $15,000,000 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: /s/ Michael K. Murphy ------------------------- Michael K. Murphy Vice President One First National Plaza Chicago, Illinois 60670 Suite 0363; 1-10 Attention: Electric, Gas & Telecommunications Division Wire Instructions: ABA No. 7521-7563 $25,000,000 BANK OF AMERICA ILLINOIS By: /s/ R. Vernon Howard ------------------------- Title: Authorized Officer ------------------------- 335 Madison Avenue New York, New York 10021 Attention: Energy/Utilities/ Mining Group Wire Instructions: ABA No. 071000039 $20,000,000 THE BANK OF CALIFORNIA, N.A. By: /s/ Susan K. Johnson ------------------------- Title: Vice President ------------------------- 550 S. Hope Street, 5th Floor P.O. Box 2330 Los Angeles, CA 90051-0330 Attention: Susan K. Johnson --------------------------- Wire Instructions: ABA No. 121000015 $15,000,000 BANK OF MONTREAL By: /s/ Howard H. Turner ------------------------- Title: Director ------------------------- 115 S. LaSalle Street, 12th Floor Chicago, IL 60603 Attention: Angela Corbett --------------------------- Wire Instructions: 071-000-288 --------------------------- Harris Chicago, Acct. #124-850-6 Benef: BMO Chicago $25,000,000 THE BANK OF NEW YORK By: /s/ Dennis Pidherny ------------------------- Title: Vice President ------------------------- One Wall Street, 19th Floor New York, NY 10286 Attention: Denis Pidherny --------------------- Wire Instructions: ABA No. 021000018 $15,000,000 CIBC INC. By: /s/ Margaret E. McTigue ------------------------- Title: Vice President ------------------------- Two Paces West 2727 Paces Ferry Road, Suite 1200 Atlanta, GA 30339 Attention: Clare Coyne Wire Instructions: Morgan Guaranty ABA No. 021-000-238 f/a CIBC New York at 630-00-480 Attn: Credit Operations - Atlanta Ref: Consumers Power Company With copies to: 200 W. Madison, Suite 2300 Chicago, IL 60606 Attn: Margaret E. McTigue $20,000,000 THE CHASE MANHATTAN BANK, N.A. By: /s/ Thomas L. Casey ------------------------- Title: Vice President ------------------------- One Chase Manhattan Plaza, 3rd Floor New York, NY 10081 Attention: ------------------------ Wire Instructions: ABA No. 021000021 $20,000,000 CHEMICAL BANK By: /s/ Jane Ritchie ------------------------ Title: Vice President ------------------------ 270 Park Avenue, 8th Floor New York, NY 10017 Attention: Anne Hickey ------------------------ Wire Instructions: ABA No. 021000128 $25,000,000 COMERICA BANK By: /s/ Charles L. Weddell ------------------------- Title: Vice President ------------------------- One Detroit Center 500 Woodward Avenue, 8th Floor Detroit, MI 48226 Attention: U.S. Banking ------------------------- Wire Instructions: ABA No. 072000096 $15,000,000 CREDIT LYONNAIS, Chicago Branch By: /s/ Attila Koc ------------------------- Title: Vice President ------------------------- 227 W. Monroe Street, Suite 3800 Chicago, IL 60606 Attention: ------------------------ Wire Instructions: ------------------------ CREDIT LYONNAIS, Cayman Island Branch By: /s/ Attila Koc ------------------------ Title: Authorized Signature ------------------------ 227 W. Monroe Street, Suite 3800 Chicago, IL 60606 Attention: ------------------------ Wire Instructions: ------------------------ $15,000,000 THE DAI-ICHI KANGYO BANK, LTD., Chicago Branch By: /s/ Masami Tsuboi ------------------------ Title: Vice President ------------------------ 10 S. Wacker Drive, 26th Floor Chicago, IL 60614 Attention: Richard R. Howard ------------------------ Wire Instructions: ABA071000013; Acct. 10-31198 $10,000,000 THE FIRST NATIONAL BANK OF BOSTON By: /s/ Frank T. Smith, Jr. ------------------------ Title: Director ------------------------ 100 Federal Street M/S 01-08-02 Boston, MA 02110 Attention: Debora F. Williams - Commercial Loan Svcs. Wire Instructions: ABA #011000390 ----------------------------- $20,000,000 THE FUJI BANK, LTD., Chicago Branch By: /s/ S. Akutsan ------------------------ Title: Joint General Manager ------------------------ 225 West Wacker Drive, Suite 2000 Chicago, IL 60606 Attention: Loan Administration ------------------------ Wire Instructions: ABA No. 071000013 $15,000,000 THE INDUSTRIAL BANK OF JAPAN, LTD., Chicago Branch By: /s/ Hiroaki Nakamura ------------------------ Title: Joint General Manager ------------------------ 227 W. Monroe Street, Suite 2600 Chicago, IL 60606 Attention: ------------------------ Wire Instructions: ------------------------ $20,000,000 MICHIGAN NATIONAL BANK By: /s/ Mark Aben ------------------------ Title: Vice President ------------------------ Michigan National Tower 124 West Allegan Street P.O. Box 40766 Lansing, MI 48901-7966 Attention: Wire Instructions: ABA No. 072000805 $20,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Carl J. Mehldau, Jr. ------------------------ Title: Associate ------------------------ 60 Wall Street New York, NY 10260 Attention: ------------------------ Wire Instructions: ------------------------ $25,000,000 NBD BANK By: /s/ Thomas A. Gamm ------------------------ Title: Second Vice President ------------------------ 611 Woodward Avenue, 2nd Floor Detroit, MI 48226 Attention: Commercial Loan Dept Acct. 212115 Wire Instructions: ABA No. 072000326 $25,000,000 THE SANWA BANK, LIMITED By: /s/ Richard H. Ault ------------------------ Title: Vice President ------------------------ 10 S. Wacker Drive, Suite 3100 Chicago, IL 60606 Attention: Beverly A. Wyckoff ------------------------ Wire Instructions: ABA 071001805 $15,000,000 SOCIETE' GENERALE By: /s/ A. H. Tune / /s/ Petrus J. Mare Title: Vice President / Vice President ------------------------ 181 W.Madison, Suite 3400 Chicago, IL 60602 Attention: Utilities ------------------------ Wire Instructions: Citibank, NY A/C of Societe Generale A/C #36008936 LSA #9005447 Re: Consumers Power $10,000,000 THE SUMITOMO BANK, LTD. By: /s/ H. Iwami ------------------------ Title: Joint General Manager ------------------------ 233 South Wacker Drive Chicago, IL 60606-6448 Attention: ------------------------ Wire Instructions: ------------------------ $15,000,000 TORONTO DOMINION (TEXAS), INC. By: /s/ Frederic Hawley ------------------------ Title: Vice President ------------------------ 909 Fannin Street, Suite 1700 Houston, TX 77010 Attention: Manager, Credit Administration Wire Instructions: The Toronto-Dominion Bank ABA No. 026003243 Further Credit: TD Houston Acct. No. 2159251 With a copy to: 31 West 52nd Street, 21st Floor New York, NY 10019-6101 Attention: Director, Utilities and Project Finance $20,000,000 UNION BANK OF SWITZERLAND, Chicago Branch By: /s/ Walter R. Wolff ------------------------ Title: Managing Director ------------------------ 30 S. Wacker Drive, 40th Floor Chicago, IL 60606 By: /s/ Thomas H. Meyers ------------------------ Title: Lending Officer ------------------------ Attention: Walter R. Wolff ------------------------ Wire Instructions: ABA No. 026008439 $20,000,000 THE YASUDA TRUST & BANKING CO., LTD., New York Branch By: /s/ Michael G. Haggay ------------------------ Title: Vice President ------------------------ 666 5th Avenue, Suite 801 New York, NY 10103 Attention: Loan Administration Wire Instructions: ABA No. 0210-00128 - ------------- $425,000,000 Total _____________ EXHIBIT "A" NOTE $------------- July 14, l9 [1995]* [1996]** [1997]** [1998]** CONSUMERS POWER COMPANY, a Michigan corporation (the "Company"), promises to pay to the order of -------------------- (the "Bank") the lesser of the principal sum of ---------------- Dollars or the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to Section 2.1 of the Credit Agreement hereinafter referred to, whichever is less, in immediately available funds at the main office of The First National Bank of Chicago in Chicago, Illinois, as Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Company shall pay each Loan in full on the last day of such Loan's applicable Interest Period and shall pay the aggregate unpaid principal amount of all Loans in full on a date not later than July 14, [1996]* [1997]** [1998]** [1999]**. The Bank shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder, provided, that the Bank's failure to record such amounts on this Note shall not affect the Company's obligation to repay the obligations evidenced hereby. This Note is issued pursuant to, and is entitled to the benefits of, the Credit Agreement, dated as of July 14, 1995, among the Company, the banks named therein and The First National Bank of Chicago, individually and as agent (the "Agreement"), to which Agreement, as it may be amended from time to time, reference is hereby made for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. CONSUMERS POWER COMPANY By: --------------------- Title: ------------------ - ---------- * Initial note issued at closing. ** Replacement note(s) issued pursuant to Section 2.3.1.3. of the Agreement. SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE OF CONSUMERS POWER COMPANY, DATED JULY 14, [l995] [1996] [1997] [1998] Principal Maturity Principal Amount of of Interest Amount Unpaid Date Loan Period Paid Balance --------- ----------- --------- -------- EXHIBIT "B" -------, l9-- The Banks who are parties to the Credit Agreement described below. Gentlemen: I am [Assistant] General Counsel for Consumers Power Company, a Michigan corporation (the "Company") and I, or an attorney or attorneys under my general supervision, have represented the Company in connection with its execution and delivery of a Credit Agreement among the Company, The First National Bank of Chicago, individually and as Agent, and the Banks named therein, providing for Advances in an aggregate principal amount not exceeding $425,000,000 at any one time outstanding and dated as of July 14, 1995 (the "Agreement"). All capitalized terms used in this opinion shall have the meanings attributed to them in the Agreement. I, or an attorney or attorneys under my general supervision, have examined the Company's Articles of Incorporation, By-laws, Resolutions, the Credit Documents and such other documents and records as I have deemed necessary in order to render this opinion. Based upon the foregoing, it is my opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. 2. The execution and delivery of the Credit Documents by the Company and the performance by the Company of the Obligations have been duly authorized by all necessary corporate action and proceedings on the part of the Company and will not: (a) contravene the Company's charter or by-laws; (b) contravene any law or any contractual restriction imposed by any indenture or any other agreement or instrument evidencing or governing indebtedness for borrowed money of the Company; or (c) result in or require the creation of any Lien upon or with respect to any of its properties. 3. The Credit Documents have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally, and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). 4. To the best of my knowledge, there is no pending or threatened action or proceeding against the Company or any of its Consolidated Subsidiaries before any court, governmental agency or arbitrator, which might reasonably be expected to materially adversely affect (except to the extent described in the Company's annual report on Form 10-K for the year ended December 31, 1994 and quarterly report on Form 10-Q for the quarter ended March 31, 1995 as filed with the Securities and Exchange Commission, copies of which have been furnished to each Bank) the financial condition, results of operations, business or prospects of the Company and its Consolidated Subsidiaries, taken as a whole, that would materially adversely affect the Company's ability to perform its obligations under any Credit Document to which it is a party. 5. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of any Credit Document to which it is a party, except for the authorization to issue, sell or guarantee secured and/or unsecured short-term debt granted by the Federal Energy Regulatory Commission. I am a member of the bar of the State of Michigan, and as such, have made no investigation of, and give no opinion on, the laws of any state or country other than those of the State of Michigan, and, to the extent pertinent, of the United States of America. This opinion may be relied upon, and is solely for the benefit of, the Banks and their participants and assignees under the Credit Documents, and is not to be otherwise used, circulated, quoted, referred to or relied upon for any purpose without my express written permission. Sincerely, [Assistant] General Counsel EXHIBIT "C" COMMITTED DRAWING REQUEST [Letterhead of Consumers Power Company] The First National Bank of Chicago, as Agent One First National Plaza Chicago, Illinois 60670 Attention: Marilyn J. Pelkowski Gentlemen: In reference to the Credit Agreement dated as of July 14, 1995 (the "Agreement") among the undersigned, Consumers Power Company (the "Company"), the banks party thereto (the "Banks") and The First National Bank of Chicago, as agent (the "Agent"), the Company hereby confirms its telephone request of --------------, 19-- to finance U.S. dollars $ ---------, by having the Banks complete the Company's Drafts pursuant to the limited powers of attorney previously granted by the Company to the Banks. Terms used herein and not otherwise defined shall have the meanings set forth for such terms in the Agreement. The Company hereby certifies that each of the underlying transactions covers the current shipment of goods, with an aggregate U.S. dollar value of $ -----, and hereby confirms the following information from its above-referenced request: Tenor Amount Maturity (days) Financed Date Merchandise Shipped from Shipped to - ------ -------- -------- ----------- ------------ ---------- No other means of financing is being used for the above shipment(s). The amount of the Draft(s) at no time will exceed that amount which is ordinary and necessary to finance the transactions described above. The tenor of the Draft(s) is not in excess of the usual or customary period of credit required to finance the underlying transaction(s) and in no event exceeds 180 days. The Draft(s) created in connection with this shipment will be Eligible Drafts. Copies of the underlying shipping documents are being held by the Company and are available for inspection and verification by the Banks' official representatives or representatives of any other regulatory agency. The Company requests the Banks to discount the Draft(s) for value on ----- - ---, l9-- and credit the net proceeds in immediately available funds to the Company's account No. 113-10 with NBD Bank, N.A. The Company hereby agrees to pay each of the Banks the face amount of these Drafts in immediately available funds on the maturity date to the account directed by each Bank. Sincerely, CONSUMERS POWER COMPANY By: -------------------------- Title: -------------------------- EXHIBIT "D" [Letterhead of Consumers Power Company] Power of Attorney July 14, 1995 [Name and address of Bank] Ladies and Gentlemen: In reference to the Credit Agreement dated as of July 14, 1995 between the undersigned, Consumers Power Company (the "Company"), certain banks including -------- (the "Bank") and The First National Bank of Chicago, as agent (the "Agent"), the Company may from time to time request the Bank to provide the Company with financing through the use of eligible drafts for discount. With regard to such requests, the Company hereby gives its limited power of attorney to any authorized signer of the Bank to act as attorney-in-fact for the Company in the completion and execution of such drafts in accordance with the Company's instructions. This limited power of attorney shall remain in effect until cancelled or amended by written notice to the attention of ------------------. Sincerely, CONSUMERS POWERS COMPANY By: ------------------------ Title: ------------------------ EXHIBIT "E" NOTE (Competitive Bid Loans) July 14, 1995 Consumers Power Company, a Michigan corporation (the "Company"), promises to pay, on or before the Termination Date, to the order of _______________ (the "Bank") the aggregate unpaid principal amount of all Competitive Bid Loans made by the Bank to the Company pursuant to Section 2.3.2 of the Credit Agreement hereinafter referred to (as the same may be amended or modified, the "Agreement"), provided, that the aggregate principal amount of Advances from all Banks under the Agreement shall not exceed the Aggregate Commitment, in lawful money of the United States in immediately available funds at the main office of The First National Bank of Chicago, as Agent, in Chicago, Illinois, together with interest, in like money and funds, on the unpaid principal amount hereof at the rates and on the dates determined in accordance with the Agreement. The Company shall pay each Competitive Bid Loan in full on the last day of such Competitive Bid Loan's applicable Interest Period. The Bank shall, and is hereby authorized to, record on the schedule attached hereto, or otherwise record in accordance with its usual practice, the date and amount of each Competitive Bid Loan and the date and amount of each principal payment hereunder. This Note (Competitive Bid Loans) is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement dated as of July 14, 1995, among the Company, The First National Bank of Chicago, individually and as Agent, and the banks named therein, including the Bank, to which Agreement, as it may be amended from time to time, reference is hereby made for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. CONSUMERS POWER COMPANY By: ------------------------- Title: ------------------------ SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE (COMPETITIVE BID LOANS) OF CONSUMERS POWER COMPANY DATED JULY 14, l995 Principal Maturity Principal Amount of of Interest Amount Unpaid Date Loan Period Paid Balance - ---- --------- ----------- ---------- -------- EXHIBIT "F" COMPETITIVE BID QUOTE (Section 2.3.2.4) ----------, 19 To: The First National Bank of Chicago, as Agent ________________ Attn: ---------------- Re: Competitive Bid Quote to Consumers Power Company (the "Company") In response to your invitation on behalf of the Company dated ______________, 19__, we hereby make the following Competitive Bid Quote pursuant to Section 2.3.2.4 of the Credit Agreement hereinafter referred to and on the following terms: 1. Quoting Bank: _______________ 2. Person to contact at Quoting Bank: ______________________ 3. Borrowing Date: ____________, 19__ (1) 4. We hereby offer to make Competitive Bid Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest [Absolute Amount(2) Period(3) Rate(4)] $ - --------------- (1) As specified in the related Invitation. (2) Principal amount bid for each Interest Period may not exceed principal amount requested. Bids must be made for $10,000,000 and an integral multiple of $1,000,000. (3) At least 7 and up to 180 days, as specified in the related Invitation. (4) Specify rate of interest (or a margin over/under the Base Eurodollar Rate) per annum (rounded to the nearest 1/100 of 1%). We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement dated as of July 14, 1995 among the Company, the Banks listed on the signature pages thereof and yourselves, as Agent, as it may be amended from time to time, irrevocably obligates us to make the Competitive Bid Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: ___________, 19 By: --------------------------- Authorized Officer EXHIBIT "G" COMPETITIVE BID QUOTE REQUEST (Section 2.3.2.2) _____________, 19 To: The First National Bank of Chicago, as agent (the "Agent") From: Consumers Power Company ("Company") Re: Credit Agreement (the "Agreement") dated as of July 14, 1995, among the Company, The First National Bank of Chicago, individually and as Agent, and the Banks listed on the signature pages thereof, as it may be amended from time to time We hereby give notice pursuant to Section 2.3.2.2 of the Agreement that we request Competitive Bid Quotes for the following proposed Competitive Bid Advance(s): Borrowing Date: ________________, 19 Principal Amount1 Interest Period2 - ----------------- ---------------- $ Such Competitive Bid Quotes should offer an Absolute Rate. Upon acceptance by the undersigned of any or all of the Competitive Bid Advances offered by Banks in response to this request, the undersigned shall be deemed to affirm as of such date the representations and warranties made in the Agreement to the extent specified in Article V thereof. Capitalized terms used herein have the meanings assigned to them in the Agreement. CONSUMERS POWER COMPANY By: Title: - -------------------- 1 Amount must be at least $10,000,000 and an integral multiple of $1,000,000. 2 At least 7 and up to 180 days, subject to the provisions of the definition of Absolute Rate Interest Period. EXHIBIT "H" INVITATION FOR COMPETITIVE BID QUOTES (Section 2.3.2.3) , 19 To: [Name of Bank] Re: Invitation for Competitive Bid Quotes to Consumers Power Company (the "Company") Pursuant to Section 2.3.2.3 of the Credit Agreement dated as of July 14, 1995 (the "Agreement") among the Company, the Banks parties thereto and the undersigned, as Agent, as it may be amended from time to time, we are pleased on behalf of the Company to invite you to submit Competitive Bid Quotes to the Company for the following proposed Competitive Bid Advance(s): Borrowing Date: ___________________, 19__ Principal Amount Interest Period - ---------------- --------------- $ Such Competitive Bid Quotes should offer an Absolute Rate. Your Competitive Bid Quote must comply with Section 2.3.2.4 of the Agreement and the foregoing terms in which the Competitive Bid Quote Request was made. Capitalized terms used herein have the meanings assigned to them in the Agreement. Please respond to this invitation by no later than 9:00 a.m. Chicago time on ______________________, 19__. THE FIRST NATIONAL BANK OF CHICAGO, as Agent By: Authorized Officer EXHIBIT "I" Form of Certificate as to Debt-Capital Ratio and Pursuant to Section 8.1 of the Credit Agreement I, ______________________, _____________________ of Consumers Power Company, a Michigan corporation (the "Company"), DO HEREBY CERTIFY in connection with the Credit Agreement dated as of July 14, 1995 (the "Credit Agreement"; the terms defined therein being used herein as defined), among the Company, the Banks named therein and The First National Bank of Chicago, as Agent for the Banks, that: 1. Section 8.1 of the Credit Agreement provides that the Company shall: "At all times, maintain a ratio of Total Consolidated Debt to Total Consolidated Capitalization of not greater than .75 to 1.0. 2. The following calculations are made in accordance with the definitions of Total Consolidated Debt and Total Consolidated Capitalization in the Credit Agreement and are correct and accurate as of _______________________, 19__: A. Total Consolidated Debt: ----------------------- (a) Indebtedness for borrowed money $ (b) Indebtedness for deferred purchase price of property/services (c) Unfunded Vested Liabilities (d) Obligations under acceptance facilities (e) Obligations under Capital Leases (f) Guaranties, endorsements and other contingent obligations Total $ B. Total Consolidated Capitalization: --------------------------------- (a) Total Consolidated Debt $ (b) Equity of common stockholders (c) Equity of preference stockholders (d) Equity of preferred stockholders Total $ C. Debt to Capitalization Ratio ---------------------------- (total of A divided by total of B) $ IN WITNESS WHEREOF, I have signed this Certificate this ___________ day of______________, 19__. EXHIBIT "J" ASSIGNMENT AGREEMENT This Assignment Agreement (this "Assignment Agreement") between - ___________________________________ (the "Assignor") and ___________________ (the "Assignee") is dated as of ____________________, 19__. The parties hereto agree as follows: 1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement (which, as it may be amended, modified, renewed or extended from time to time is herein called the "Credit Agreement") described in Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement. 2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement such that after giving effect to such assignment the Assignee shall have purchased pursuant to this Assignment Agreement the percentage interest specified in Item 3 of Schedule 1 of all outstanding rights and obligations under the Credit Agreement relating to the facilities listed in Item 3 of Schedule 1. The aggregate Commitment (or Loans, if the applicable Commitment has been terminated) purchased by the Assignee hereunder is set forth in Item 4 of Schedule 1. 3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the "Effective Date") shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period agreed to by the Agent) after a Notice of Assignment substantially in the form of Exhibit "I" attached hereto has been delivered to the Agent. Such Notice of Assignment must include any consents required to be delivered to the Agent by Section 12.1(c) of the Credit Agreement. In no event will the Effective Date occur if the payments required to be made by the Assignee to the Assignor on the Effective Date under Sections 4 and 5 hereof are not made on the proposed Effective Date. The Assignor will notify the Assignee of the proposed Effective Date no later than the Business Day prior to the proposed Effective Date. As of the Effective Date, (i) the Assignee shall have the rights and obligations of a Bank under the Credit Agreement with respect to the rights and obligations assigned to the Assignee hereunder and (ii) the Assignor shall relinquish its rights and be released from its corresponding obligations under the Credit Agreement with respect to the rights and obligations assigned to the Assignee hereunder. 4. PAYMENTS OBLIGATIONS. On and after the Effective Date, the Assignee shall be entitled to receive from the Agent all payments of principal, interest and fees with respect to the interest assigned hereby. The Assignee shall advance funds directly to the Agent with respect to all Loans and reimbursement payments made on or after the Effective Date with respect to the interest assigned hereby. [In consideration for the sale and assignment of Loans hereunder, (i) the Assignee shall pay the Assignor, on the Effective Date, an amount equal to the principal amount of the portion of all Floating Rate Loans assigned to the Assignee hereunder and (ii) with respect to each Fixed Rate Loan made by the Assignor and assigned to the Assignee hereunder which is outstanding on the Effective Date, (a) on the last day of the Interest Period therefor or (b) on such earlier date agreed to by the Assignor and the Assignee or (c) on the date on which any such Fixed Rate Loan either becomes due (by acceleration or otherwise) or is prepaid (the date as described in the foregoing clauses (a), (b) or (c) being hereinafter referred to as the "Payment Date"), the Assignee shall pay the Assignor an amount equal to the principal amount of the portion of such Fixed Rate Loan assigned to the Assignee which is outstanding on the Payment Date. If the Assignor and the Assignee agree that the Payment Date for such Fixed Rate Loan shall be the Effective Date, they shall agree to the interest rate applicable to the portion of such Loan assigned hereunder for the period from the Effective Date to the end of the existing Interest Period applicable to such Fixed Rate Loan (the "Agreed Interest Rate") and any interest received by the Assignee in excess of the Agreed Interest Rate shall be remitted to the Assignor. In the event interest for the period from the Effective Date to but not including the Payment Date is not paid by the Company with respect to any Fixed Rate Loan sold by the Assignor to the Assignee hereunder, the Assignee shall pay to the Assignor interest for such period on the portion of such Fixed Rate Loan sold by the Assignor to the Assignee hereunder at the applicable rate provided by the Credit Agreement. In the event a prepayment of any Fixed Rate Loan which is existing on the Payment Date and assigned by the Assignor to the Assignee hereunder occurs after the Payment Date but before the end of the Interest Period applicable to such Fixed Rate Loan, the Assignee shall remit to the Assignor the excess of the prepayment penalty paid with respect to the portion of such Fixed Rate Loan assigned to the Assignee hereunder over the amount which would have been paid if such prepayment penalty was calculated based on the Agreed Interest Rate. The Assignee will also promptly remit to the Assignor (i) any principal payments received from the Agent with respect to Fixed Rate Loans prior to the Payment Date and (ii) any amounts of interest on Loans and fees received from the Agent which relate to the portion of the Loans assigned to the Assignee hereunder for periods prior to the Effective Date, in the case of Floating Rate Loans, or the Payment Date, in the case of Fixed Rate Loans, and not previously paid by the Assignee to the Assignor.] (1) In the event that either party hereto receives any payment to which the other party hereto is entitled under this Assignment Agreement, then the party receiving such amount shall promptly remit it to the other party hereto. - --------------------------- (1) Each Assignor may insert its standard payment provisions in lieu of the payment terms included in this Exhibit. 5. FEES PAYABLE BY THE ASSIGNEE. The Assignee shall pay to the Assignor a fee on each day on which a payment of interest or fees is made under the Credit Agreement with respect to the amounts assigned to the Assignee hereunder (other than a payment of interest or commitment fees for the period prior to the Effective Date or, in the case of Fixed Rate Loans, the Payment Date, which the Assignee is obligated to deliver to the Assignor pursuant to Section 4 hereof). The amount of such fee shall be the difference between (i) the interest or fee, as applicable, paid with respect to the amounts assigned to the Assignee hereunder and (ii) the interest or fee, as applicable, which would have been paid with respect to the amounts assigned to the Assignee hereunder if each interest rate was ___ of 1% less than the interest rate paid by the Company or if the commitment fee was ___ of 1% less than the commitment fee paid by the Company, as applicable. In addition, the Assignee agrees to pay ___ % of the recordation fee required to be paid to the Agent in connection with this Assignment Agreement. 6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S LIABILITY. The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim. It is understood and agreed that the assignment and assumption hereunder are made without recourse to the Assignor and that the Assignor makes no other representation or warranty of any kind to the Assignee. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) the due execution, legality, validity, enforceability, genuineness, sufficiency or collectability of the Credit Agreement or any Note or any Draft, (ii) any representation, warranty or statement made in or in connection with the Credit Agreement, (iii) the financial condition or creditworthiness of the Company, (iv) the performance of or compliance with any of the terms or provisions of the Credit Agreement, (v) inspecting any of the property, books or records of the Company, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Credit Agreement. 7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements requested by the Assignee and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement, (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank and based on such documents and information at it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank, (v) agrees that its payment instructions and notice instructions are as set forth in the attachment to Schedule 1, (vi) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Credit Agreement will not be "plan assets" under ERISA, [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that the Assignee is entitled to receive payments under the Credit Agreement without deduction or withholding of any United States federal income taxes] (2). - ------------------------ (2) to be inserted if the Assignee is not incorporated under the laws of the United States, or a state thereof. 8. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor harmless against any and all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment Agreement. 9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall have the right pursuant to Section 12.1(c) of the Credit Agreement to assign the rights which are assigned to the Assignee hereunder to any entity or person, provided that (i) any such subsequent assignment does not violate any of the terms and conditions of the Credit Agreement or any law, rule, regulation, order, writ, judgment, injunction or decree and that any consent required under the terms of the Credit Agreement has been obtained and (ii) unless the prior written consent of the Assignor is obtained, the Assignee is not thereby released from its obligations to the Assignor hereunder, if any remain unsatisfied, including, without limitation, its obligations under Sections 4, 5 and 8 hereof. 10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the Aggregate Commitment occurs between the date of this Assignment Agreement and the Effective Date, the percentage interest specified in Item 3 of Schedule 1 shall remain the same, but the dollar amount purchased shall be recalculated based on the reduced Aggregate Commitment. 11. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice of Assignment embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings between the parties hereto relating to the subject matter hereof. 12. GOVERNING LAW. This Assignment Agreement shall be governed by the internal law, and not the law of conflicts, of the State of Illinois. 13. NOTICES. Notices shall be given under this Assignment Agreement in the manner set forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be the address set forth in the attachment to Schedule 1. IN WITNESS WHEREOF, the parties hereto have executed this Assignment Agreement by their duly authorized officers as of the date first above written. [NAME OF ASSIGNOR] By: ------------------------------- Title: ------------------------------- ------------------------------- ------------------------------- ------------------------------- [NAME OF ASSIGNEE] By: ------------------------------- Title: ------------------------------- ------------------------------- ------------------------------- ------------------------------- SCHEDULE 1 to Assignment Agreement 1. Description and Date of Credit Agreement: Credit Agreement, dated as of July 14, 1995, among Consumers Power Company, the banks named therein and The First National Bank of Chicago, individually and as agent. 2. Date of Assignment Agreement: ______________, 19__ 3. Amounts (As of Date of Item 2 above): a. Total of Commitments (Loans)* under Credit Agreement $_______ b. Assignee's Percentage purchased under the Assignment Agreement*** _______% c. Amount of Assigned Share purchased under the Assignment Agreement $_______ 4. Assignee's Aggregate (Loan Amount)** Commitment Amount Purchased Hereunder: $_______ 5. Proposed Effective Date: ________________________ Accepted and Agreed: [NAME OF ASSIGNOR] [NAME OF ASSIGNEE] By: By: ---------------------- ------------------------ Title: Title: ---------------------- ------------------------ * If a Commitment has been terminated, insert outstanding Loans in place of Commitment ** Percentage taken to 10 decimal places Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT Attach Assignor's Administrative Information Sheet, which must include notice address for the Assignor and the Assignee EXHIBIT "I" to Assignment Agreement NOTICE OF ASSIGNMENT ------------- _________________, 19__ To: CONSUMERS POWER COMPANY 212 West Michigan Avenue Jackson, Michigan 49201 Attention: Vice President & Treasurer THE FIRST NATIONAL BANK OF CHICAGO One First National Plaza Chicago, Illinois 60670 Suite 0363; 1-10 Attention: Electric, Gas & Telecommunications Division From: [NAME OF ASSIGNOR] (the "Assignor") [NAME OF ASSIGNEE] (the "Assignee") 1. We refer to that Credit Agreement (the "Credit Agreement") described in Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement. 2. This Notice of Assignment (this "Notice") is given and delivered to the Company and the Agent pursuant to Section 12.1 of the Credit Agreement. 3. The Assignor and the Assignee have entered into an Assignment Agreement, dated as of _____________, 19__ (the "Assignment"), pursuant to which, among other things, the Assignor has sold, assigned, delegated and transferred to the Assignee, and the Assignee has purchased, accepted and assumed from the Assignor the percentage interest specified in Item 3 of Schedule 1 of all outstandings, rights and obligations under the Credit Agreement relating to the facilities listed in Item 3 of Schedule 1. The Effective Date of the Assignment shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or such shorter period as agreed to by the Agent) after this Notice of Assignment and any consents and fees required by Sections 12.1 of the Credit Agreement have been delivered to the Agent, provided that the Effective Date shall not occur if any condition precedent agreed to by the Assignor and the Assignee has not been satisfied. 4. The Assignor and the Assignee hereby give to the Company and the Agent notice of the assignment and delegation referred to herein. The Assignor will confer with the Agent before the date specified in Item 5 of Schedule 1 to determine if the Assignment Agreement will become effective on such date pursuant to Section 3 hereof, and will confer with the Agent to determine the Effective Date pursuant to Section 3 hereof if it occurs thereafter. The Assignor shall notify the Agent if the Assignment Agreement does not become effective on any proposed Effective Date as a result of the failure to satisfy the conditions precedent agreed to by the Assignor and the Assignee. At the request of the Agent, the Assignor will give the Agent written confirmation of the satisfaction of the conditions precedent. 5. The Assignor or the Assignee shall pay to the Agent on or before the Effective Date the processing fee of $2,500 required by Section 12.1 of the Credit Agreement. 6. If Notes are outstanding on the Effective Date, the Assignor and the Assignee request and direct that the Agent prepare and cause the Company to execute and deliver new Notes or, as appropriate, replacements notes, to the Assignor and the Assignee. The Assignor and, if applicable, the Assignee each agree to deliver to the Agent the original Note received by it from the Company upon its receipt of a new Note in the appropriate amount. 7. The Assignee advises the Agent that notice and payment instructions are set forth in the attachment to Schedule 1. 8. The Assignee hereby represents and warrants that none of the funds, monies, assets or other consideration being used to make the purchase pursuant to the Assignment are "plan assets" as defined under ERISA and that its rights, benefits, and interests in and under the Loan Documents will not be "plan assets" under ERISA. 9. The Assignee authorizes the Agent to act as its agent under the Loan Documents in accordance with the terms thereof. The Assignee acknowledges that the Agent has no duty to supply information with respect to the Company or the Loan Documents to the Assignee until the Assignee becomes a party to the Credit Agreement.* *May be eliminated if Assignee is a party to the Credit Agreement prior to the Effective Date. NAME OF ASSIGNOR NAME OF ASSIGNEE By: By: -------------------------- -------------------------- Title: Title: -------------------------- -------------------------- ACKNOWLEDGED AND CONSENTED TO ACKNOWLEDGED AND CONSENTED TO BY THE FIRST NATIONAL BANK OF CHICAGO BY CONSUMERS POWER COMPANY By: By: ------------------------------ ----------------------------- Title: Title: ------------------------------ ----------------------------- [Attach photocopy of Schedule 1 to Assignment] EX-12 3 CMS ENERGY RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT (12) Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges (Millions of Dollars)
Six Months Ended Years Ended December 31 June 30, 1995 1994 1993 1992 1991 1990 (b) (c)(d) (e) Earnings as defined (a) Net income $ 119 $ 179 $ 155 $(297) $(262) $(494) Income taxes 74 92 75 (146) (94) 25 Exclude equity basis subsidiaries (19) (18) (6) 10 10 13 Fixed charges as defined, adjusted to exclude capitalized interest of $2, $6, $5, $3, $5, and $38 million for the six months ended June 30, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively 139 237 245 228 364 317 ------ ------ ------ ------ ------ ------ Earnings as defined $ 313 $ 490 $ 469 $(205) $ 18 $(139) ====== ====== ====== ====== ====== ====== Fixed charges as defined (a) Interest on long-term debt $ 113 $ 193 $ 204 $ 169 $ 274 $ 293 Estimated interest portion of lease rental 5 9 11 16 17 18 Other interest charges 9 18 24 35 68 33 Preferred stock dividend 22 36 17 16 15 17 ------ ------ ------ ------ ------ ------ Fixed charges as defined $ 149 $ 256 $ 256 $ 236 $ 374 $ 361 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.10 1.91 1.83 - - - ====== ====== ====== ====== ====== ====== NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include a $520 million pretax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding these amounts. (c) Excludes an extraordinary after-tax loss of $14 million. (d) For the year ended December 31, 1991, fixed charges exceeded earnings by $356 million. Earnings as defined include pretax losses of $398 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant, $76 million for potential customer refunds and other reserves, and $51 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.45 excluding these amounts. (e) For the year ended December 31, 1990, fixed charges exceeded earnings by $500 million. Earnings as defined include pretax losses of $847 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant. The ratio of earnings to fixed charges would have been 1.96 excluding these amounts.
EX-15 4 CMS ENERGY LETTER FROM ACCOUNTANT ARTHUR ANDERSEN LLP Exhibit (15) To CMS Energy Corporation: We are aware that CMS Energy Corporation has incorporated by reference in its Registration Statements No. 33-51877, No. 33-55805, No. 33-9732, No. 33-29681, No. 33-47629, No. 33-57719, No. 33-57719-01, No. 33-64044, No. 33-60007 and No. 33-61595 its Form 10-Q for the quarter ended June 30, 1995, which includes our report dated August 9, 1995 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Arthur Andersen LLP Detroit, Michigan, August 9, 1995. EX-27 5 CMS ENERGY FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 6-MOS DEC-31-1994 JAN-01-1995 JUN-30-1995 PER-BOOK 4,294 1,226 650 1,318 0 7,488 1 1,740 (513) 1,229 0 356 2,038 309 710 0 142 0 109 39 2,557 7,488 1,956 74 1,626 1,705 251 (3) 253 120 133 14 119 37 0 381 1.36 0
EX-27 6 CONSUMERS FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000201533 CONSUMERS POWER COMPANY 1,000,000 6-MOS DEC-31-1994 JAN-01-1995 JUN-30-1995 PER-BOOK 4,294 667 561 1,185 0 6,707 841 491 136 1,487 0 356 1,551 309 404 0 10 0 109 39 2,461 6,707 1,783 79 1,486 1,571 212 1 219 79 140 14 126 70 0 344 0 0
EX-99 7 CMS ENERGY - CONSUMERS GAS GROUP FINANCIALS 1 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP (representing a business unit of Consumers Power Company ("Consumers") and its wholly-owned subsidiary, Michigan Gas Storage Company) as of June 30, 1995 and 1994, and the related statements of income, common stockholders' equity and cash flows for the three-month, six-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Consumers Gas Group as of December 31, 1994, and the related statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3 and 6 to the financial statements as to which the date is June 9, 1995), we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, August 9, 1995. 2 Consumers Gas Group Statements of Income (Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 1995 1994 1995 1994 1995 1994 In Millions OPERATING REVENUE $ 197 $ 183 $ 679 $ 711 $1,119 $1,184 ---------------------------------------------------------- OPERATING EXPENSES Operation Cost of gas sold 102 93 383 427 617 687 Other 46 43 92 87 190 174 ---------------------------------------------------------- Total operation 148 136 475 514 807 861 Maintenance 9 10 19 21 37 42 Depreciation, depletion and amortization 14 12 47 43 80 74 General taxes 9 7 30 31 53 52 ---------------------------------------------------------- Total operating expenses 180 165 571 609 977 1,029 ---------------------------------------------------------- PRETAX OPERATING INCOME 17 18 108 102 142 155 INCOME TAXES 5 4 36 33 45 44 ---------------------------------------------------------- NET OPERATING INCOME 12 14 72 69 97 111 ---------------------------------------------------------- OTHER INCOME (DEDUCTIONS) 1 (1) - (1) (1) (1) ---------------------------------------------------------- FIXED CHARGES Interest on long-term debt 7 7 15 14 30 32 Other interest 1 1 2 2 5 6 Capitalized interest - - - - (1) - Preferred dividends 2 1 3 2 6 3 ---------------------------------------------------------- Net fixed charges 10 9 20 18 40 41 ---------------------------------------------------------- NET INCOME $ 3 $ 4 $ 52 $ 50 $ 56 $ 69 ========================================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3 Consumers Gas Group Statements of Cash Flows (Unaudited)
Six Months Ended Twelve Months Ended June 30 June 30 1995 1994 1995 1994 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 52 $ 50 $ 56 $ 69 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 47 43 80 74 Capital lease and other amortization 3 2 5 5 Deferred income taxes and investment tax credit 15 3 16 4 Changes in other assets and liabilities 51 11 57 5 Other - - 1 2 ------ ------ ------ ------ Net cash provided by operating activities 168 109 215 159 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (47) (48) (128) (146) Other (5) (2) (11) (5) ------ ------ ------ ------ Net cash used in investing activities (52) (50) (139) (151) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Decrease in notes payable, net (72) (42) (14) (13) Payment of common stock dividends (40) (34) (53) (54) Retirement of bonds and other long-term debt (2) (23) (8) (137) Payment of capital lease obligations (2) (2) (5) (5) Repayment of bank loans - (21) (85) (21) Proceeds from bank loans - - 88 2 Proceeds from preferred stock - 42 - 42 Contribution from stockholder - 22 - 22 Proceeds from bonds and other long-term debt - - - 158 ------ ------ ------ ------ Net cash used in financing activities (116) (58) (77) (6) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS - 1 (1) 2 CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 4 4 5 3 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 4 $ 5 $ 4 $ 5 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4 Consumers Gas Group Balance Sheets
June 30 June 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions ASSETS PLANT (At original cost) Plant $2,097 $2,064 $1,988 Less accumulated depreciation, depletion and amortization 1,156 1,117 1,098 ----------------------------------- 941 947 890 Construction work-in-progress 56 47 49 ----------------------------------- 997 994 939 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 4 4 5 Accounts receivable and accrued revenue, less allowances of $2, $2 and $2, respectively (Note 6) 66 51 162 Inventories at average cost Gas in underground storage 155 235 160 Materials and supplies 10 9 10 Trunkline settlement 30 30 30 Deferred income taxes 4 16 11 Prepayments and other 27 48 30 ----------------------------------- 296 393 408 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 158 158 163 Trunkline settlement 40 55 70 Deferred income taxes 5 3 3 Other 69 70 67 ----------------------------------- 272 286 303 ----------------------------------- TOTAL ASSETS $1,565 $1,673 $1,650 ===================================
5
June 30 June 30 1995 December 31 1994 (Unaudited) 1994 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholders' equity $ 329 $ 317 $ 326 Preferred stock 78 78 78 Long-term debt 425 426 382 Non-current portion of capital leases 17 18 19 ----------------------------------- 849 839 805 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 13 13 59 Accounts payable 69 68 79 Accrued taxes 39 55 39 Trunkline settlement 30 30 30 Accrued refunds 28 20 35 Notes payable 27 99 41 Accrued interest 8 8 9 Other 38 68 64 ----------------------------------- 252 361 356 ----------------------------------- NON-CURRENT LIABILITIES Postretirement benefits 175 172 177 Regulatory liabilities for income taxes, net 150 144 137 Trunkline settlement 40 55 70 Deferred investment tax credits 29 30 31 Other 70 72 74 ----------------------------------- 464 473 489 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,565 $1,673 $1,650 =================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6 Consumers Gas Group Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 1995 1994 1995 1994 1995 1994 In Millions COMMON STOCK At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184 ------------------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 107 85 107 85 107 85 Stockholder's contribution - 22 - 22 - 22 ------------------------------------------------------------------- At end of period 107 107 107 107 107 107 ------------------------------------------------------------------- REVALUATION CAPITAL At beginning of period (1) - - - - - SFAS 115 - unrealized loss, net of tax 1 - - - - - ------------------------------------------------------------------- At end of period - - - - - - ------------------------------------------------------------------- RETAINED EARNINGS At beginning of period 75 56 26 19 35 20 Net income 3 4 52 50 56 69 Common stock dividends declared (40) (25) (40) (34) (53) (54) ------------------------------------------------------------------- At end of period 38 35 38 35 38 35 ------------------------------------------------------------------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 329 $ 326 $ 329 $ 326 $ 329 $ 326 =================================================================== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7 Consumers Gas Group Condensed Notes to Financial Statements In July 1995, CMS Energy issued 7 million shares of Class G Common Stock. This new class of Common Stock is intended to reflect the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). Accordingly, these financial statements and their related condensed notes should be read along with the financial statements and notes contained in the 1994 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants, and the financial statements and notes of CMS Energy and Consumers Gas Group in CMS Energy's Registration Statement on Form S-3 (Nos. 33-57719 and 33-57719-01) relating to the Class G Common Stock. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers and 4) storage and transmission of natural gas. On March 21, 1995, CMS Energy received shareholders' approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy, designated Class G Common Stock which reflects the separate performance of the Consumers Gas Group. The existing CMS Energy Common Stock continues to be outstanding and reflects the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to the outstanding shares of the Class G Common Stock. In July 1995, CMS Energy issued 7 million shares of Class G Common Stock at a price to the public of $17.75 per share, representing 21.875 percent of the common stockholders' equity value attributed to the Consumers Gas Group. On August 9, 1995, CMS Energy received notification that underwriters intend to exercise their option and purchase an additional 520,000 shares of CMS Energy Class G Common Stock at a price to the public of $17.75 per share for the purpose of covering over-allotments related to the July 1995 initial public offering. This issuance of the additional shares will increase the common stockholder's equity value attributed to the Consumers Gas Group, represented by the outstanding shares of Class G Common Stock, to 23.5 percent. 2: Earnings Per Share and Dividends Earnings (Loss) attributable to CMS Energy Class G Common Stock on a per share basis will be determined based on 23.5 percent of the earnings of the Consumers Gas Group, which reflects the intent of the Board of Directors that the earnings and financial condition of the Consumers Gas Group be the primary basis for determining dividends to be paid on the Class G Common Stock. Stockholders of Class G Common Stock have no direct rights in the equity or assets of the Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of its Board of Directors, dividends will be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. Dividends on the Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of the Consumers Gas Group, and to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current intention that the declaration or payment of dividends with respect to the Class G Common Stock will not be reduced, suspended or eliminated as a result of factors arising out or relating to the electric utility business or the non-utility businesses of CMS Energy unless such factors also require, in the Board of Directors' sole discretion, the omission of the declaration or reduction in payment of dividends on both the CMS Energy Common Stock and the Class G Common Stock. In July 1995, the Board of Directors declared a quarterly dividend of 28 cents per share ($1.12 per share on an annual basis) on Class G Common Stock. 3: Rate Matters For information regarding rate matters directly affecting the Consumers Gas Group, see the "Gas Rates" and "GCR Issues," discussions in Note 3 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 4: Commitments and Contingencies Capital Expenditures: The Consumers Gas Group estimates capital expenditures, including new lease commitments, will be $129 million for 1995, $119 million for 1996 and $101 million for 1997. These estimates include an attributed portion of Consumers' anticipated capital expenditures for common plant and equipment of $24 million, $18 million and $15 million for 1995, 1996 and 1997, respectively. For further information regarding commitments and contingencies directly affecting the Consumers Gas Group (including those involving former manufactured gas plant sites), see the "Environmental Matters," "Public Utility Holding Company Act Exemption" and "Other" discussions in Note 4 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 5: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended June 30 were: In Millions Six Months Ended Twelve Months Ended 1995 1994 1995 1994 Cash transactions Interest paid (net of amounts capitalized) $ 16 $ 16 $ 33 $ 37 Income taxes paid (net of refunds) 21 26 33 39 Non-cash transactions Assets placed under capital leases $ 1 $ 2 $ 4 $ 4 6: Short-term and Long-term Financings Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. At June 30, 1995, Consumers had an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At June 30, 1995 and 1994, Consumers had a total of $309 million and $129 million outstanding under these facilities, respectively. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million replacing the $470 million facility which expired by its own terms. Consumers has an established $500-million trade receivables purchase and sale program. At June 30, 1995, receivables sold under the agreement totaled $190 million compared with $205 million at June 30, 1994. Consumers generally manages its short-term financings on a centralized consolidated basis. The portion of receivables sold attributable to the Consumers Gas Group at June 30, 1995 and 1994 is estimated by management to be $38 million and $42 million, respectively. Accounts receivable and accrued revenue in the balance sheets have been reduced to reflect receivables sold. The portions of short-term debt and receivables sold attributed to Consumers Gas Group reflect the high utilization of short-term borrowings to finance the purchase of gas for storage in the summer and fall periods. In April 1995, the MPSC issued an order authorizing Consumers to issue and sell up to $300 million of intermediate and/or long-term debt and $100 million of preferred stock or subordinate debentures. A portion of any future issuance of debt or securities may be attributed to the Consumers Gas Group. 10 Consumers Gas Group Management's Discussion and Analysis In July 1995, CMS Energy issued 7 million shares of Class G Common Stock. This new class of Common Stock is intended to reflect the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). Accordingly, this MD&A should be read along with the MD&A in the 1994 Form 10-K of CMS Energy and the MD&As of CMS Energy and Consumers Gas Group in CMS Energy's Registration Statement on Form S-3 (Nos. 33- 57719 and 33-57719-01) relating to the Class G Common Stock. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers and 4) storage and transmission of natural gas. On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' or CMS Energy's consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive. On March 21, 1995, CMS Energy received shareholders' approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy, designated Class G Common Stock which reflects the separate performance of the Consumers Gas Group. The existing CMS Energy Common Stock continues to be outstanding and reflects the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to the outstanding shares of the Class G Common Stock. In July 1995, CMS Energy issued 7 million shares of Class G Common Stock at a price to the public of $17.75 per share, representing 21.875 percent of the common stockholders' equity value attributed to the Consumers Gas Group. On August 9, 1995, CMS Energy received notification that underwriters intend to exercise their option and purchase an additional 520,000 shares of CMS Energy Class G Common Stock at a price to the public of $17.75 per share for the purpose of covering over-allotments related to the July 1995 initial public offering. This issuance of the additional shares will increase the common stockholder's equity value attributed to the Consumers Gas Group, represented by the outstanding Class G Common Stock, to 23.5 percent. Earnings for the quarters ended June 30, 1995 and 1994 Net income for the Consumers Gas Group for the second quarter of 1995 totaled $3 million, compared with $4 million for the second quarter of 1994. The $1 million decrease in 1995 net income compared with 1994 reflects higher gas deliveries, more than offset by higher gas operating expenses which include depreciation and general taxes. Net income in the second quarters of 1995 and 1994 reflect the seasonality of Consumers Gas Group's business in that approximately 74 percent of its revenues are generated in the first and fourth quarters of each year. Earnings for the six months ended June 30, 1995 and 1994 Net income for the Consumers Gas Group for the six months ended June 30, 1995 totaled $52 million, compared with $50 million for the six months ended June 1994. Earnings in 1995 recognize the reversal of a loss previously recorded for a gas contract contingency partly offset by a decrease in gas deliveries and higher gas operating expenses which include depreciation. Earnings for the 12 months ended June 30, 1995 and 1994 Net income for the Consumers Gas Group for the 12 months ended June 30, 1995 totaled $56 million, compared with $69 million for the 12 months ended June 30, 1994. The decrease in 1995 net income reflects lower gas deliveries and higher gas operating expenses which include depreciation and general taxes, partly offset by the reversal of losses previously recorded for gas contingencies. Increased operating costs included $14 million of postretirement benefit costs. Cash Position, Financing and Investing Consumers Gas Group's cash requirements are met by cash from operations and financing activities. In the first six months of 1995 and 1994, Consumers Gas Group's cash inflow from operations was derived mainly from Consumers' sale and transportation of natural gas. Consumers Gas Group's primary use of cash continues to reflect its gas utility construction expenditures and improvements in the reliability of its gas utility transmission and distribution systems. It also has used its cash to retire portions of long-term securities and to pay common and preferred dividends. Financing and Investing Activities: Capital expenditures for the Consumers Gas Group (including assets placed under capital lease) totaled $48 million for the first six months of 1995 compared with $50 million for the first six months of 1994. Financing and Investing Outlook: CMS Energy estimates that capital expenditures for the Consumers Gas Group, including new lease commitments, will total approximately $359 million over the next three years. In Millions Years Ended December 31 1995 1996 1997 Gas Utility (a) $126 $117 $ 99 Michigan Gas Storage 3 2 2 ---- ---- ---- $129 $119 $101 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to both utility businesses. The Consumers Gas Group expects that cash from operations and the ability to access debt markets will provide necessary working capital and liquidity to fund future capital expenditures, required debt payments and other cash needs in the foreseeable future. Consumers generally manages its short-term financings on a centralized, consolidated basis. At June 30, 1995, Consumers' available sources of credit included unsecured, committed lines of credit totaling $185 million and a $470 million working capital facility. In July 1995, Consumers signed a new four-year, unsecured working capital facility in an aggregate amount of $425 million, replacing the $470 million facility which expired by its own terms. Consumers also has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At June 30, 1995, receivables sold totaled $190 million. Consumers Gas Group's attributed portion of such receivables sold totaled $38 million. Results of Operations For Consumers Gas Group's results of operations, see "Consumers Gas Group Results of Operations" in CMS Energy's MD&A included and incorporated by reference herein. Gas Issues For Consumers Gas Group's discussion of Gas Rates, GCR Issues and Environmental Matters, see "Consumers Gas Group Issues" in CMS Energy's MD&A included and incorporated by reference herein. Outlook For Consumers Gas Group's outlook discussion, see "Consumers Gas Group Outlook" in CMS Energy's MD&A included and incorporated by reference herein. Other For information regarding CMS Energy's exemption from registration under PUHCA and the effect of New Accounting Standards, see "Other" in CMS Energy's MD&A included and incorporated by reference herein. EX-99 8 EXHIBIT VOLUME COVER AND EXHIBIT INDEX UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 CMS ENERGY CORPORATION AND CONSUMERS POWER COMPANY FORM 10-Q EXHIBITS FOR QUARTER ENDED JUNE 30, 1995 EXHIBIT INDEX Exhibit Numbers Description (10) - Consumers: Credit Agreement dated as of July 14, 1995 among Consumers Power Company, the Banks named therein and the First National Bank of Chicago, as Administrative Agent. (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15) - CMS Energy: Letter of independent public accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - Consumers: Financial Data Schedule (99) - CMS Energy: Consumers Gas Group Financials -----END PRIVACY-ENHANCED MESSAGE-----