-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sv1q6rVQIAKT9LMZ7QVJA2/a0o/RAhUBB/PHh0ltI2/neDRj/h6r1j82gdGSKwv9 57l/6x/FQVBCSgkB0MS+CA== 0000201533-96-000149.txt : 19961113 0000201533-96-000149.hdr.sgml : 19961113 ACCESSION NUMBER: 0000201533-96-000149 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 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: 96659059 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 517-788-0550 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 382726431 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 96659060 BUSINESS ADDRESS: STREET 1: FAIRLANE PLZ SOUTH STE 1100 STREET 2: 330 TOWN CENTER DR CITY: DEARBORN STATE: MI ZIP: 48126 BUSINESS PHONE: 313-436-9200 MAIL ADDRESS: STREET 1: FAIRLANE PLAZA SOUTH, SUITE 1100 STREET 2: 330 TOWN CENTER DRIVE CITY: DEARBORN STATE: MI ZIP: 48126 10-Q 1 BODY OF 10-Q DOCUMENT FOR CMS ENERGY & CONSUMERS FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-9513 CMS ENERGY CORPORATION 38-2726431 (A Michigan Corporation) Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 (313)436-9200 1-5611 CONSUMERS POWER COMPANY 38-0442310 (A Michigan Corporation) 212 West Michigan Avenue Jackson, Michigan 49201 (517)788-0550 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares outstanding of each of the issuer's classes of common stock at October 31, 1996: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 92,529,498 CMS Energy Class G Common Stock, no par value 7,809,380 Consumers Power Company, $10 par value, privately held by CMS Energy 84,108,789 CMS Energy Corporation and Consumers Power Company Quarterly reports on Form 10-Q to the Securities and Exchange Commission for the Quarter Ended September 30, 1996 This combined Form 10-Q is separately filed by CMS Energy Corporation and Consumers Power Company. Information contained herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Consumers Power Company makes no representation as to information relating to any other companies affiliated with CMS Energy Corporation. TABLE OF CONTENTS Page Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 PART I: CMS Energy Corporation Report of Independent Public Accountants. . . . . . . . . . . . . 6 Consolidated Statements of Income . . . . . . . . . . . . . . . . 7 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 8 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 9 Consolidated Statements of Common Stockholders' Equity. . . . . . 11 Condensed Notes to Consolidated Financial Statements. . . . . . . 12 Management's Discussion and Analysis. . . . . . . . . . . . . . . 21 Consumers Power Company Report of Independent Public Accountants. . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . 61 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 62 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3 GLOSSARY Certain terms used in the text and financial statements are defined below. ABATE . . . . . . . . . . . . Association of Businesses Advocating Tariff Equity ABB . . . . . . . . . . . . . ABB Energy Ventures, Inc. ALJ . . . . . . . . . . . . . Administrative Law Judge Attorney General. . . . . . . Michigan Attorney General bcf . . . . . . . . . . . . . Billion cubic feet Big Rock. . . . . . . . . . . Big Rock Point nuclear plant, owned by Consumers Board of Directors. . . . . . Board of Directors of CMS Energy Class G Common Stock. . . . . One of two classes of common stock of CMS Energy, no par value, which reflects the separate performance of the Consumers Gas Group Clean Air Act . . . . . . . . Federal Clean Air Act as amended on November 15, 1990 CMS Electric and Gas. . . . . CMS Electric and Gas Company, a subsidiary of Enterprises CMS Electric Marketing. . . . CMS Electric Marketing Company, a subsidiary of Enterprises CMS Energy. . . . . . . . . . CMS Energy Corporation CMS Energy Common Stock . . . One of two classes of common stock of CMS Energy, par value $.01 per share CMS Gas Marketing . . . . . . CMS Gas Marketing Company, a subsidiary of Enterprises CMS Gas Transmission. . . . . CMS Gas Transmission and Storage Company, a subsidiary of Enterprises CMS Generation. . . . . . . . CMS Generation Co., a subsidiary of Enterprises CMS Holdings. . . . . . . . . CMS Midland Holdings Company, a subsidiary of Consumers CMS Midland . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers CMS NOMECO. . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of Enterprises Common Stock. . . . . . . . . CMS Energy Common Stock and Class G Common Stock Consumers . . . . . . . . . . Consumers Power Company, a subsidiary of CMS Energy Consumers Power Company Financing I . . . . . . . . A Delaware business trust formed by Consumers Consumers Gas Group . . . . . The gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Court of Appeals. . . . . . . Michigan Court of Appeals Detroit Edison. . . . . . . . The Detroit Edison Company DEQ . . . . . . . . . . . . . Michigan Department of Environmental Quality DNR . . . . . . . . . . . . . Michigan Department of Natural Resources DSM . . . . . . . . . . . . . Demand-side management EDEER . . . . . . . . . . . . Empresa Distribuidora de Electricidad de Entre Rios S. A., an electric distribution utility in northeastern Argentina EDEVA . . . . . . . . . . . . Empresa de Energia y Vapor S. A., a consortium of Argentine investors Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . Gas cost recovery General Motors. . . . . . . . General Motors Corporation GTNs. . . . . . . . . . . . . CMS Energy General Term Notes, $250 million Series A and $125 million Series B HYDRA-CO. . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary of CMS Generation kWh . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison mcf . . . . . . . . . . . . . Thousand cubic feet MCV Facility. . . . . . . . . A natural gas-fueled, combined cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . Midland Cogeneration Venture Limited Partnership MD&A. . . . . . . . . . . . . Management's Discussion and Analysis Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary of Consumers MHP . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P. MPSC. . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . Megawatts NEIL. . . . . . . . . . . . . Nuclear Electric Insurance Ltd. NML . . . . . . . . . . . . . Nuclear Mutual Ltd. NOPR. . . . . . . . . . . . . Notice of Proposed Rulemaking NRC . . . . . . . . . . . . . Nuclear Regulatory Commission Order 888 and Order 889 . . . FERC final rules issued on April 24, 1996 Outstanding Shares. . . . . . Outstanding shares of Class G Common Stock Palisades . . . . . . . . . . Palisades nuclear plant, owned by Consumers PPA . . . . . . . . . . . . . The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term that commenced in March 1990 PSCR. . . . . . . . . . . . . Power supply cost recovery RCRA. . . . . . . . . . . . . Resource Conservation Recovery Act of 1976 Retained Interest . . . . . . The interest in the common stockholders' equity of the Consumers Gas Group that is retained by CMS Energy Retained Interest Shares. . . Authorized but unissued shares of Class G Common Stock not held by holders of the Outstanding Shares and attributable to the Retained Interest SEC . . . . . . . . . . . . . Securities and Exchange Commission Settlement Order. . . . . . . MPSC Order issued March 31, 1993 in MPSC Case Nos. U-10127, U-8871 and others, and the rehearing order issued May 26, 1993 SFAS. . . . . . . . . . . . . Statement of Financial Accounting Standards Superfund . . . . . . . . . . Comprehensive Environmental Response, Compensation and Liability Act Terra . . . . . . . . . . . . Terra Energy Ltd., an oil and gas exploration and production company located in Traverse City, Michigan and a subsidiary of CMS NOMECO TGN . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a natural gas pipeline located in Argentina Walter. . . . . . . . . . . . Walter International, Inc., an oil and gas exploration and production company located in Houston, Texas and a subsidiary of CMS NOMECO 6 ARTHUR ANDERSEN LLP Report of Independent Public Accountants To CMS Energy Corporation: We have reviewed the accompanying consolidated balance sheets of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 26, 1996, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Detroit, Michigan, November 11, 1996. 7 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1996 1995 1996 1995 1996 1995 In Millions, Except Per Share Amounts OPERATING REVENUE Electric utility $ 655 $ 640 $1,827 $1,723 $2,381 $2,246 Gas utility 123 122 880 801 1,274 1,116 Oil and gas exploration and production 32 26 94 82 120 101 Independent power production 44 25 108 71 133 87 Natural gas transmission, storage and marketing 71 52 231 133 294 171 Other 4 4 10 11 17 13 ------- ------- ------- ------- ------- ------- Total operating revenue 929 869 3,150 2,821 4,219 3,734 ------- ------- ------- ------- ------- ------- OPERATING EXPENSES Operation Fuel for electric generation 76 74 219 208 294 284 Purchased power - related parties 150 124 436 369 558 492 Purchased and interchange power 56 72 147 154 189 182 Cost of gas sold 106 93 682 536 967 755 Other 189 168 539 491 746 656 ------- ------- ------- ------- ------- ------- Total operation 577 531 2,023 1,758 2,754 2,369 Maintenance 42 48 120 139 167 192 Depreciation, depletion and amortization 99 96 322 302 436 410 General taxes 45 45 149 143 202 189 ------- ------- ------- ------- ------- ------- Total operating expenses 763 720 2,614 2,342 3,559 3,160 ------- ------- ------- ------- ------- ------- PRETAX OPERATING INCOME (LOSS) Electric utility 126 125 323 295 390 346 Gas utility (1) 2 112 110 153 139 Oil and gas exploration and production 10 5 28 27 31 24 Independent power production 29 13 62 40 68 48 Natural gas transmission, storage and marketing 5 4 21 9 26 10 Other (3) - (10) (2) (8) 7 ------- ------- ------- ------- ------- ------- Total pretax operating income 166 149 536 479 660 574 ------- ------- ------- ------- ------- ------- INCOME TAXES 34 32 125 111 143 118 ------- ------- ------- ------- ------- ------- NET OPERATING INCOME 132 117 411 368 517 456 ------- ------- ------- ------- ------- ------- OTHER INCOME (DEDUCTIONS) Accretion income 2 3 7 9 10 12 Accretion expense (7) (7) (21) (23) (28) (32) Other income taxes, net 3 3 9 8 12 10 Other, net 1 (1) 5 6 7 17 ------- ------- ------- ------- ------- ------- Total other income (deductions) (1) (2) - - 1 7 ------- ------- ------- ------- ------- ------- FIXED CHARGES Interest on long-term debt 58 55 174 168 230 218 Other interest 7 8 19 17 29 25 Capitalized interest (1) (2) (5) (4) (9) (5) Preferred dividends 7 7 21 21 28 28 Preferred securities distributions 2 - 6 - 6 - ------- ------- ------- ------- ------- ------- Net fixed charges 73 68 215 202 284 266 ------- ------- ------- ------- ------- ------- NET INCOME $ 58 $ 47 $ 196 $ 166 $ 234 $ 197 ======= ======= ======= ======= ======= ======= NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS CMS Energy $ 61 $ 48 $ 186 $ 167 $ 220 $ 198 ======= ======= ======= ======= ======= ======= Class G $ (3) $ (1) $ 10 $ (1) $ 14 $ (1) ======= ======= ======= ======= ======= ======= AVERAGE COMMON SHARES OUTSTANDING CMS Energy 92 89 92 88 92 88 ======= ======= ======= ======= ======= ======= Class G 8 7 8 7 8 7 ======= ======= ======= ======= ======= ======= EARNINGS (LOSS) PER AVERAGE COMMON SHARE CMS Energy $ .65 $ .54 $ 2.02 $ 1.90 $ 2.39 $ 2.26 ======= ======= ======= ======= ======= ======= Class G $ (.28) $ (.17) $ 1.38 $ (.17) $ 1.92 $ (.17) ======= ======= ======= ======= ======= ======= DIVIDENDS DECLARED PER COMMON SHARE CMS Energy $ .27 $ .24 $ .75 $ .66 $ .99 $ .87 ======= ======= ======= ======= ======= ======= Class G $ .295 $ .28 $ .855 $ .28 $ 1.135 $ .28 ======= ======= ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1996 1995 1996 1995 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 196 $ 166 $ 234 $ 197 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $37, $38, $49 and $51, respectively) 322 302 436 410 Capital lease and other amortization 33 50 44 70 Deferred income taxes and investment tax credit 25 65 35 60 Accretion expense 21 23 28 32 Accretion income - abandoned Midland project (7) (9) (10) (12) Undistributed earnings of related parties (54) (47) (60) (58) MCV power purchases - settlement (Note 2) (43) (102) (78) (118) Other 11 12 6 (30) Changes in other assets and liabilities 16 (71) 178 26 ------ ------ ------ ------ Net cash provided by operating activities 520 389 813 577 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (430) (380) (585) (540) Investments in partnerships and unconsolidated subsidiaries (147) (174) (215) (187) Investments in nuclear decommissioning trust funds (37) (38) (49) (51) Acquisition of companies, net of cash acquired (20) (147) (19) (147) Cost to retire property, net (20) (28) (34) (41) Deferred demand-side management costs (6) (7) (8) (11) Proceeds from sale of property 34 1 55 11 Other 4 (7) (3) (6) ------ ------ ------ ------ Net cash used in investing activities (622) (780) (858) (972) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank loans and notes 385 211 507 733 Proceeds from preferred securities 97 - 97 - Issuance of common stock 29 148 41 154 Increase (decrease) in notes payable, net - 135 (133) 74 Repayment of bank loans (264) (14) (268) (344) Payment of common stock dividends (75) (60) (99) (78) Retirement of bonds and other long-term debt (37) (44) (37) (95) Payment of capital lease obligations (33) (26) (44) (37) Retirement of common stock (1) (1) (1) (1) ------ ------ ------ ------ Net cash provided by financing activities 101 349 63 406 ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (1) (42) 18 11 CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 37 26 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 55 $ 37 $ 55 $ 37 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9 CMS Energy Corporation Consolidated Balance Sheets
September 30 September 30 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions ASSETS PLANT AND PROPERTY (At Cost) Electric $6,286 $6,103 $6,007 Gas 2,363 2,218 2,180 Oil and gas properties (full-cost method) 1,126 1,074 1,074 Other 87 105 56 ------ ------ ------ 9,862 9,500 9,317 Less accumulated depreciation, depletion and amortization 4,936 4,627 4,578 ------ ------ ------ 4,926 4,873 4,739 Construction work-in-progress 251 201 222 ------ ------ ------ 5,177 5,074 4,961 ------ ------ ------ INVESTMENTS Independent power production 305 275 277 Natural gas transmission, storage and marketing 241 193 186 First Midland Limited Partnership (Note 2) 230 225 222 Midland Cogeneration Venture Limited Partnership (Note 2) 127 103 98 Other 89 22 21 ------ ------ ------ 992 818 804 ------ ------ ------ CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 55 56 37 Accounts receivable and accrued revenue, less allowances of $3, $4 and $4, respectively (Note 7) 219 296 202 Inventories at average cost Gas in underground storage 250 184 263 Materials and supplies 82 83 77 Generating plant fuel stock 28 37 28 Deferred income taxes 19 24 18 Prepayments and other 132 230 117 ------ ------ ------ 785 910 742 ------ ------ ------ NON-CURRENT ASSETS Postretirement benefits 442 462 466 Nuclear decommissioning trust funds 360 304 283 Abandoned Midland project 117 131 135 Other 418 444 459 ------ ------ ------ 1,337 1,341 1,343 ------ ------ ------ TOTAL ASSETS $8,291 $8,143 $7,850 ====== ====== ======
10
September 30 September 30 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION (Note 7) Common stockholders' equity $1,619 $1,469 $1,439 Preferred stock of subsidiary 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 - - Long-term debt 2,996 2,906 2,763 Non-current portion of capital leases 92 106 101 ------ ------ ------ 5,163 4,837 4,659 ------ ------ ------ CURRENT LIABILITIES Current portion of long-term debt and capital leases 198 207 207 Notes payable 341 341 474 Accounts payable 260 306 214 Accrued taxes 147 254 106 Power purchases - settlement (Note 2) 90 90 95 Accounts payable - related parties 59 53 49 Accrued interest 51 45 32 Accrued refunds 23 22 31 Other 196 192 172 ------ ------ ------ 1,365 1,510 1,380 ------ ------ ------ NON-CURRENT LIABILITIES Deferred income taxes 651 640 628 Postretirement benefits 528 533 547 Power purchases - settlement (Note 2) 197 221 244 Deferred investment tax credits 163 171 173 Regulatory liabilities for income taxes, net 61 44 38 Other 163 187 181 ------ ------ ------ 1,763 1,796 1,811 ------ ------ ------ COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,291 $8,143 $7,850 ====== ====== ====== (a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers. THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11 CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1996 1995 1996 1995 1996 1995 In Millions COMMON STOCK At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 ------- ------- ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 1,967 1,740 1,951 1,701 1,935 1,694 Common stock reacquired (1) (1) (1) (1) (1) (1) Common stock issued: CMS Energy 12 72 26 111 41 117 Class G 1 123 3 123 4 123 Common stock reissued - 1 - 1 - 2 ------- ------- ------- ------- ------- ------- At end of period 1,979 1,935 1,979 1,935 1,979 1,935 ------- ------- ------- ------- ------- ------- REVALUATION CAPITAL At beginning of period (8) 1 (8) - (8) - Change in unrealized investment- gain (loss) 1 (9) 1 (8) 1 (8) ------- ------- ------- ------- ------- ------- At end of period (7) (8) (7) (8) (7) (8) ------- ------- ------- ------- ------- ------- RETAINED EARNINGS (DEFICIT) At beginning of period (385) (513) (475) (595) (489) (608) Net income 58 47 196 166 234 197 Common stock dividends declared: CMS Energy (25) (21) (69) (58) (91) (76) Class G (2) (2) (6) (2) (8) (2) ------- ------- ------- ------- ------- ------- At end of period (354) (489) (354) (489) (354) (489) ------- ------- ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $1,619 $1,439 $1,619 $1,439 $1,619 $1,439 ======= ======= ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
12 CMS Energy Corporation Condensed Notes to Consolidated Financial Statements These financial statements and their related condensed notes should be read along with the consolidated financial statements and notes contained in the 1995 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure and Basis of Presentation CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses, including oil and gas exploration and production, development and operation of independent power production facilities, electric and gas marketing services to utilities, commercial and industrial customers, storage and transmission of natural gas, and electric distribution. CMS Energy uses the equity method of accounting for investments in companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating income. For the three, nine and twelve month periods ended September 30, 1996, undistributed equity earnings were $13 million, $54 million and $60 million, respectively and $22 million, $47 million and $58 million for the three, nine and twelve month periods ended September 30, 1995. 2: The Midland Cogeneration Venture The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. Consumers, through two wholly owned subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in the MCV Facility. Results of Operations for CMS Midland and CMS Holdings:
In Millions Summarized Statements of Income Quarter Nine months 12 months Periods Ended September 30 1996 1995 1996 1995 1996 1995 Pretax operating income $19 $9 $31 $28 $38 $33 Income taxes and other 6 3 9 8 11 7 --- -- --- --- --- --- Net income $13 $6 $22 $20 $27 $26 === == === === === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the termination of the PPA. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. The PPA provides that Consumers is to pay the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge, and a variable energy charge based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity, the fixed energy charge, and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all energy delivered on an economic basis above the availability limits to 915 MW, Consumers has been allowed to recover a capacity payment of 1/2 cent per kWh in addition to the variable energy charge. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC-authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. If Consumers is unable to sell any capacity above the 1993 MPSC-authorized level, future additional after-tax losses and after-tax cash underrecoveries would be incurred. Consumers' estimates of its after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 authorized level. Under the Settlement Order, capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs, but the MPSC will determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. The MCV Partnership did not object to the Settlement Order. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals. In March 1996, the Court of Appeals affirmed the Settlement Order. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including Consumers' electric rate case (see Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. The total estimated cash underrecoveries are not expected to change under the settlement agreement as proposed, although the years in which they occur could vary from the schedule shown in the above table. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding the proposed settlement agreement, see Note 3. At September 30, 1996 and December 31, 1995, the after-tax present value of the Settlement Order liability totaled $186 million and $202 million, respectively. The reduction in the liability since December 31, 1995 reflects after-tax cash underrecoveries of $28 million, partially offset by after-tax accretion expense of $12 million. The undiscounted after-tax amount associated with the liability totaled $564 million at September 30, 1996. In 1994 and 1995, Consumers paid a total of $44 million to terminate power purchase agreements with the developers of two proposed independent power projects totaling 109 MW. As part of the proposed settlement agreement reached with the MPSC staff (see Note 3), Consumers is seeking to utilize less-expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. Cost recovery for this contract capacity would start in 1996. Even if Consumers is not allowed to substitute MCV Facility capacity for the capacity to be provided under the terminated agreements, Consumers believes that the MPSC would still approve recovery of the buyout costs due to the significant customer savings resulting from the terminated power purchase agreements. As a result, Consumers has recorded a regulatory asset of $44 million. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General appealed these plan case orders to the Court of Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 plan case. As part of its decision in the 1993 PSCR reconciliation case issued in February 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believed this was contrary to the terms of the Settlement Order and appealed the February 1995 order on this issue. The MCV Partnership and ABATE filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's order. 3: Rate Matters Electric Rate Proceedings: In late 1994, Consumers filed a request with the MPSC to increase its retail electric rates. The request included provisions for ratemaking treatment of the 325 MW of MCV Facility contract capacity above 915 MW. Early in 1996, the MPSC issued a partial final order in this case, granting Consumers a $46 million annual increase in its electric retail rates. This order authorized a 12.25 percent return on common equity. However, it did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers. In addition, Consumers filed a request with the MPSC seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts. For further information regarding these requests, see the Electric Rate Proceedings and Special Rates discussions in CMS Energy's MD&A. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in separate proceedings. Some of these issues were preliminarily addressed in February 1996 when the MPSC issued a partial final order in Consumers' electric rate case. If fully adopted, the settlement agreement would provide for cost recovery of the entire 325 MW of uncommitted MCV Facility capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; and accelerate recovery of nuclear plant investment. Consumers expects a final order during the fourth quarter of 1996. Gas Rates: As part of an agreement approved by the MPSC, Consumers filed a gas rate case in December 1994 that incorporated cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites (see Note 4). In March 1996, the MPSC issued a final order in this case, authorizing recovery of costs related to postretirement benefits and former manufactured gas plant sites. Overall, however, the order decreased Consumers' gas rates by $11.7 million annually and authorized an 11.6 percent return on common equity. Gas loaning activities are new transactions for Consumers. In that regard, an issue has arisen about whether revenue from these activities should be transferred to customers. Consumers strongly disagrees with this suggestion but is unable to predict the outcome of any regulatory proceeding where this issue has arisen. GCR Matters: In 1993, the MPSC issued an order favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers. In early 1995, management concluded that the intrastate producers' pending appeals of the order would not be successful and, accordingly, reversed a previously accrued contingency and recorded a $23 million (pretax) benefit. The MPSC order was affirmed by the Court of Appeals, and the Michigan Supreme Court later denied the producers' petition for review. In September 1996, the producers filed a petition requesting the U.S. Supreme Court to review the Michigan Supreme Court's decision. In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. Resolution of the issues discussed in this note is not expected to have a material impact on CMS Energy's financial position or results of operations. 4: Commitments, Contingencies and Other Environmental Matters: Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Superfund liability is joint and several and along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the significant sites will be between $1 million and $9 million. At September 30, 1996, Consumers has accrued $1 million for its estimated losses. Under Part 201 of the Michigan Natural Resources and Environmental Protection Act, which bears some similarities to Superfund, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites. Three of the four plans submitted by Consumers have been approved by the DNR or the DEQ. The findings for two remedial investigations indicate that the expenditures for remedial action at those sites are likely to be less than previously estimated; however, these findings may not be representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At September 30, 1996, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions, such as remediation technique, nature and extent of contamination, and legal and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order issued in early 1996, Consumers is deferring environmental clean- up costs incurred at these sites and amortizing these costs over ten years. Rate recognition of amortization expense will not begin until after a prudence review in a general rate case. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. The Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. Consumers' coal- fueled electric generating units burn low-sulfur coal and are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $35 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 $40 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $940 million for 1996, $925 million for 1997 and $900 million for 1998. For further information regarding capital expenditures, see Forward-Looking Information in CMS Energy's MD&A. Other: As of September 30, 1996, CMS Energy or its subsidiaries have guaranteed up to $93 million in contingent obligations of unconsolidated affiliates and other parties. In August 1995 CMS Generation was served a complaint, which was filed in a U.S. District Court in the State of Colorado, alleging multiple claims relating to a business project in the Philippines. Plaintiffs have claimed approximately $85 million in direct damages, indirect damages in a like amount, plus punitive damages, interest, and attorney's fees. CMS Generation is vigorously contesting this action. A number of lawsuits have been filed against Consumers relating to so-called stray voltage. Claimants contend that stray voltage results when low-level electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the grounding of the customer's service. At September 30, 1996, Consumers had 31 separate stray voltage lawsuits awaiting trial court action. In addition to the matters disclosed in these notes, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business and involving personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on CMS Energy's financial position or results of operations. 5: Nuclear Matters Consumers filed updated decommissioning information with the MPSC in 1995 which estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered that Consumers file a report on the adequacy of the surcharge revenues with the MPSC at three-year intervals beginning in 1998. Consumers filed its decommissioning plan for Big Rock with the NRC in 1995. The NRC has reviewed the plan but does not formally approve decommissioning until approximately two years before site release. The NRC has approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades; however, certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff is reviewing the petitions. Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. 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. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. The cask in which the minor flaws were detected continues to store spent fuel safely and there is no requirement for its replacement, but Consumers had nevertheless planned to remove the spent fuel and insert it into another cask. Consumers has postponed this action while it monitors an investigation under way at another utility that uses a similar dry storage cask system for spent nuclear fuel. The other utility experienced an unexpected ignition of hydrogen gas following the loading of a cask. Although the event caused no injuries or releases of radioactive material, and Consumers' procedures had already precluded a similar event, the NRC has instructed utilities using the dry storage casks to take certain additional precautions when loading or unloading casks. Consumers does not plan to load or unload any casks before the end of 1996. 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 during prolonged accidental outages. Such costs would not be covered by insurance during the first 21 weeks of any outage, but the major portion of such costs would be covered during the next twelve months of the outage, followed by reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $30 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Analysis of data from testing of similar materials indicated 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; however, an analysis that Consumers submitted to the NRC for review in April 1996 suggests that the reactor vessel could be safely operated beyond 1999 without annealing. Nevertheless, Consumers is currently developing a contingency plan to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million, which would likely allow for operation of the plant to the end of its license life in the year 2007 or beyond. Consumers cannot predict whether the NRC will concur with the April 1996 analysis or, if the NRC does concur, whether these analyses will result in a future decision to adopt or postpone annealing. 6: Supplemental Cash Flow Information The Statement of Cash Flows includes as cash equivalents all highly liquid investments with an original maturity of three months or less. Other cash flow activities and non-cash investing and financing activities for the periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1996 1995 1996 1995 Cash transactions Interest paid (net of amounts capitalized) $ 176 $ 159 $ 224 $ 195 Income taxes paid (net of refunds) 61 25 70 37 Non-cash transactions Nuclear fuel placed under capital lease $ 8 $ 24 $ 10 $ 27 Other assets placed under capital leases 2 3 4 7 Common Stock issued to acquire companies - 86 4 86 Assumption of debt - 16 - 16 Capital leases refinanced - - 21 - 7: Short-Term And Long-Term Financings, Capitalization and Other CMS Energy In the first quarter of 1996, CMS Energy filed a shelf registration with the SEC for the issuance and sale of up to $125 million of Series B GTNs, with net proceeds to be used for general corporate purposes. As of September 30, 1996, CMS Energy had issued and outstanding approximately $250 million of Series A and $82 million of Series B GTNs with weighted-average interest rates of 7.7 and 8.0 percent, respectively. In the fourth quarter of 1996, CMS Energy received net proceeds of approximately $64 million from the issuance of 2.1 million shares of CMS Energy Common Stock purchased by an underwriter and subsequently sold by the underwriter in block transactions. The issuance of these shares completes the remaining amount on a shelf-registration filing by CMS Energy with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock of CMS Energy. Proceeds from the sale will be used for general corporate purposes of CMS Energy. Consumers In October 1996, Consumers received FERC authorization to issue up to $900 million of short-term securities through 1998. This is the same amount of short-term securities authorized through 1996. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $145 million that are used to finance seasonal working capital requirements. At September 30, 1996, a total of $340 million was outstanding at a weighted-average interest rate of 6.0 percent, compared with $474 million outstanding at September 30, 1995, at a weighted-average interest rate of 6.8 percent. Consumers has an established $500 million trade receivables purchase and sale program. At September 30, 1996 and 1995, receivables sold under the agreement totaled $210 million. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In October 1996, Consumers requested FERC authorization to issue $500 million of long-term securities for refunding purposes. The authorization would apply to the period from December 1996 through November 1998. Consumers has been required to seek authorization to issue long-term securities from the FERC since late 1995, when the Michigan legislature repealed the MPSC's authority to regulate the issuance of securities. Also in October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. In January 1996, four million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through Consumers Power Company Financing I, a business trust wholly owned by Consumers. Net proceeds from the sale totaled $97 million. The business trust was formed for the sole purpose of issuing the Trust Originated Preferred Securities, and the primary asset of the trust is $103 million of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers and maturing in 2015. Consumers' obligations with respect to the Trust Originated Preferred Securities under the notes, the indenture under which the notes are issued, Consumers' guarantee of the Trust Originated Preferred Securities, and the declaration of trust constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. In September 1996, Consumers extended its nuclear fuel lease an additional year to November 1998. CMS NOMECO In March 1996, CMS NOMECO replaced its $140 million revolving credit agreement with a $225 million revolving credit agreement. As of September 30, 1996, $102 million was outstanding under the new agreement, with a weighted-average interest rate of 6.3 percent. CMS Generation In January 1996, CMS Generation refinanced a one-year $118 million bridge credit facility for the HYDRA-CO acquisition with a $110 million, five-year term loan. As of September 30, 1996, $107 million was outstanding with a weighted-average interest rate of 7.3 percent. 8: Earnings Per Share and Dividends Earnings (loss) per share attributable to Common Stock, for the periods ended September 30, 1996 reflect the performance of the Consumers Gas Group. Earnings (loss) per share attributable to Common Stock, for the periods ended September 30, 1995 reflect the performance of the Consumers Gas Group since initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock participates in earnings and dividends from the issue date. The earnings (loss) attributable to each class of common stock and the related amounts per share are computed by considering the weighted-average number of shares outstanding. Earnings (loss) attributable to outstanding Class G Common Stock are equal to the Consumers Gas Group net income (loss) multiplied by a fraction; the numerator is the weighted-average number of Outstanding Shares during the period and the denominator represents the weighted-average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis, for the nine months ended September 30, 1996, are based on 23.67 percent of the income of the Consumers Gas Group. The seasonal loss attributable to Class G Common Stock on a per share basis, for the periods ended September 30, 1995, is based on 23.17 percent of the loss of the Consumers Gas Group. For purpose of analysis, following are pro forma data for the nine months ended September 30, 1995 and the year ended December 31, 1995 which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to the Consumers Gas Group) on January 1, 1994, and actual data for the nine months ended September 30, 1996. In Millions, Except Per Share Amounts Actual Pro Forma Pro Forma Nine Months Ended Nine Months Ended Year Ended September 30 September 30 December 31 1996 1995 1995 Net Income $ 196 $ 166 $ 204 Net Income attributable to CMS Energy Common Stock $ 186 $ 156 $ 189 Net Income attributable to outstanding Class G Common Stock $ 10 $ 10 $ 15 Average shares outstanding: CMS Energy Common Stock 92.001 88.021 88.810 Class G Common Stock 7.695 7.521 7.536 Earnings per share attributable to CMS Energy Common Stock $ 2.02 $ 1.76 $ 2.14 Earnings per share attributable to outstanding Class G Common Stock $ 1.38 $ 1.38 $ 1.93 In February and May 1996, CMS Energy paid a dividend of $.24 per share on CMS Energy Common Stock and $.28 per share on Class G Common Stock. In August 1996, CMS Energy paid a dividend of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock. In October 1996, the Board of Directors declared a quarterly dividend of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock to be paid in November 1996. 21 CMS Energy Corporation Management's Discussion and Analysis This MD&A should be read along with the MD&A in CMS Energy's 1995 Form 10- K. This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this Form 10-Q that are not historical facts, are forward-looking and, accordingly, involve estimates, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this Form 10-Q, the Forward-Looking Information section of this MD&A indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses, including oil and gas exploration and production, development and operation of independent power production facilities, electric and gas marketing services to utilities, commercial and industrial customers, storage and transmission of natural gas, and electric distribution. Consolidated Earnings for the Periods Ended September 30, 1996 and 1995 In Millions, Except Per Share Amounts Consolidated Earnings at September 30 1996 1995 Change Quarter: Consolidated Net Income $ 58 $ 47 $ 11 Net Income (Loss) Attributable to Common Stock: CMS Energy 61 48 13 Class G (3) (1) (2)) Earnings (Loss) Per Average Common Share: CMS Energy .65 .54 .11 Class G (.28) (.17) (a) (.11) Nine months: Consolidated Net Income $ 196 $ 166 $ 30 Net Income (Loss) Attributable to Common Stock: CMS Energy 186 167 19 Class G 10 (1) 11 Earnings (Loss) Per Average Common Share: CMS Energy 2.02 1.90 .12 Class G 1.38 (.17) (a) 1.55 Twelve months: Consolidated Net Income $ 234 $ 197 $ 37 Net Income (Loss) Attributable to Common Stock: CMS Energy 220 198 22 Class G 14 (1) 15 Earnings (Loss) Per Average Common Share: CMS Energy 2.39 2.26 .13 Class G 1.92 (.17) (a) 2.09 (a) Class G Shares were issued on July 21, 1995. Pro-forma earnings (loss) per share, assuming Class G shares were outstanding during the entire period for the quarter, nine month and twelve month periods ended September 30, 1995, would be $ (.25), $ 1.38 and $ 1.63 respectively. The increase in consolidated net income for each period in 1996 primarily reflects the favorable impact of an electric rate increase and increased operating income resulting from a refund received by the MCV Partnership. As a result, in August 1996, the MCV Partnership recognized a $19 million reduction to fuel costs in its current operating results. This resulted in a $6 million earnings benefit in 1996 for CMS Energy. Consolidated net income was also effected by increased earnings from CMS Gas Transmission's 25 percent ownership interest in TGN. The nine-month and twelve-month periods in 1996 reflect increased electric sales, gas deliveries and revenues from gas loaning activities. In addition, the nine-month and twelve-month periods in 1996 reflect the equity earnings resulting from the buy-out of a power purchase agreement involving a partnership in which CMS Generation owns a 50 percent ownership interest. For further information, see the individual results of operations sections of this MD&A. Cash Position, Investing and Financing CMS Energy's primary ongoing source of operating cash is dividends from its subsidiaries. CMS Energy's consolidated operating cash requirements are met by its operating and financing activities. CMS Energy's consolidated cash from operations is derived mainly from Consumers' sale and transportation of natural gas, Consumers' generation, transmission, and sale of electricity and CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations totaled $520 million and $389 million for the first nine months of 1996 and 1995, respectively. The $131 million increase resulted from increased electricity sales and gas deliveries, lower cash losses associated with the PPA, CMS NOMECO's increased sale of oil and natural gas and changes in the timing of cash payments related to Consumers' operations. CMS Energy uses its operating cash primarily to expand its international businesses, maintain and expand its electric and gas utility systems, retire portions of its long-term debt and pay dividends. Investing Activities: Net cash used in investing activities totaled $622 million and $780 million for the first nine months of 1996 and 1995, respectively. The decrease of $158 million primarily reflects the acquisition of HYDRA-CO in the first quarter of 1995 and an increase in proceeds from the sale of property during 1996. These changes were partially offset by an increase in capital expenditures. CMS Energy's expenditures for its utility and international businesses were $314 million and $299 million, respectively. Financing Activities: Net cash provided by financing activities totaled $101 million and $349 million for the first nine months of 1996 and 1995, respectively. The net decrease of $248 million primarily reflects an increase in cash used to repay bank loans partially offset by increased proceeds due to refinancing bank loans and issuing notes, a decrease in the sale of Common Stock, and a net decrease in cash received from short term-borrowings, compared with 1995. These changes were partially offset by proceeds from the sale of Trust Originated Preferred Securities (see Note 7) in 1996. In October 1995, CMS NOMECO filed a registration statement with the SEC for an initial public offering of not more than 20 percent of CMS NOMECO common stock. CMS Energy will continue to evaluate market conditions for a possible offering of CMS NOMECO common stock. In the first quarter of 1996, CMS Energy filed a shelf-registration statement with the SEC for the issuance and sale of up to $125 million of Series B GTNs, with net proceeds to be used for general corporate purposes. As of September 30, 1996, CMS Energy had issued and outstanding approximately $250 million of Series A GTNs and $82 million of Series B GTNs with weighted-average interest rates of 7.7 percent and 8.0 percent, respectively. In the first quarter of 1996, CMS Generation refinanced the $118 million bridge credit facility obtained in connection with the acquisition of HYDRA-CO with a $110 million, five-year term loan. As of September 30, 1996, $107 million was outstanding with a weighted-average interest rate of 7.3 percent. In the first quarter of 1996, CMS NOMECO replaced its $140 million revolving credit agreement with a $225 million revolving credit agreement. As of September 30, 1996, $102 million was outstanding under the new agreement with a weighted-average interest rate of 6.3 percent. Through September 30, 1996, CMS Energy paid $69 million in cash dividends to holders of CMS Energy Common Stock and $6 million in cash dividends to holders of Class G Common Stock. In October 1996, the Board of Directors declared a quarterly dividend of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock to be paid in November 1996. In July 1996, the Board of Directors declared quarterly dividends of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock, representing an increase in the annualized dividend on CMS Energy Common Stock to $1.08 per share from the previous amount of $.96 per share (a 12.5 percent increase) and an increase in the annualized dividend on Class G Common Stock to $1.18 per share from the previous dividend of $1.12 per share (a 5.4 percent increase). In the second quarter of 1996, Consumers declared and paid a $75 million common dividend to CMS Energy from its first quarter earnings. In the third quarter of 1996, Consumers declared and paid a $40 million common dividend to CMS Energy from its second quarter earnings. In October 1996, Consumers declared a $48 million common dividend to CMS Energy, from its third quarter earnings, to be paid in November 1996. Consumers had temporarily suspended its common dividends from mid-1995 until early 1996 to improve its capital structure. In the second quarter of 1996, CMS Enterprises declared and paid a common dividend of $42 million to CMS Energy. In the third quarter of 1996, CMS Enterprises declared and paid a $23 million common dividend to CMS Energy. In the fourth quarter of 1996, CMS Energy received net proceeds of approximately $64 million from the issuance of 2.1 million shares of CMS Energy Common Stock purchased by an underwriter and subsequently sold by the underwriter in block transactions. The issuance of these shares completes the remaining amount on a shelf-registration filing by CMS Energy with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock of CMS Energy. Proceeds from the sale will be used for general corporate purposes of CMS Energy. Other Investing and Financing Matters: CMS Energy has available, unsecured, committed lines of credit totaling $105 million and a $450 million credit facility. At September 30, 1996, CMS Energy had utilized a total of $179 million under these facilities. CMS Energy will continue to evaluate the capital markets in 1996 as a source of financing its subsidiaries' investing activities and required debt retirements. Consumers has several available, unsecured, committed lines of credit totaling $145 million and a $425 million working capital facility. At September 30, 1996, Consumers had a total of $340 million outstanding under these facilities. In October 1996, Consumers received FERC authorization to issue up to $900 million of short-term securities through 1998. This is the same amount of short-term securities authorized through 1996. Consumers uses short-term borrowings to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At September 30, 1996 and 1995, receivables sold totaled $210 million. In October 1996, Consumers requested FERC authorization to issue $500 million of long-term securities for refunding purposes. Also in October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. At September 30, 1996 the book value per share for CMS Energy Common Stock and Class G Common Stock was $16.57 and $11.07, respectively. Electric Utility Results of Operations Electric Pretax Operating Income for the Periods Ended September 30, 1996 and 1995: In Millions Pretax Operating Income Quarter ended Nine months ended 12 months ended 1996 compared 1996 compared 1996 compared with 1995 with 1995 with 1995 Sales (net of special contract discounts) $(12) $ (3) $11 Rate increases and other regulatory issues 13 32 32 Operations and maintenance - 8 12 General taxes and depreciation (1) (12) (19) Other 1 3 8 ----- --- --- Total change $ 1 $28 $44 ===== === === Electric Sales: Total electric sales increased for the quarter ended (2.7 percent), nine months ended (3.7 percent), and twelve months ended September 30, 1996 (3.4 percent) over the comparable 1995 periods. The table below reflects these electric kWh sales increases by class of customer for the various periods.
In Billions of kWh Electric Sales Quarter ended Sept. 30 Nine months ended Sept. 30 12 months ended Sept. 30 1996 1995 Var. 1996 1995 Var. 1996 1995 Var. Residential 2.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2 Commercial 2.7 2.7 - 7.5 7.3 0.2 9.8 9.5 0.3 Industrial 3.4 3.2 0.2 9.5 9.5 - 12.7 12.6 0.1 Other 0.9 0.6 0.3 2.5 1.8 0.7 3.2 2.6 0.6 --- --- --- ---- ---- --- ---- ---- --- Total sales 9.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2 === === === ==== ==== === ==== ==== ===
Power Costs: In Millions Power Costs at September 30 1996 1995 Change Quarter $ 282 $270 $ 12 Nine months 802 731 71 Twelve months 1,041 958 83 The increases in each period resulted primarily from greater power purchases from outside sources to meet increased sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the termination of the PPA in 2025. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals. In March 1996, the Court of Appeals affirmed the Settlement Order. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $28 million for the first nine months of 1996. Estimated after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 authorized level. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including the electric rate case (discussed below) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. The total estimated cash underrecoveries are not expected to change under the settlement agreement as proposed, although the years in which they occur could vary from the schedule shown in the above table. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding the proposed settlement agreement, see Note 3. In 1994 and 1995, Consumers terminated power purchase agreements with the developers of a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. To replace this capacity, 109 MW of less expensive contract capacity from the MCV Facility, which Consumers is currently not authorized to recover from retail customers, would be used. For further information, see Note 2. Electric Rate Proceedings: In early 1996, the MPSC granted Consumers authority to increase its annual electric retail rates by $46 million, in response to Consumers' 1994 request. This partial final order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues. One of these issues, Consumers' electric rate case, was addressed, in part, by the order discussed above. If fully adopted, the settlement agreement would resolve Consumers' depreciation and special competitive service cases (discussed below) and cost recovery of the entire 325 MW of uncommitted MCV Facility capacity. Consumers expects a final order during the fourth quarter of 1996. For more information regarding the electric rate order and the proposed settlement agreement, see Note 3. In 1995, Consumers filed a request with the MPSC seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease in depreciation expense associated with this transfer. If the MPSC approves both aspects of the request, the net result will be a decrease in electric depreciation expense of $7 million for ratemaking purposes. The ALJ issued a proposal for decision in this case that recommended the MPSC reject Consumers' position regarding the reallocation of Consumers' depreciation reserve and plant investment. This case is currently part of the proposed settlement agreement. In the proposed settlement, the depreciation of the Palisades and Big Rock nuclear generating plants would be accelerated while overall depreciation rates would remain the same. Special Rates: Consumers currently has a request before the MPSC that would allow Consumers a certain level of rate-pricing flexibility to respond to customers' alternative energy options. This request has also been consolidated into the settlement proceeding discussed above. Electric Environmental Matters: The 1990 amendment of the 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 currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Final acid rain program nitrogen oxide regulations are expected to be issued in late 1996. Management believes that Consumers' annual operating costs will not be materially affected. Part 201 of the Michigan Natural Resources and Environmental Protection Act was substantially amended in 1995 and bears some similarities to Superfund. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions are properly recoverable in rates. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 4. Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report recognized improved performance at the plant, specifically in the areas of engineering and plant operations. In the report, the NRC noted areas that continue to require management's attention, but also recognized the development and implementation of plans for corrective action designed to address previously identified weak areas. The report noted that performance in the areas of maintenance and plant support was good and remained unchanged. Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consequently, Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Consumers does not plan to load or unload any casks before the end of 1996, including a cask in which a minor flaw has been detected. For further information, see Note 5. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Analysis of data from testing of similar materials indicated that the Palisades reactor vessel can be safely operated through late 1999; however, an analysis that Consumers submitted to the NRC for review in April 1996 suggests that the reactor vessel could be safely operated beyond 1999 without annealing. Nevertheless, Consumers is currently developing a contingency plan to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million, which would likely allow for operation of the plant to the end of its license life in the year 2007 or beyond. Consumers cannot predict whether the NRC will concur with the April 1996 analysis or, if the NRC does concur, whether these analyses will result in a future decision to adopt or postpone annealing. Stray Voltage: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. At September 30, 1996, Consumers had 31 separate stray voltage lawsuits awaiting trial court action. CMS Energy believes that the resolution of these lawsuits will not have a material impact on its financial position, liquidity or results of operations. Consumers Gas Group Results of Operations In Millions Pretax Operating Income Quarter ended Nine months ended 12 months ended 1996 compared 1996 compared 1996 compared with 1995 with 1995 with 1995 Sales $ 1 $24 $50 Reversal of gas contingencies - (23) (23) Recovery of gas costs and other issues 2 3 3 Gas loaning activities - 7 7 Operations and maintenance (6) (5) (16) General taxes and depreciation - (4) (7) --- --- --- Total change $(3) $ 2 $14 === === === Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility, decreased for the quarter ended (5.1 percent), but increased for the nine months ended (8.9 percent), and twelve-months ended September 30, 1996 (14.2 percent) when compared with the corresponding 1995 periods. The increased deliveries reflect growth resulting from customer additions, conversions to natural gas from alternative fuels, continued strength in the Michigan economy and, for the nine months ended and twelve-months ended September 30, 1996, colder temperatures. Although the industrial sector, for the nine months ended September 30, 1996, accounted for approximately 20% of total deliveries, it contributed almost 40% of the weather-adjusted growth. The table below indicates total system deliveries and the impact of weather: In Bcf Gas Deliveries Nine months ended 12 months ended Sept. 30 Sept. 30 1996 1995 Var. 1996 1995 Var. Weather-adjusted deliveries 234.5 223.5 11.0 337.1 321.0 16.1 (variance reflects growth) Impact of weather 6.6 (2.1) 8.7 17.4 (10.5) 27.9 ----- ----- ---- ----- ----- ---- System deliveries excluding transport to MCV 241.1 221.4 19.7 354.5 310.5 44.0 Transport to MCV 48.6 39.9 8.7 62.4 58.2 4.2 ----- ----- ---- ----- ----- ---- Total system deliveries 289.7 261.3 28.4 416.9 368.7 48.2 ===== ===== ==== ===== ===== ==== Cost of Gas Sold: In Millions Cost of Gas Sold at September 30 1996 1995 Change Quarter $ 51 53 $ (2) Nine months 504 435 69 Twelve months 740 622 118 The increases for the nine-month and twelve-month periods were the result of increased sales and the reversal of a $23 million gas contract contingency during the first quarter of 1995. Consumers Gas Group Issues Gas Rate Proceedings: In early 1996, the MPSC issued a final order in Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million annually. The MPSC order authorized an 11.6 percent return on common equity. Consumers filed a petition for rehearing with the MPSC, requesting reconsideration of certain issues. This petition was denied in June 1996 and the matter is now closed. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to bypass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC-authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Matters: In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. Gas loaning activities are new transactions for Consumers. In that regard, an issue has arisen about whether revenue from these activities should be transferred to customers. Consumers strongly disagrees with this suggestion but is unable to predict the outcome of any regulatory proceeding where this issue has arisen. Gas Environmental Matters: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At September 30, 1996, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order, Consumers is deferring environmental clean-up costs and amortizing these costs over 10 years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. For further information regarding environmental matters, see Note 4. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three months ended September 30, 1996 increased $5 million over the comparable period in 1995, primarily reflecting higher oil and gas prices and higher gas volumes. Pretax operating income for the nine months ended September 30, 1996 increased $1 million from the same period in 1995, primarily due to higher oil and gas prices and volumes, mostly offset by the recognition of a $9.9 million gain from assignment and novation of a gas supply contract recorded in the first quarter of 1995. Pretax operating income for the twelve months ended September 30, 1996 increased $7 million from the 12 months ended September 30, 1995, primarily due to higher sales volumes and prices, partially offset by the gain from the assignment and novation of a gas supply contract. Capital Expenditures: Capital expenditures during 1996 relate primarily to the development of existing oil and gas reserves. Independent Power Production Pretax Operating Income: Pretax operating income for the three, nine and twelve months ended September 30, 1996 increased $16 million, $22 million and $20 million, respectively, over the comparable periods in 1995, primarily reflecting a gain on the sale of a power purchase agreement by a partnership in which CMS Generation owns a 50 percent interest, a gain on the sale of a partnership interest and increased operating income resulting from a refund received by the MCV Partnership. Capital Expenditures and Other: In the second quarter of 1996, CMS Generation commenced construction of the La Plata Cogeneration Plant, a 128 MW natural gas fueled, combined cycle power plant in Buenos Aires Province, Argentina. Construction of the $110 million plant being built on the site of a petroleum refinery owned and operated by YPF S.A., Argentina's largest oil company, is scheduled to be completed by the fall of 1997. In July 1996, CMS Generation increased its ownership interest in the project from 39 percent to 100 percent by purchasing the remaining 61 percent from EDEVA, a consortium of Argentine investors. The Overseas Private Investment Corporation is expected to provide approximately $75 million in non-recourse project financing for the facility. In April 1996, CMS Generation and ABB signed agreements with Morocco's national utility, Office National de l'Electricite, for the privatization, expansion and operation of the Jorf Lasfar coal-fueled power plant located southwest of Casablanca. The agreements cover purchase and operation of two existing 330 MW electric generating units and construction and operation of another two 330 MW electric generating units by CMS Generation and ABB. CMS Generation and ABB each will hold a 50 percent interest in the transaction. CMS Energy posted a $30 million conditional letter of credit to ensure performance under the agreements. Financial closing is targeted for year end 1996, with construction of the second two units to begin shortly thereafter. In July 1996, CMS Generation began construction on repowering its Centrales Termicas Mendoza electric generating plant in western Argentina's Mendoza Province. In the first quarter of 1996, CMS Generation increased its ownership interest in the plant to 81 percent. The company currently plans to invest $185 million to refurbish and repower the facility resulting in an increase in its generating capacity from 242 MW to 506 MW. Capital markets financing is targeted for early 1997. During August 1996, CMS Generation's GVK Industries independent power project in Jegurupadu, Andhra Pradesh, India began generating electricity from the plant's first gas-fueled turbine. CMS Generation holds a 25.25 percent interest in, and operates, the 235 MW plant. Construction is continuing on two additional gas turbines and one steam turbine unit of the combined cycle facility with an estimated total cost of $260 million. The project has received a Government of India counter-guarantee and expects to complete international financing during late 1996 or early 1997. Natural Gas Transmission, Storage and Marketing Pretax Operating Income: Pretax operating income for the three, nine and twelve months ended September 30, 1996 increased $1 million, $12 million and $16 million respectively over the comparable periods in 1995, reflecting earnings from new pipeline and storage investments, primarily TGN, the continued growth of existing projects, gas marketed to end-users and the gain resulting from the dissolution of the Moss Bluff and Grands Lacs partnerships (see below). Capital Expenditures and Other: In June 1996, CMS Gas Transmission sold its 50 percent ownership interest in Moss Bluff Gas Storage Systems, a partnership that owns a gas storage facility, to its partner, MHP, and purchased the remaining 50 percent ownership interest in the Grands Lacs Limited Partnership, a marketing center for natural gas, from MHP. This transaction resulted in CMS Gas Transmission receiving approximately $26 million. In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company, a natural gas storage facility located in Forrest County, Mississippi. The salt dome storage cavern provides up to 3.2 bcf per day of 10-day storage service and has the capability of being refilled in 20 days. In January 1996, CMS Gas Transmission acquired an ownership interest in Nitrotec Corporation, a proprietary gas technology company. Nitrotec specializes in the development and commercialization of advanced carbon- based adsorption gas separation technologies. Nitrotec recently received approval of patent applications covering its helium removal process and nitrogen rejection process. International Electric Distribution Capital Expenditures: In April 1996, a seven-company consortium in which CMS Electric and Gas holds a 40 percent interest acquired 90 percent of the outstanding shares of EDEER for approximately $160 million, of which CMS Energy's portion was $65 million. EDEER, with 1995 revenue of $105 million and electric sales of 1.1 billion kWh, serves over 200,000 customers, primarily residential and commercial, in a 55,000 square kilometer area. In May 1996, the Entre Rios Province transferred ownership and operating management of EDEER to the consortium. Forward-Looking Information Forward-looking information is included throughout this Form 10-Q. CMS Energy's material contingencies are also described in the Condensed Notes to Consolidated Financial Statements and should be read accordingly. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include prevailing governmental policies and regulatory actions both domestic and international (including those of the FERC and the MPSC) with respect to rates, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, operation and construction of natural gas pipeline and storage facilities, recovery of the cost of purchased power or natural gas, decommissioning costs, and present or prospective wholesale and retail competition, among others. The business and profitability of CMS Energy are also influenced by economic and geographic factors including political and economic risks (particularly those associated with international development and operations, including currency fluctuation), changes in environmental laws and policies, weather conditions, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy, inflation, capital market conditions, unanticipated development project delays or changes in project costs, and the ability to secure agreement in pending negotiations (particularly for projects in development), among other important factors. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of CMS Energy. Capital Expenditures: CMS Energy estimates that capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total approximately $2.8 billion over the next three years. Cash generated by operations is expected to satisfy a substantial portion of capital expenditures. Nevertheless, CMS Energy will continue to evaluate capital markets in 1996 as a potential source of financing its subsidiaries' investing activities. CMS Energy estimates the following capital expenditures by business segment over the next three years: In Millions Years Ended December 31 1996 1997 1998 Electric utility (a) $315 $260 $275 Gas utility (a) 135 110 100 Oil and gas exploration and production 120 135 150 Independent power production 164 162 162 Natural gas transmission, storage and marketing 140 58 113 International electric distribution 66 200 100 ---- ---- ---- $940 $925 $900 ==== ==== ==== (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. CMS Energy currently plans to invest $405 million from 1996 to 1998 in its oil and gas exploration and production operations which will be concentrated in North and South America and offshore west Africa. CMS Energy also plans to invest $488 million relating to its independent power production operations from 1996 to 1998 to pursue acquisitions and development of electric generating plants in the United States, Latin America, southern Asia, the Pacific Rim region and North Africa. An investment of $311 million from 1996 to 1998, relating to non-utility gas operations, is planned to continue development of natural gas storage, gathering and pipeline operations both domestically and internationally. CMS Energy also plans to work toward the development of U.S. regional "market centers" for natural gas through strategic alliances and asset acquisition and development. These estimates are prepared for planning purposes and are subject to revision. Electric Outlook, Sales and Competition: The Governor of the State of Michigan has requested that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry. In April 1996, the MPSC directed Consumers, Detroit Edison, and other electric utilities to file applications addressing the recommendation of the Michigan Jobs Commission to allow a choice of power suppliers for new industrial and commercial electric load. Consumers filed a proposed plan for open access transmission services, under which Consumers could meet new demand in its service area by delivering electricity from any supplier capable of providing power to Consumers' electric system, provided certain reciprocity and other conditions were met. Among the other conditions was a requirement that stranded costs would be fully recovered from existing customers. The Michigan Jobs Commission's recommendations also include related matters, such as the full recovery of utility stranded costs. No new legislation has been introduced. However, Consumers, Detroit Edison, and the Jobs Commission have continued to meet for the purpose of confirming the principles, such as full recovery of stranded costs in the event of expanded choice by retail customers, upon which a new regulatory and statutory framework for the electric utility business in Michigan would be based. Once established, those principles could in turn form the basis for definitive agreements, filings with the MPSC, and revised statutes. These parties are hopeful that the principles and definitive agreements would receive the support of other interested parties such as the MPSC staff. There can be no assurance that the necessary agreements will be reached, that regulatory approvals will be granted, and that necessary legislation will be passed, nor can a definitive timetable be established at this time for realization of these events. In April 1996, the FERC issued Orders 888 and 889, which require utilities to provide open access to the interstate transmission grid. Order 888 requires public utilities owning, controlling, or operating transmission lines in interstate commerce to file non-discriminatory open access tariffs that contain minimum terms and conditions of non-discriminatory service, allows utilities to charge their current conforming transmission rates or apply for new rates, and provides for the full recovery of stranded costs. Order 888 also requires power pools to restructure their ongoing operations and open up to non-utility members. Order 889 requires utilities to establish electronic systems to share information about available transmission capacity and to separate their wholesale power marketing and transmission operations functions by implementing standards of conduct. These Orders became effective in July 1996. In addition, the FERC issued a NOPR in April 1996 that proposes for consideration a new system for utilities to use in reserving capacity on their own and others' transmission lines. This would replace certain tariffs included in Order 888 with a capacity reservation tariff in which participants would reserve firm rights to transfer power between designated receipt and delivery points. Consumers is evaluating these developments and has not determined the full impact of the FERC's Orders on its financial position, liquidity or results of operations. In July 1996, Consumers filed an open access transmission tariff and conforming transmission rate change in response to Order 888. Consumers currently expects approximately 2 percent average annual growth in electric system sales over the next five years. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions, or the developing competitive market for electricity as discussed below. Consumers' retail service is affected by competition in several areas, including the installation of cogeneration or other self-generation facilities by Consumers' larger industrial customers; the formation of municipal utilities that would displace retail service by Consumers to an entire community; and competition from neighboring utilities that offer flexible rate arrangements designed to encourage movement of facilities or production to their service areas. Consumers continues to work toward retaining its current retail service customers. As part of an order issued in early 1996, the MPSC significantly reduced the rate subsidization of residential customers by industrial and large commercial customers. In addition, in an effort to meet the challenge of competition, Consumers has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors contract, Consumers will serve certain facilities at least five years and other facilities at least 10 years in exchange for discounted electric rates. Certain facilities will have the option of taking retail wheeling service (if available) after the first three years of the contract. The MPSC approved this contract in 1995, and has since approved long-term sales contracts with other major customers representing a substantial percentage of Consumers' industrial load deemed to have viable cogeneration alternatives. These orders have been appealed by the Attorney General. In addition to offering electric rates that are competitive with those of other energy providers, Consumers is pursuing numerous other strategies to retain its other large customers. These strategies include improving reliability, power quality and customer communications, and providing consulting services to help customers use energy efficiently. Consumers is also taking steps to prepare for a future environment in which open access is the predominant means by which large industrial and commercial customers provide for their power requirements. In 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers, ABATE and The Dow Chemical Company filed claims of appeal of the MPSC's retail wheeling orders. The Court of Appeals subsequently consolidated these appeals with those previously filed by Detroit Edison and the Attorney General. Consumers does not expect this short-term experiment to have a material impact on its financial position, liquidity or results of operations. In July 1996, an electric marketer filed applications with the MPSC for approval to sell electricity generated outside of Michigan to certain of Consumers' industrial customers. These customers purchase approximately 100 MW annually from Consumers. There is currently no MPSC-approved program of retail access that would allow the transactions requested by this electric marketer to take place. Consumers intends to vigorously oppose the creation of any such program before the MPSC and in the courts; however, Consumers cannot predict the ultimate outcome of this matter. SFAS 71 allows the deferral of certain costs and the recording of regulatory assets. Management has evaluated Consumers' current regulatory position and believes it continues to support the recognition of Consumers' electric- related regulatory assets. If changes in the industry were to lead to Consumers discontinuing the application of SFAS 71, for all or part of its business, Consumers might be required to write off the portion of any regulatory asset for which no regulatory assurance of recovery continued to exist. Consumers does not believe that there is any current evidence that supports the write-off of any of its electric-related regulatory assets. Gas Outlook, Competition and Deliveries: Consumers currently anticipates gas deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off-system deliveries) over the next five years, assuming a steadily growing customer base. Additionally, Consumers has several strategies that 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. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption. In 1996, the Low Income Home Energy Assistance Program provided $58 million in heating assistance to Michigan households, with approximately 19 percent of funds going to Consumers' customers. Federal legislative approval provided Michigan residents with $55 million of funding for 1997. Consumers therefore does not anticipate a significant change in its revenues from this program in 1997. In October 1996, the MPSC issued an order requesting Consumers and other local distribution companies whose rates are regulated by the MPSC to develop pilot programs that would allow any customers to purchase gas from other suppliers and have the gas transported through local pipelines. These pilot programs, which are to be implemented in the second quarter of 1997, are intended to help the MPSC determine whether it is appropriate to allow all customers access to the competitive gas transportation market. Under SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its regulatory assets related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs. 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 September 30, 1996 and 1995, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Power Company and subsidiaries as of December 31, 1995, and the related consolidated statements of income, common stockholder's equity and cash flows for the year then ended (not presented herein), and, in our report dated January 26, 1996, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Detroit, Michigan, November 11, 1996. 37 Consumers Power Company Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1996 1995 1996 1995 1996 1995 In Millions OPERATING REVENUE Electric $ 655 $ 640 $1,827 $1,723 $2,381 $2,246 Gas 123 122 880 801 1,274 1,116 Other 20 10 33 30 41 36 --------------------------------------------------------- Total operating revenue 798 772 2,740 2,554 3,696 3,398 --------------------------------------------------------- OPERATING EXPENSES Operation Fuel for electric generation 76 74 219 208 294 284 Purchased power - related parties 150 124 436 369 558 492 Purchased and interchange power 56 72 147 154 189 182 Cost of gas sold 51 53 504 435 740 622 Other 154 142 435 419 607 573 --------------------------------------------------------- Total operation 487 465 1,741 1,585 2,388 2,153 Maintenance 41 47 117 136 164 188 Depreciation, depletion and amortization 83 81 273 262 369 354 General taxes 43 43 141 138 192 183 --------------------------------------------------------- Total operating expenses 654 636 2,272 2,121 3,113 2,878 --------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) Electric 126 125 323 295 390 346 Gas (1) 2 112 110 153 139 Other 19 9 33 28 40 35 --------------------------------------------------------- Total pretax operating income 144 136 468 433 583 520 INCOME TAXES 38 36 134 121 158 132 --------------------------------------------------------- NET OPERATING INCOME 106 100 334 312 425 388 --------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Dividends from affiliates 4 4 13 13 17 17 Accretion income 2 3 7 9 10 12 Accretion expense (7) (7) (21) (23) (28) (32) Other income taxes, net 3 3 9 9 13 11 Other, net - 1 1 2 1 11 --------------------------------------------------------- Total other income 2 4 9 10 13 19 --------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 34 35 104 106 139 140 Other interest 5 7 11 16 19 24 Capitalized interest - (1) (2) (2) (3) (2) --------------------------------------------------------- Net interest charges 39 41 113 120 155 162 --------------------------------------------------------- Net Income 69 63 230 202 283 245 Preferred Stock Dividends 7 7 21 21 28 28 Preferred Securities Distribution 2 - 6 - 6 - --------------------------------------------------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 60 $ 56 $ 203 $ 181 $ 249 $ 217 ========================================================= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38 Consumers Power Company Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1996 1995 1996 1995 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 230 $ 202 $ 283 $ 245 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning depreciation of $37, $38, $49 and $51, respectively) 273 262 369 354 Capital lease and other amortization 32 27 44 38 Deferred income taxes and investment tax credit 27 52 32 52 Accretion expense 21 23 28 32 Accretion income - abandoned Midland project (7) (9) (10) (12) Undistributed earnings of related parties (30) (28) (39) (35) MCV power purchases - settlement (Note 2) (43) (102) (78) (118) Other 4 4 5 4 Changes in other assets and liabilities (49) (113) 148 6 ------ ------ ------ ------ Net cash provided by operating activities 458 318 782 566 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (298) (278) (434) (411) Investments in nuclear decommissioning trust funds (37) (38) (49) (51) Cost to retire property, net (20) (28) (34) (41) Deferred demand-side management costs (6) (7) (8) (11) Proceeds from sale of property - 1 1 4 Other 2 (5) 1 (5) ------ ------ ------ ------ Net cash used in investing activities (359) (355) (523) (515) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Payment of common stock dividends (114) (70) (114) (133) Retirement of bonds and other long-term debt (37) (1) (37) (1) Payment of capital lease obligations (32) (26) (43) (37) Payment of preferred stock dividends (21) (21) (28) (28) Preferred securities distributions (6) - (6) - Increase (decrease) in notes payable, net (1) 135 (134) 74 Proceeds from preferred securities 97 - 97 - Contribution from stockholder 13 - 13 - Repayment of bank loans - - - (328) Proceeds from bank loans - - - 400 ------ ------ ------ ------ Net cash provided by (used in) financing activities (101) 17 (252) (53) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) (20) 7 (2) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 5 7 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 12 $ 5 $ 12 $ 5 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39 Consumers Power Company Consolidated Balance Sheets
September 30 September 30 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions ASSETS PLANT (At original cost) Electric $6,286 $6,103 $6,007 Gas 2,268 2,169 2,132 Other 25 30 30 ----------------------------------- 8,579 8,302 8,169 Less accumulated depreciation, depletion and amortization 4,354 4,090 4,041 ----------------------------------- 4,225 4,212 4,128 Construction work-in-progress 194 190 217 ----------------------------------- 4,419 4,402 4,345 ----------------------------------- INVESTMENTS Stock of affiliates 338 337 326 First Midland Limited Partnership (Note 2) 230 225 222 Midland Cogeneration Venture Limited Partnership (Note 2) 127 103 98 Other 8 7 8 ----------------------------------- 703 672 654 ----------------------------------- CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 12 14 5 Accounts receivable and accrued revenue, less allowances of $2, $3 and $3, respectively (Note 7) 64 137 78 Accounts receivable - related parties 27 10 49 Inventories at average cost Gas in underground storage 250 184 263 Materials and supplies 71 72 73 Generating plant fuel stock 28 37 28 Postretirement benefits 25 25 25 Deferred income taxes 21 26 20 Prepayments and other 81 181 77 ----------------------------------- 579 686 618 ----------------------------------- NON-CURRENT ASSETS Postretirement benefits 442 462 466 Nuclear decommissioning trust funds 360 304 283 Abandoned Midland Project 117 131 135 Other 278 297 316 ----------------------------------- 1,197 1,194 1,200 ----------------------------------- TOTAL ASSETS $6,898 $6,954 $6,817 ===================================
40
September 30 September 30 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 504 491 491 Revaluation capital 30 29 22 Retained earnings since December 31, 1992 326 237 191 ----------------------------------- 1,701 1,598 1,545 Preferred stock 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 - - Long-term debt 1,876 1,922 1,921 Non-current portion of capital leases 89 104 101 ----------------------------------- 4,122 3,980 3,923 ----------------------------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases 97 90 88 Notes payable 340 341 474 Accounts payable 161 207 133 Accrued taxes 96 225 73 Power purchases - settlement (Note 2) 90 90 95 Accounts payable - related parties 65 56 53 Accrued interest 28 32 26 Accrued refunds 23 22 31 Other 173 178 161 ----------------------------------- 1,073 1,241 1,134 ----------------------------------- NON-CURRENT LIABILITIES Deferred income taxes 618 605 593 Postretirement benefits 509 517 534 Power purchases - settlement (Note 2) 197 221 244 Deferred investment tax credit 162 169 172 Regulatory liabilities for income taxes, net 61 44 38 Other (Note 4) 156 177 179 ----------------------------------- 1,703 1,733 1,760 ----------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,898 $6,954 $6,817 =================================== (a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers. THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
41 Consumers Power Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1996 1995 1996 1995 1996 1995 In Millions COMMON STOCK At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841 --------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 504 491 491 491 491 491 Stockholder's contribution - - 13 - 13 - --------------------------------------------------------- At end of period 504 491 504 491 504 491 --------------------------------------------------------- REVALUATION CAPITAL At beginning of period 31 19 29 15 22 14 Change in unrealized investment-gain (loss) (1) 3 1 7 8 8 --------------------------------------------------------- At end of period 30 22 30 22 30 22 --------------------------------------------------------- RETAINED EARNINGS At beginning of period 305 135 237 80 191 107 Net income 69 63 230 202 283 245 Common stock dividends declared (39) - (114) (70) (114) (133) Preferred stock dividends declared (7) (7) (21) (21) (28) (28) Preferred securities distributions (2) - (6) - (6) - --------------------------------------------------------- At end of period 326 191 326 191 326 191 --------------------------------------------------------- TOTAL COMMON STOCKHOLDER'S EQUITY $1,701 $1,545 $1,701 $1,545 $1,701 $1,545 ========================================================= 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 1995 Form 10-K of Consumers Power Company that includes the Report of Independent Public Accountants. In the opinion of management, the unaudited information herein reflects all adjustments necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. 1: Corporate Structure Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. 2: The Midland Cogeneration Venture The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. Consumers, through two wholly owned subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in the MCV Facility. Results of Operations for CMS Midland and CMS Holdings:
In Millions Summarized Statements of Income Quarter Nine months 12 months Periods Ended September 30 1996 1995 1996 1995 1996 1995 Pretax operating income $19 $9 $31 $28 $38 $33 Income taxes and other 6 3 9 8 11 7 --- -- --- --- --- --- Net income $13 $6 $22 $20 $27 $26 === == === === === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the termination of the PPA. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. The PPA provides that Consumers is to pay the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge, and a variable energy charge based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity, the fixed energy charge, and the prescribed energy charges associated with the scheduled deliveries within certain hourly availability limits, whether or not those deliveries are scheduled on an economic basis. For all energy delivered on an economic basis above the availability limits to 915 MW, Consumers has been allowed to recover a capacity payment of 1/2 cent per kWh in addition to the variable energy charge. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power costs under the PPA as a result of the Settlement Order. This loss was based, in part, on management's assessment of the future availability of the MCV Facility and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC-authorized level, could be resold. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. If Consumers is unable to sell any capacity above the 1993 MPSC-authorized level, future additional after-tax losses and after-tax cash underrecoveries would be incurred. Consumers' estimates of its after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 authorized level. Under the Settlement Order, capacity and energy purchases from the MCV Partnership above the 915 MW level can be utilized to satisfy customers' power needs, but the MPSC will determine the levels of recovery from retail customers at a later date. The Settlement Order also provides Consumers the right to remarket to third parties the remaining contract capacity. The MCV Partnership did not object to the Settlement Order. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals. In March 1996, the Court of Appeals affirmed the Settlement Order. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including Consumers' electric rate case (see Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. The total estimated cash underrecoveries are not expected to change under the settlement agreement as proposed, although the years in which they occur could vary from the schedule shown in the above table. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding the proposed settlement agreement, see Note 3. At September 30, 1996 and December 31, 1995, the after-tax present value of the Settlement Order liability totaled $186 million and $202 million, respectively. The reduction in the liability since December 31, 1995 reflects after-tax cash underrecoveries of $28 million, partially offset by after-tax accretion expense of $12 million. The undiscounted after-tax amount associated with the liability totaled $564 million at September 30, 1996. In 1994 and 1995, Consumers paid a total of $44 million to terminate power purchase agreements with the developers of two proposed independent power projects totaling 109 MW. As part of the proposed settlement agreement reached with the MPSC staff (see Note 3), Consumers is seeking to utilize less-expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. Cost recovery for this contract capacity would start in 1996. Even if Consumers is not allowed to substitute MCV Facility capacity for the capacity to be provided under the terminated agreements, Consumers believes that the MPSC would still approve recovery of the buyout costs due to the significant customer savings resulting from the terminated power purchase agreements. As a result, Consumers has recorded a regulatory asset of $44 million. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General appealed these plan case orders to the Court of Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 plan case. As part of its decision in the 1993 PSCR reconciliation case issued in February 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believed this was contrary to the terms of the Settlement Order and appealed the February 1995 order on this issue. The MCV Partnership and ABATE filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's order. 3: Rate Matters Electric Rate Proceedings: In late 1994, Consumers filed a request with the MPSC to increase its retail electric rates. The request included provisions for ratemaking treatment of the 325 MW of MCV Facility contract capacity above 915 MW. Early in 1996, the MPSC issued a partial final order in this case, granting Consumers a $46 million annual increase in its electric retail rates. This order authorized a 12.25 percent return on common equity. However, it did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. Consumers also has a separate request before the MPSC to offer competitive special rates to certain large qualifying customers. In addition, Consumers filed a request with the MPSC seeking to adjust its depreciation rates and to reallocate certain portions of its electric production plant to transmission accounts. For further information regarding these requests, see the Electric Rate Proceedings and Special Rates discussions in Consumers' MD&A. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues currently before the MPSC in separate proceedings. Some of these issues were preliminarily addressed in February 1996 when the MPSC issued a partial final order in Consumers' electric rate case. If fully adopted, the settlement agreement would provide for cost recovery of the entire 325 MW of uncommitted MCV Facility capacity; implement provisions for incentive ratemaking; resolve the special competitive services and depreciation rate cases; implement a limited direct access program; and accelerate recovery of nuclear plant investment. Consumers expects a final order during the fourth quarter of 1996. Gas Rates: As part of an agreement approved by the MPSC, Consumers filed a gas rate case in December 1994 that incorporated cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites (see Note 4). In March 1996, the MPSC issued a final order in this case, authorizing recovery of costs related to postretirement benefits and former manufactured gas plant sites. Overall, however, the order decreased Consumers' gas rates by $11.7 million annually and authorized an 11.6 percent return on common equity. Gas loaning activities are new transactions for Consumers. In that regard, an issue has arisen about whether revenue from these activities should be transferred to customers. Consumers strongly disagrees with this suggestion but is unable to predict the outcome of any regulatory proceeding where this issue has arisen. GCR Matters: In 1993, the MPSC issued an order favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers. In early 1995, management concluded that the intrastate producers' pending appeals of the order would not be successful and, accordingly, reversed a previously accrued contingency and recorded a $23 million (pretax) benefit. The MPSC order was affirmed by the Court of Appeals, and the Michigan Supreme Court later denied the producers' petition for review. In September 1996, the producers filed a petition requesting the U.S. Supreme Court to review the Michigan Supreme Court's decision. In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. Resolution of the issues discussed in this note is not expected to have a material impact on Consumers' financial position or results of operations. 4: Commitments and Contingencies Environmental Matters: Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Superfund liability is joint and several and along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the significant sites will be between $1 million and $9 million. At September 30, 1996, Consumers has accrued $1 million for its estimated losses. Under Part 201 of the Michigan Natural Resources and Environmental Protection Act, which bears some similarities to Superfund, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites. Three of the four plans submitted by Consumers have been approved by the DNR or the DEQ. The findings for two remedial investigations indicate that the expenditures for remedial action at those sites are likely to be less than previously estimated; however, these findings may not be representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At September 30, 1996, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions, such as remediation technique, nature and extent of contamination, and legal and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order issued in early 1996, Consumers is deferring environmental clean- up costs incurred at these sites and amortizing these costs over ten years. Rate recognition of amortization expense will not begin until after a prudence review in a general rate case. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. The Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. Consumers' coal- fueled electric generating units burn low-sulfur coal and are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $35 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 $40 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $450 million for 1996, $370 million for 1997, and $375 million for 1998. For further information regarding capital expenditures, see Forward-Looking Information in Consumers' MD&A. Other: A number of lawsuits have been filed against Consumers relating to so-called stray voltage. Claimants contend that stray voltage results when low-level electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the grounding of the customer's service. At September 30, 1996, Consumers had 31 separate stray voltage lawsuits awaiting trial court action. In addition to the matters disclosed in these notes, Consumers and certain of its subsidiaries are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business and involving personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 5: Nuclear Matters Consumers filed updated decommissioning information with the MPSC in 1995 which estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered that Consumers file a report on the adequacy of the surcharge revenues with the MPSC at three-year intervals beginning in 1998. Consumers filed its decommissioning plan for Big Rock with the NRC in 1995. The NRC has reviewed the plan but does not formally approve decommissioning until approximately two years before site release. The NRC has approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades; however, certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff is reviewing the petitions. Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. 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. Consumers has examined radiographs for all of its casks and has found all other welds acceptable. The cask in which the minor flaws were detected continues to store spent fuel safely and there is no requirement for its replacement, but Consumers had nevertheless planned to remove the spent fuel and insert it into another cask. Consumers has postponed this action while it monitors an investigation under way at another utility that uses a similar dry storage cask system for spent nuclear fuel. The other utility experienced an unexpected ignition of hydrogen gas following the loading of a cask. Although the event caused no injuries or releases of radioactive material, and Consumers' procedures had already precluded a similar event, the NRC has instructed utilities using the dry storage casks to take certain additional precautions when loading or unloading casks. Consumers does not plan to load or unload any casks before the end of 1996. 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 during prolonged accidental outages. Such costs would not be covered by insurance during the first 21 weeks of any outage, but the major portion of such costs would be covered during the next twelve months of the outage, followed by reduced coverage to approximately 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $30 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. As an NRC licensee, Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Analysis of data from testing of similar materials indicated 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; however, an analysis that Consumers submitted to the NRC for review in April 1996 suggests that the reactor vessel could be safely operated beyond 1999 without annealing. Nevertheless, Consumers is currently developing a contingency plan to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million, which would likely allow for operation of the plant to the end of its license life in the year 2007 or beyond. Consumers cannot predict whether the NRC will concur with the April 1996 analysis or, if the NRC does concur, whether these analyses will result in a future decision to adopt or postpone annealing. 6: Supplemental Cash Flow Information The Statement of Cash Flows includes as cash equivalents all highly liquid investments with an original maturity of three months or less. Other cash flow activities and non-cash investing and financing activities for the periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1996 1995 1996 1995 Cash transactions Interest paid (net of amounts capitalized) $111 $125 $145 $155 Income taxes paid (net of refunds) 105 72 76 41 Non-cash transactions Nuclear fuel placed under capital lease $ 8 $ 24 $ 10 $ 27 Other assets placed under capital leases 2 3 4 7 Capital leases refinanced - - 21 - 7: Short-Term and Long-Term Financings and Capitalization In October 1996, Consumers received FERC authorization to issue up to $900 million of short-term securities through 1998. This is the same amount of short-term securities authorized through 1996. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $145 million that are used to finance seasonal working capital requirements. At September 30, 1996, a total of $340 million was outstanding at a weighted-average interest rate of 6.0 percent, compared with $474 million outstanding at September 30, 1995, at a weighted-average interest rate of 6.8 percent. Consumers has an established $500 million trade receivables purchase and sale program. At September 30, 1996 and 1995, receivables sold under the agreement totaled $210 million. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In October 1996, Consumers requested FERC authorization to issue $500 million of long-term securities for refunding purposes. The authorization would apply to the period from December 1996 through November 1998. Consumers has been required to seek authorization to issue long-term securities from the FERC since late 1995, when the Michigan legislature repealed the MPSC's authority to regulate the issuance of securities. Also in October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. In January 1996, four million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through Consumers Power Company Financing I, a business trust wholly owned by Consumers. Net proceeds from the sale totaled $97 million. The business trust was formed for the sole purpose of issuing the Trust Originated Preferred Securities, and the primary asset of the trust is $103 million of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers and maturing in 2015. Consumers' obligations with respect to the Trust Originated Preferred Securities under the notes, the indenture under which the notes are issued, Consumers' guarantee of the Trust Originated Preferred Securities, and the declaration of trust constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. In September 1996, Consumers extended its nuclear fuel lease an additional year to November 1998. In October 1996, Consumers declared a $48 million common dividend to be paid in November 1996. 50 Consumers Power Company Management's Discussion and Analysis This MD&A should be read along with the MD&A in Consumers' 1995 Form 10-K. This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this Form 10-Q that are not historical facts, are forward-looking and, accordingly, involve estimates, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this Form 10-Q, the Forward-Looking Information section of this MD&A indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Consolidated Earnings for the Periods Ended September 30, 1996 and 1995 In Millions Consolidated Earnings at September 30 1996 1995 Change Quarter $ 60 $ 56 $ 4 Nine months 203 181 22 Twelve months 249 217 32 The earnings in each period in 1996 reflect the favorable impact of an electric rate increase received in February 1996. The nine-month and twelve-month periods in 1996 reflect increased electric sales, gas deliveries, and revenues from gas loaning activities. In addition, other operating income increased for all periods in 1996 due to a FERC-ordered refund received by the MCV Partnership from a gas pipeline supplier. The FERC Order required combining the capital cost of common-use facility additions with the cost of existing common-use facilities for the purpose of determining the gas transportation rates to be charged to all system shippers, including the MCV Facility. As a result, in August 1996, the MCV Partnership recognized a $19 million reduction to fuel costs in its current operating results. This resulted in a $6 million earnings benefit in 1996 for Consumers. For further information, see the Electric and Gas Utility Results of Operations sections of this MD&A. Cash Position, Investing and Financing Cash from operations is derived from the sale and transportation of natural gas and the generation, transmission, and sale of electricity. Cash from operations totaled $458 million and $318 million for the first nine months of 1996 and 1995, respectively. The $140 million increase resulted from increased electricity sales and gas deliveries, lower cash losses associated with the PPA, and changes in the timing of cash payments related to Consumers' operations. Consumers uses its operating cash primarily to maintain and expand its electric and gas systems, retire portions of its long-term debt, and pay dividends. Investing Activities: Net cash used in investing activities totaled $359 million and $355 million for the first nine months of 1996 and 1995, respectively. Cash used for increased capital expenditures was largely offset by reduced costs to retire property. Financing Activities: Net cash used in financing activities totaled $101 million for the first nine months of 1996, compared with $17 million provided by financing activities for the corresponding period in 1995. The net increase of $118 million in cash used in 1996 reflects an additional $44 million in common dividends paid, the redemption of $36 million of maturing first mortgage bonds, and a net decrease of $136 million in cash received from short-term borrowings compared with 1995. These changes were partially offset by $97 million in proceeds from the sale of Trust Originated Preferred Securities (see Note 7) in 1996. In October 1996, Consumers declared a $48 million common dividend to be paid in November 1996. Consumers temporarily suspended its common dividends from mid-1995 until early 1996 to improve its capital structure. Other Investing and Financing Matters: Consumers has several available, unsecured, committed lines of credit totaling $145 million and a $425 million working capital facility. At September 30, 1996, Consumers had a total of $340 million outstanding under these facilities. In October 1996, Consumers received FERC authorization to issue up to $900 million of short-term securities through 1998. This is the same amount of short-term securities authorized through 1996. Consumers uses short-term borrowings to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. Consumers has an agreement permitting the sales of certain accounts receivable for up to $500 million. At September 30, 1996 and 1995, receivables sold totaled $210 million. In October 1996, Consumers requested FERC authorization to issue $500 million of long-term securities for refunding purposes. Also in October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. Electric Utility Results of Operations Electric Pretax Operating Income for the Periods Ended September 30, 1996 and 1995: In Millions Electric Pretax Operating Income at September 30 1996 1995 Change Quarter $ 126 $ 125 $ 1 Nine months 323 295 28 Twelve months 390 346 44 Electric pretax operating income in each period in 1996 reflects the favorable impact of an electric rate increase received in February 1996. The nine-month and twelve-month periods also reflect the benefit of increased sales and lower maintenance expenses. The increases in each period were partly offset by decreased revenues due to special contract discounts negotiated with large industrial customers and increased depreciation and operation expenses, and, for the nine-month and twelve- month periods, higher general taxes. The following table quantifies these impacts: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1996 compared 1996 compared 1996 compared with 1995 with 1995 with 1995 Sales (net of special contract discounts) $(12) $ (3) $11 Rate increases and other regulatory issues 13 32 32 Operations and maintenance - 8 12 General taxes and depreciation (1) (12) (19) Other 1 3 8 ----- --- --- Total change $ 1 $28 $44 ===== === === Electric Sales: Total electric sales increased for the quarter ended (2.7 percent), nine months ended (3.7 percent), and twelve months ended September 30, 1996 (3.4 percent) over the comparable 1995 periods. The table below reflects these electric kWh sales increases by class of customer for the various periods.
In Billions of kWh Electric Sales Quarter ended Sept. 30 Nine months ended Sept. 30 12 months ended Sept. 30 1996 1995 Var. 1996 1995 Var. 1996 1995 Var. Residential 2.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2 Commercial 2.7 2.7 - 7.5 7.3 0.2 9.8 9.5 0.3 Industrial 3.4 3.2 0.2 9.5 9.5 - 12.7 12.6 0.1 Other 0.9 0.6 0.3 2.5 1.8 0.7 3.2 2.6 0.6 --- --- --- ---- ---- --- ---- ---- --- Total sales 9.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2 === === === ==== ==== === ==== ==== ===
Power Costs: In Millions Power Costs at September 30 1996 1995 Change Quarter $ 282 $270 $ 12 Nine months 802 731 71 Twelve months 1,041 958 83 The increases in each period resulted primarily from greater power purchases from outside sources to meet increased sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW for 1996 and for each subsequent year through the termination of the PPA in 2025. In 1993, the MPSC issued the Settlement Order that has allowed Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. ABATE and the Attorney General had appealed the Settlement Order to the Court of Appeals. In March 1996, the Court of Appeals affirmed the Settlement Order. The market for the remaining 325 MW of contract capacity was assessed at the end of 1992. This assessment, along with the Settlement Order, resulted in Consumers recognizing a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Additional losses may occur if actual future experience materially differs from the 1992 estimates. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $28 million for the first nine months of 1996. Estimated after-tax cash underrecoveries and possible losses for 1996 and the next four years are shown in the table below. After-tax, In Millions 1996 1997 1998 1999 2000 Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7 Possible additional underrecoveries and losses (a) 20 22 72 72 74 (a) If unable to sell any capacity above the MPSC's 1993 authorized level. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that would potentially resolve several issues in three pending proceedings, including the electric rate case (discussed below) and cost recovery for the entire 325 MW of MCV Facility capacity above the MPSC's currently authorized 915 MW level. The total estimated cash underrecoveries are not expected to change under the settlement agreement as proposed, although the years in which they occur could vary from the schedule shown in the above table. Consumers does not anticipate the need for an additional loss to be recorded above the amount anticipated in 1992 if the settlement agreement is adopted as proposed. For further information regarding the proposed settlement agreement, see Note 3. In 1994 and 1995, Consumers terminated power purchase agreements with the developers of a proposed 65 MW coal-fired cogeneration facility and a proposed 44 MW wood and chipped-tire plant. To replace this capacity, 109 MW of less expensive contract capacity from the MCV Facility, which Consumers is currently not authorized to recover from retail customers, would be used. For further information, see Note 2. Electric Rate Proceedings: In early 1996, the MPSC granted Consumers authority to increase its annual electric retail rates by $46 million, in response to Consumers' 1994 request. This partial final order did not address cost recovery related to the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC stated that this matter would be addressed in connection with its consideration of the proposed settlement agreement discussed below. In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that, if approved by the MPSC, would resolve several outstanding regulatory issues. One of these issues, Consumers' electric rate case, was addressed, in part, by the order discussed above. If fully adopted, the settlement agreement would resolve Consumers' depreciation and special competitive service cases (discussed below) and cost recovery of the entire 325 MW of uncommitted MCV Facility capacity. Consumers expects a final order during the fourth quarter of 1996. For more information regarding the electric rate order and the proposed settlement agreement, see Note 3. In 1995, Consumers filed a request with the MPSC seeking approval to increase its traditional depreciation expense by $21 million and reallocate certain portions of its utility plant from production to transmission, resulting in a $28 million decrease in depreciation expense associated with this transfer. If the MPSC approves both aspects of the request, the net result will be a decrease in electric depreciation expense of $7 million for ratemaking purposes. The ALJ issued a proposal for decision in this case that recommended the MPSC reject Consumers' position regarding the reallocation of Consumers' depreciation reserve and plant investment. This case is currently part of the proposed settlement agreement. In the proposed settlement, the depreciation of the Palisades and Big Rock nuclear generating plants would be accelerated while overall depreciation rates would remain the same. Special Rates: Consumers currently has a request before the MPSC that would allow Consumers a certain level of rate-pricing flexibility to respond to customers' alternative energy options. This request has also been consolidated into the settlement proceeding discussed above. Electric Environmental Matters: The 1990 amendment of the 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 currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Final acid rain program nitrogen oxide regulations are expected to be issued in late 1996. Management believes that Consumers' annual operating costs will not be materially affected. Part 201 of the Michigan Natural Resources and Environmental Protection Act was substantially amended in 1995 and bears some similarities to Superfund. Consumers expects that it will ultimately incur costs at a number of sites. Consumers believes costs incurred for both investigation and required remedial actions are properly recoverable in rates. Consumers is a so-called "potentially responsible party" at several sites being administered under Superfund. Along with Consumers, there are numerous credit-worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 4. Nuclear Matters: In 1995, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report recognized improved performance at the plant, specifically in the areas of engineering and plant operations. In the report, the NRC noted areas that continue to require management's attention, but also recognized the development and implementation of plans for corrective action designed to address previously identified weak areas. The report noted that performance in the areas of maintenance and plant support was good and remained unchanged. Consumers' on-site storage pool for spent nuclear fuel at Palisades is at capacity. Consequently, Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Consumers does not plan to load or unload any casks before the end of 1996, including a cask in which a minor flaw has been detected. For further information, see Note 5. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated "pressurized thermal shock" events during its remaining license life. Analysis of data from testing of similar materials indicated that the Palisades reactor vessel can be safely operated through late 1999; however, an analysis that Consumers submitted to the NRC for review in April 1996 suggests that the reactor vessel could be safely operated beyond 1999 without annealing. Nevertheless, Consumers is currently developing a contingency plan to anneal the reactor vessel in 1998 at an estimated cost of $20 million to $30 million, which would likely allow for operation of the plant to the end of its license life in the year 2007 or beyond. Consumers cannot predict whether the NRC will concur with the April 1996 analysis or, if the NRC does concur, whether these analyses will result in a future decision to adopt or postpone annealing. Stray Voltage: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. At September 30, 1996, Consumers had 31 separate stray voltage lawsuits awaiting trial court action. Consumers believes that the resolution of these lawsuits will not have a material impact on its financial position, liquidity or results of operations. Gas Utility Results of Operations Gas Pretax Operating Income for the Periods Ended September 30, 1996 and 1995: In Millions Gas Pretax Operating Income (Loss) at September 30 1996 1995 Change Quarter $ (1) $ 2 $ (3) Nine months 112 110 2 Twelve months 153 139 14 The quarter ended September 30, 1996 reflects lower deliveries and higher operating costs. The nine-month and twelve-month periods ended in 1996 benefited from increased gas deliveries due to growth and colder weather, and revenues from gas loaning activities. During the comparable periods in 1995, a previously recorded gas contract contingency (see Note 3) was reversed, and operation, depreciation and general tax expenses were lower. The following table quantifies these impacts: In Millions Impact on Pretax Operating Income Quarter ended Nine months ended 12 months ended 1996 compared 1996 compared 1996 compared with 1995 with 1995 with 1995 Sales $ 1 $24 $50 Reversal of gas contingencies - (23) (23) Recovery of gas costs and other issues 2 3 3 Gas loaning activities - 7 7 Operations and maintenance (6) (5) (16) General taxes and depreciation - (4) (7) --- --- ---- Total change $(3) $ 2 $14 === === ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility, decreased for the quarter ended (5.1 percent), but increased for the nine months ended (8.9 percent), and twelve-months ended September 30, 1996 (14.2 percent) when compared with the corresponding 1995 periods. The increased deliveries reflect growth resulting from customer additions, conversions to natural gas from alternative fuels, continued strength in the Michigan economy and, for the nine months ended and twelve-months ended September 30, 1996, colder temperatures. Although the industrial sector, for the nine months ended September 30, 1996, accounted for approximately 20% of total deliveries, it contributed almost 40% of the weather-adjusted growth. The table below indicates total system deliveries and the impact of weather: In Bcf Gas Deliveries Nine months ended 12 months ended Sept. 30 Sept. 30 1996 1995 Var. 1996 1995 Var. Weather-adjusted deliveries 234.5 223.5 11.0 337.1 321.0 16.1 (variance reflects growth) Impact of weather 6.6 (2.1) 8.7 17.4 (10.5) 27.9 ----- ----- ---- ----- ------ ---- System deliveries excluding transport to MCV 241.1 221.4 19.7 354.5 310.5 44.0 Transport to MCV 48.6 39.9 8.7 62.4 58.2 4.2 ----- ----- ---- ----- ----- ---- Total system deliveries 289.7 261.3 28.4 416.9 368.7 48.2 ===== ===== ==== ===== ===== ==== Cost of Gas Sold: In Millions Cost of Gas Sold at September 30 1996 1995 Change Quarter $ 51 53 $ (2) Nine months 504 435 69 Twelve months 740 622 118 The increases for the nine-month and twelve-month periods were the result of increased sales and the reversal of a $23 million gas contract contingency during the first quarter of 1995. Gas Utility Issues Gas Rate Proceedings: In early 1996, the MPSC issued a final order in Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million annually. The MPSC order authorized an 11.6 percent return on common equity. Consumers filed a petition for rehearing with the MPSC, requesting reconsideration of certain issues. This petition was denied in June 1996 and the matter is now closed. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to bypass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In February 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC-authorized gas transportation rates must be borne by Consumers' shareholders. In March 1995, Consumers filed an appeal with the Court of Appeals claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Matters: In October 1995, the MPSC issued an order regarding a $44 million (excluding any interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order supports its position that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. Gas loaning activities are new transactions for Consumers. In that regard, an issue has arisen about whether revenue from these activities should be transferred to customers. Consumers strongly disagrees with this suggestion but is unable to predict the outcome of any regulatory proceeding where this issue has arisen. Gas Environmental Matters: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available to Consumers and its continued internal review of these former manufactured gas plant sites have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At September 30, 1996, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order, Consumers is deferring environmental clean-up costs and amortizing these costs over 10 years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. For further information regarding environmental matters, see Note 4. Forward-Looking Information Forward-looking information is included throughout this Form 10-Q. Consumers' material contingencies are also described in the Condensed Notes to Consolidated Financial Statements and should be read accordingly. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include prevailing governmental policies and regulatory actions (including those of the FERC and the MPSC) with respect to rates, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, operation and construction of natural gas pipeline and storage facilities, recovery of the cost of purchased power or natural gas, decommissioning costs, and present or prospective wholesale and retail competition, among others. The business and profitability of Consumers are also influenced by economic and geographic factors including political and economic risks, changes in environmental laws and policies, weather conditions, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy, inflation, capital market conditions, and the ability to secure agreement in pending negotiations, among other important factors. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Consumers. Capital Expenditures: Consumers estimates the following capital expenditures, including new lease commitments, by company and by business segment over the next three years: In Millions Years Ended December 31 1996 1997 1998 Consumers Construction $403 $344 $334 Nuclear fuel lease 34 4 27 Capital leases other than nuclear fuel 4 19 11 Michigan Gas Storage 9 3 3 ---- ---- ---- $450 $370 $375 ==== ==== ==== Electric utility operations (a) $315 $260 $275 Gas utility operations (a) 135 110 100 ---- ---- ---- $450 $370 $375 ==== ==== ==== (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. These estimates are prepared for planning purposes and are subject to revision. Electric Outlook, Sales and Competition: The Governor of the State of Michigan has requested that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry. In April 1996, the MPSC directed Consumers, Detroit Edison, and other electric utilities to file applications addressing the recommendation of the Michigan Jobs Commission to allow a choice of power suppliers for new industrial and commercial electric load. Consumers filed a proposed plan for open access transmission services, under which Consumers could meet new demand in its service area by delivering electricity from any supplier capable of providing power to Consumers' electric system, provided certain reciprocity and other conditions were met. Among the other conditions was a requirement that stranded costs would be fully recovered from existing customers. The Michigan Jobs Commission's recommendations also include related matters, such as the full recovery of utility stranded costs. No new legislation has been introduced. However, Consumers, Detroit Edison, and the Jobs Commission have continued to meet for the purpose of confirming the principles, such as full recovery of stranded costs in the event of expanded choice by retail customers, upon which a new regulatory and statutory framework for the electric utility business in Michigan would be based. Once established, those principles could in turn form the basis for definitive agreements, filings with the MPSC, and revised statutes. These parties are hopeful that the principles and definitive agreements would receive the support of other interested parties such as the MPSC staff. There can be no assurance that the necessary agreements will be reached, that regulatory approvals will be granted, and that necessary legislation will be passed, nor can a definitive timetable be established at this time for realization of these events. In April 1996, the FERC issued Orders 888 and 889, which require utilities to provide open access to the interstate transmission grid. Order 888 requires public utilities owning, controlling, or operating transmission lines in interstate commerce to file non-discriminatory open access tariffs that contain minimum terms and conditions of non-discriminatory service, allows utilities to charge their current conforming transmission rates or apply for new rates, and provides for the full recovery of stranded costs. Order 888 also requires power pools to restructure their ongoing operations and open up to non-utility members. Order 889 requires utilities to establish electronic systems to share information about available transmission capacity and to separate their wholesale power marketing and transmission operations functions by implementing standards of conduct. These Orders became effective in July 1996. In addition, the FERC issued a NOPR in April 1996 that proposes for consideration a new system for utilities to use in reserving capacity on their own and others' transmission lines. This would replace certain tariffs included in Order 888 with a capacity reservation tariff in which participants would reserve firm rights to transfer power between designated receipt and delivery points. Consumers is evaluating these developments and has not determined the full impact of the FERC's Orders on its financial position, liquidity or results of operations. In July 1996, Consumers filed an open access transmission tariff and conforming transmission rate change in response to Order 888. Consumers currently expects approximately 2 percent average annual growth in electric system sales over the next five years. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions, or the developing competitive market for electricity as discussed below. Consumers' retail service is affected by competition in several areas, including the installation of cogeneration or other self-generation facilities by Consumers' larger industrial customers; the formation of municipal utilities that would displace retail service by Consumers to an entire community; and competition from neighboring utilities that offer flexible rate arrangements designed to encourage movement of facilities or production to their service areas. Consumers continues to work toward retaining its current retail service customers. As part of an order issued in early 1996, the MPSC significantly reduced the rate subsidization of residential customers by industrial and large commercial customers. In addition, in an effort to meet the challenge of competition, Consumers has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors contract, Consumers will serve certain facilities at least five years and other facilities at least 10 years in exchange for discounted electric rates. Certain facilities will have the option of taking retail wheeling service (if available) after the first three years of the contract. The MPSC approved this contract in 1995, and has since approved long-term sales contracts with other major customers representing a substantial percentage of Consumers' industrial load deemed to have viable cogeneration alternatives. These orders have been appealed by the Attorney General. In addition to offering electric rates that are competitive with those of other energy providers, Consumers is pursuing numerous other strategies to retain its other large customers. These strategies include improving reliability, power quality and customer communications, and providing consulting services to help customers use energy efficiently. Consumers is also taking steps to prepare for a future environment in which open access is the predominant means by which large industrial and commercial customers provide for their power requirements. In 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. Consumers, ABATE and The Dow Chemical Company filed claims of appeal of the MPSC's retail wheeling orders. The Court of Appeals subsequently consolidated these appeals with those previously filed by Detroit Edison and the Attorney General. Consumers does not expect this short-term experiment to have a material impact on its financial position, liquidity or results of operations. In July 1996, an electric marketer filed applications with the MPSC for approval to sell electricity generated outside of Michigan to certain of Consumers' industrial customers. These customers purchase approximately 100 MW annually from Consumers. There is currently no MPSC-approved program of retail access that would allow the transactions requested by this electric marketer to take place. Consumers intends to vigorously oppose the creation of any such program before the MPSC and in the courts; however, Consumers cannot predict the ultimate outcome of this matter. SFAS 71 allows the deferral of certain costs and the recording of regulatory assets. Management has evaluated Consumers' current regulatory position and believes it continues to support the recognition of Consumers' electric- related regulatory assets. If changes in the industry were to lead to Consumers discontinuing the application of SFAS 71, for all or part of its business, Consumers might be required to write off the portion of any regulatory asset for which no regulatory assurance of recovery continued to exist. Consumers does not believe that there is any current evidence that supports the write-off of any of its electric-related regulatory assets. Gas Outlook, Competition and Deliveries: Consumers currently anticipates gas deliveries to grow approximately 2 percent per year (excluding transportation to the MCV Facility and off-system deliveries) over the next five years, assuming a steadily growing customer base. Additionally, Consumers has several strategies that 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. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption. In 1996, the Low Income Home Energy Assistance Program provided $58 million in heating assistance to Michigan households, with approximately 19 percent of funds going to Consumers' customers. Federal legislative approval provided Michigan residents with $55 million of funding for 1997. Consumers therefore does not anticipate a significant change in its revenues from this program in 1997. In October 1996, the MPSC issued an order requesting Consumers and other local distribution companies whose rates are regulated by the MPSC to develop pilot programs that would allow any customers to purchase gas from other suppliers and have the gas transported through local pipelines. These pilot programs, which are to be implemented in the second quarter of 1997, are intended to help the MPSC determine whether it is appropriate to allow all customers access to the competitive gas transportation market. Under SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its regulatory assets related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs. 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' Form 10-K for the year ended December 31, 1995, and in Forms 10-Q for the quarters ended March 31, 1996 and June 30, 1996. 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. MCV - RELATED PROCEEDINGS In March 1993, the MPSC approved, with modifications, a contested settlement agreement among Consumers, the MPSC staff and 10 independent cogenerators which resolved certain regulatory issues and allowed Consumers to recover from electric customers a substantial portion of the cost of 915 MW of contract capacity from the MCV Facility. After their requests for rehearing were denied by the MPSC, ABATE and the Attorney General appealed the orders approving the settlement to the Court of Appeals, which upheld the Commission's orders. In the meantime, the MPSC has been implementing the settlement in reconciliation cases for 1993, 1994 and subsequent years. As part of its decision in the 1993 PSCR reconciliation case issued in February 1995, the MPSC disallowed approximately 2.5% of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believed this was contrary to the terms of the Settlement Order and appealed the February 1995 order on this issue. The MCV Partnership and ABATE filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's order in all respects. This proceeding is now closed. STRAY VOLTAGE LAWSUITS Consumers has a number of lawsuits relating to so-called stray voltage, which results when low level electrical currents present in grounded electric systems are diverted from their intended path. At September 30, 1996, Consumers had 31 separate stray voltage cases awaiting action at the trial court level and 10 cases on appeal or involved in the post-trial process. MPSC CASE NO. U-10029 - INTRASTATE GAS SUPPLY In February 1993, the MPSC issued an order granting Consumers' request to lower the price to be paid an intrastate gas supplier, North Michigan, who then filed an appeal with the Court of Appeals. The Court of Appeals affirmed the MPSC order and denied North Michigan's motion for reconsideration. The Michigan Supreme Court denied North Michigan's application for leave to appeal the Court of Appeals' decision. In September 1996, North Michigan filed a petition for a writ of certiorari with the U.S. Supreme Court to review the Michigan Supreme Court's decision. The petition alleges that the procedures under Public Act 9 of the Michigan statutes, and Act 9 as applied and on its face, denied North Michigan its constitutional rights to due process of law. Collateral suits are still pending in the Court of Appeals. ENVIRONMENTAL MATTERS INDEPENDENT POWER PRODUCTION PROJECT In June 1996, CMS Generation Operating Company, a CMS Generation subsidiary, was informed by the U.S. Attorney's Office and the EPA of a criminal investigation involving alleged violations of RCRA and Superfund. These officials were investigating allegedly improper ash disposal that may have occurred during 1993 at a plant in California operated by CMS Generation Operating Company during the period in question. In October 1996, CMS Generation Operating Company and the officials investigating the matter signed a pretrial diversion agreement under which CMS Generation Operating Company agrees to pay an amount toward cleanup costs to the entity conducting the cleanup at the plant, and the U.S. Attorney's Office agrees that there will be no prosecution of CMS Generation Operating Company with respect to the matters alleged. Payment of restitution under the pretrial diversion agreement will not have a material adverse effect on the financial condition of CMS Energy. This matter is now closed as it relates to CMS Energy and its subsidiaries. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed Charges (15) - CMS Energy: Letter of Independent Public Accountant (27)(a) - CMS Energy: Financial Data Schedule (27)(b) - Consumers: Financial Data Schedule (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 June 30, 1996. 63 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. CMS ENERGY CORPORATION (Registrant) Date: November 12, 1996 By A M Wright Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS POWER COMPANY (Registrant) Date: November 12, 1996 By A M Wright Alan M. Wright Senior Vice President and Chief Financial Officer EX-12 2 RATIO OF EARNINGS TO FIXED CHARGES Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges (Millions of Dollars)
Nine Months Ended Years Ended December 31 Sept. 30, 1996 1995 1994 1993 1992 1991 (b) (c)(d) ---------------------------------------------------------------- Earnings as defined (a) - ----------------------- Net income $ 196 $ 204 $ 179 $ 155 $(297) $(262) Income taxes 116 118 92 75 (146) (94) Exclude equity basis subsidiaries (61) (57) (18) (6) 10 10 Fixed charges as defined, adjusted to exclude capitalized interest of $5, $8, $6, $5, $3, and $5 million for the nine months ended September 30, 1996 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively 222 280 237 245 228 364 ------------------------------------------------------------ Earnings as defined $ 473 $ 545 $ 490 $ 469 $(205) $ 18 ============================================================ Fixed charges as defined (a) - ---------------------------- Interest on long-term debt $ 174 $ 224 $ 193 $ 204 $ 169 $ 274 Estimated interest portion of lease rental 7 9 9 11 16 17 Other interest charges 19 27 18 24 35 68 Preferred securities dividends and distributions 41 42 36 17 16 15 ------------------------------------------------------------ Fixed charges as defined $ 241 $ 302 $ 256 $ 256 $ 236 $ 374 ============================================================ Ratio of earnings to fixed charges 1.96 1.81 1.91 1.83 - - ============================================================ NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include a $520 million pretax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding these amounts. (c) Excludes an extraordinary after-tax loss of $14 million. (d) For the year ended December 31, 1991, fixed charges exceeded earnings by $356 million. Earnings as defined include pretax losses of $398 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear plant, $76 million for potential customer refunds and other reserves, and $51 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.45 excluding these amounts.
EX-15 3 ARTHUR ANDERSEN CONSENT Exhibit (15) ARTHUR ANDERSEN LLP To CMS Energy Corporation: We are aware that CMS Energy Corporation has incorporated by reference in its Registration Statements No. 33-29681, No. 33-47629, No. 33-57719, No. 33-57719-01, No. 33-64044, No. 33-60007, No. 33-61595, No. 33-62573 and No. 333-01261 its Form 10-Q for the quarter ended September 30, 1996, which includes our report dated November 11, 1996 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. ARTHUR ANDERSEN LLP Detroit, Michigan, November 11, 1996. EX-27 4 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 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 PER-BOOK 4,396 1,773 785 1,337 0 8,291 1 1,979 (354) 1,619 100 356 2,044 341 952 0 161 0 92 37 2,582 8,291 3,150 116 2,614 2,739 411 (9) 411 188 223 27 196 75 0 520 2.02 0 EPS for CMS Energy Common Stock $2.02 EPS for Class G Common Stock $1.38
EX-27 5 CONSUMERS FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000201533 CONSUMERS POWER COMPANY 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 PER-BOOK 4,396 726 579 1,197 0 6,898 841 504 326 1,701 100 356 1,473 340 403 0 60 0 89 37 2,369 6,898 2,740 125 2,272 2,406 334 0 343 113 230 27 203 114 0 458 0 0
EX-99 6 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 September 30, 1996 and 1995, and the related statements of income, common stockholders' equity and cash flows for the three-month, nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Consumers Gas Group as of December 31, 1995, and the related statements of income, common stockholders' equity and cash flows for the year then ended (not presented herein), and, in our report dated January 26, 1996, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Detroit, Michigan, November 11, 1996. 2 Consumers Gas Group Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1996 1995 1996 1995 1996 1995 In Millions, Except Per Share Amounts OPERATING REVENUE $ 123 $ 122 $ 880 $ 801 $1,274 $1,116 ------- ------- ------- ------- ------- ------- OPERATING EXPENSES Operation Cost of gas sold 51 53 504 435 740 622 Other 48 42 139 135 201 183 ------- ------- ------- ------- ------- ------- Total operation 99 95 643 570 941 805 Maintenance 9 9 27 27 39 37 Depreciation, depletion and amortization 9 10 60 57 86 82 General taxes 7 6 38 37 55 53 ------- ------- ------- ------- ------- ------- Total operating expenses 124 120 768 691 1,121 977 ------- ------- ------- ------- ------- ------- PRETAX OPERATING INCOME (LOSS) (1) 2 112 110 153 139 INCOME TAXES (3) (1) 35 35 48 44 ------- ------- ------- ------- ------- ------- NET OPERATING INCOME 2 3 77 75 105 95 ------- ------- ------- ------- ------- ------- OTHER INCOME (DEDUCTIONS) - - (2) - (2) (1) ------- ------- ------- ------- ------- ------- FIXED CHARGES Interest on long-term debt 7 8 22 23 29 31 Other interest 2 2 4 4 6 6 Capitalized interest - (1) - (1) - (1) Preferred dividends 2 2 5 5 6 6 ------- ------- ------- ------- ------- ------- Net fixed charges 11 11 31 31 41 42 ------- ------- ------- ------- ------- ------- NET INCOME (LOSS) $ (9) $ (8) $ 44 $ 44 $ 62 $ 52 ======= ======= ======= ======= ======= ======= NET INCOME (LOSS) ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS THROUGH RETAINED INTEREST $ (6) $ (7) $ 34 $ 45 $ 48 $ 53 ======= ======= ======= ======= ======= ======= NET INCOME (LOSS) ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ (3) $ (1) $ 10 $ (1) $ 14 $ (1) ======= ======= ======= ======= ======= ======= AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 7 8 7 8 7 ======= ======= ======= ======= ======= ======= EARNINGS (LOSS) PER AVERAGE CLASS G COMMON SHARE $ (.28) $ (.17) $ 1.38 $ (.17) $ 1.92 $ (.17) ======= ======= ======= ======= ======= ======= DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .295 $ .28 $ .855 $ .28 $ 1.135 $ .28 ======= ======= ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3 Consumers Gas Group Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 September 30 1996 1995 1996 1995 In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 44 $ 44 $ 62 $ 52 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 60 57 86 82 Capital lease and other amortization 3 3 5 4 Deferred income taxes and investment tax credit 10 19 4 17 Other 1 1 1 1 Changes in other assets and liabilities (39) (59) 36 (53) ------ ------ ------ ------ Net cash provided by operating activities 79 65 194 103 ------ ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (94) (77) (141) (124) Cost to retire property, net (7) (6) (11) (9) Other 1 1 2 2 ------ ------ ------ ------ Net cash used in investing activities (100) (82) (150) (131) ------ ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable, net 48 59 (5) 77 Proceeds from long-term note 22 - 22 - Contribution from CMS Energy stockholders 3 9 12 9 Payment of common stock dividends (27) (49) (36) (65) Retirement of bonds and other long-term debt (8) (2) (14) (3) Payment of capital lease obligations (3) (2) (6) (3) Repayment of bank loans - - - (76) Proceeds from bank loans - - - 88 ------ ------ ------ ------ Net cash provided by (used in) financing activities 35 15 (27) 27 ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 14 (2) 17 (1) CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 5 4 2 3 ------ ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 19 $ 2 $ 19 $ 2 ====== ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4 Consumers Gas Group Balance Sheets
September 30 September 30 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions ASSETS PLANT (At original cost) Plant $2,268 $2,169 $2,132 Less accumulated depreciation, depletion and amortization 1,232 1,179 1,164 ------ ------ ------ 1,036 990 968 Construction work-in-progress 53 55 48 ------ ------ ------ 1,089 1,045 1,016 ------ ------ ------ CURRENT ASSETS Cash and temporary cash investments at cost, which approximates market 19 5 2 Accounts receivable and accrued revenue, less allowances of $1, $2 and $2, respectively (Note 6) 39 99 49 Inventories at average cost Gas in underground storage 250 184 263 Materials and supplies 9 10 10 Trunkline settlement 30 30 30 Deferred income taxes 7 9 1 Prepayments and other 22 49 22 ------ ------ ------ 376 386 377 ------ ------ ------ NON-CURRENT ASSETS Postretirement benefits 156 161 160 Deferred income taxes 14 14 7 Trunkline settlement 2 25 33 Other 58 59 65 ------ ------ ------ 230 259 265 ------ ------ ------ TOTAL ASSETS $1,695 $1,690 $1,658 ====== ====== ======
5
September 30 September 30 1996 December 31 1995 (Unaudited) 1995 (Unaudited) In Millions STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholders' equity $ 359 $ 339 $ 321 Preferred stock 78 78 78 Long-term debt 423 411 417 Non-current portion of capital leases 18 20 16 ------ ------ ------ 878 848 832 ------ ------ ------ CURRENT LIABILITIES Current portion of long-term debt and capital leases 24 23 21 Notes payable 153 105 158 Accounts payable 69 79 56 Trunkline settlement 30 30 30 Accrued taxes 27 66 22 Accrued refunds 22 20 30 Accrued interest 6 7 7 Other 44 52 40 ------ ------ ------ 375 382 364 ------ ------ ------ NON-CURRENT LIABILITIES Postretirement benefits 174 175 177 Regulatory liabilities for income taxes, net 171 162 153 Deferred investment tax credit 27 28 29 Trunkline settlement 2 25 33 Other 68 70 70 ------ ------ ------ 442 460 462 ------ ------ ------ COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,695 $1,690 $1,658 ====== ====== ====== THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6 Consumers Gas Group Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1996 1995 1996 1995 1996 1995 In Millions COMMON STOCK At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184 ------- ------- ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 128 107 125 107 116 107 Stockholder's contribution - 9 3 9 12 9 ------- ------- ------- ------- ------- ------- At end of period 128 116 128 116 128 116 ------- ------- ------- ------- ------- ------- RETAINED EARNINGS At beginning of period 65 38 30 26 21 34 Net income (loss) (9) (8) 44 44 62 52 Common stock dividends declared (9) (9) (27) (49) (36) (65) ------- ------- ------- ------- ------- ------- At end of period 47 21 47 21 47 21 ------- ------- ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 359 $ 321 $ 359 $ 321 $ 359 $ 321 ======= ======= ======= ======= ======= ======= THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7 Consumers Gas Group Condensed Notes to Financial Statements 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the business of CMS Energy, see the Notes to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common Stock. This class of common stock reflects the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). For further information regarding Class G Common Stock, see Note 8 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. These financial statements and their related notes should be read along with the financial statements and notes contained in the 1995 Form 10-K of CMS Energy that includes the Report of Independent Public Accountants, included and incorporated by reference herein. 2: Earnings Per Share and Dividends Earnings (loss) per share for the periods ended September 30, 1996 reflect the performance of Consumers Gas Group. Loss per share for the periods ended September 30, 1995 reflects the performance of Consumers Gas Group since initial issuance of Class G Common Stock in the third quarter of 1995. The earnings (loss) attributable to Class G Common Stock and the related amounts per share are computed by considering the weighted-average number of shares of Class G Common Stock outstanding. Earnings (loss) attributable to outstanding Class G Common Stock are equal to Consumers Gas Group's net income (loss) multiplied by a fraction; the numerator is the weighted-average number of Outstanding Shares during the period, and the denominator is the weighted-average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per-share basis for the nine months ended September 30, 1996 are based on 23.67 percent of the earnings of Consumers Gas Group. The seasonal loss attributable to Class G Common Stock on a per-share basis for the periods ended September 30, 1995 is based on 23.17 percent of the loss of Consumers Gas Group. For purpose of analysis, following are pro forma data for the nine months ended September 30, 1995 and the year ended December 31, 1995, which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to Consumers Gas Group) on January 1, 1994, and actual data for the nine months ended September 30, 1996. In Millions, Except Per Share Amounts Actual Pro Forma Pro Forma Nine Months Ended Nine Months Ended Year Ended September 30, September 30, December 31, 1996 1995 1995 Consumers Gas Group net income $ 44 $ 44 $ 62 Net income attributable to CMS Energy Common Stock through Retained Interest $ 34 $ 34 $ 47 Net income attributable to outstanding Class G Common Stock $ 10 $ 10 $ 15 Average shares outstanding of Class G Common Stock 7.695 7.521 7.536 Earnings per share attributable to outstanding Class G Common Stock $1.38 $1.38 $1.93 The portion of Consumers' common dividends attributed to Consumers Gas Group, for periods prior to the July 1995 issuance of Class G Common Stock, have been reflected in the financial statements. These dividend amounts were allocated based on the ratio of Consumers Gas Group's net income to Consumers' consolidated net income after dividends on preferred stock. This ratio was then applied to Consumers' total dividend payments for these periods. Dividends declared on Class G Common Stock following the issuance are also reflected in the financial statements. In July and October 1995 and January and April 1996, the Board of Directors declared quarterly dividends of $.28 per share on Class G Common Stock. In July and October 1996, the Board of Directors declared quarterly dividends of $.295 per share on Class G Common Stock. 3: Rate Matters For information regarding rate matters directly affecting Consumers Gas Group, see the Gas Rates and GCR Matters discussions in Note 3 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 4: Commitments and Contingencies Capital Expenditures: Consumers Gas Group estimates capital expenditures, including new lease commitments, of $135 million for 1996, $110 million for 1997, and $100 million for 1998. These estimates include an attributed portion of Consumers' anticipated capital expenditures for common plant and equipment. For further information regarding commitments and contingencies directly affecting Consumers Gas Group (including those involving former manufactured gas plant sites), see the Environmental Matters and Other discussions in Note 4 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 5: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Consumers Gas Group's other cash flow activities and non-cash investing and financing activities for the periods ended September 30 were: In Millions Nine Months Ended Twelve Months Ended 1996 1995 1996 1995 Cash transactions Interest paid (net of amounts capitalized) $25 $26 $34 $33 Income taxes paid (net of refunds) 29 27 27 40 Non-cash transactions Assets placed under capital lease $ 1 $ 1 $ 2 $ 3 Capital leases refinanced - - 9 - 6: Short-Term and Long-Term Financings Consumers' short-term and long-term financings are discussed in Note 7 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. Consumers generally manages its short-term financings on a centralized consolidated basis. The portion of receivables sold attributable to Consumers Gas Group at September 30, 1996 and 1995 is estimated by management to be $28 million and $29 million, respectively. Accounts receivable and accrued revenue in the balance sheets have been reduced to reflect receivables sold. The portions of short-term debt and receivables sold attributed to Consumers Gas Group reflect the high utilization of short-term borrowing to finance the purchase of gas for storage in the summer and fall periods. Management believes these allocations are reasonable. 10 Consumers Gas Group Management's Discussion and Analysis In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common Stock. This class of common stock reflects the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). Accordingly, this MD&A should be read along with the MD&A in the 1995 Form 10-K of CMS Energy. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the businesses of CMS Energy, including the nature and issuance of Class G Common Stock, see the MD&A of CMS Energy included and incorporated by reference herein. Earnings for the Periods Ended September 30, 1996 and 1995 In Millions Earnings (loss) at September 30 1996 1995 Change Quarter $ (9) $ (8) $(1) Nine months 44 44 - Twelve months 62 52 10 The quarter reflects lower deliveries and higher operation, maintenance and general tax expenses. These impacts were partially offset by lower depreciation expenses. While the nine-month and twelve-month periods reflect revenues from gas loaning activities and higher gas deliveries, these benefits were partially offset by the reversal of a previously recorded gas contract contingency in 1995 and higher operation, depreciation and general tax expenses during 1996. Cash Position, Investing and Financing Consumers Gas Group's cash requirements are met by its operating and financing activities. Consumers Gas Group's cash from operations is derived mainly from Consumers' sale and transportation of natural gas. Cash from operations for the first nine months of 1996 and 1995 totaled $79 million and $65 million, respectively. The $14 million increase primarily reflects changes in the timing of cash payments related to Consumers Gas Group's operations. Consumers Gas Group uses its operating cash mainly to maintain and expand its gas utility transmission and distribution systems and to retire portions of its long-term debt and pay dividends. Investing Activities: Net cash used in investing activities totaled $100 million and $82 million for the first nine months of 1996 and 1995, respectively. The $18 million increase resulted from higher capital expenditures. Financing Activities: Net cash provided by financing activities in the first nine months of 1996 and 1995 totaled $35 million and $15 million, respectively. The $20 million increase reflects cash from the sale of Trust Originated Preferred Securities and a reduction in cash used to pay common stock dividends, partially offset by a net decrease in cash received from short-term borrowings. Other Investing and Financing Matters: Consumers has an agreement permitting the sale of certain accounts receivable for up to $500 million. At September 30, 1996, receivables sold totaled $210 million. Consumers Gas Group's attributed portion of these receivables sold totaled $28 million. For further information, see CMS Energy's MD&A included and incorporated by reference herein. Results of Operations For Consumers Gas Group's results of operations, see "Consumers Gas Group Results of Operations" in CMS Energy's MD&A included and incorporated by reference herein. Gas Issues For Consumers Gas Group's discussion of Gas Rate Proceedings, GCR Matters and Environmental Matters, see "Consumers Gas Group Issues" in CMS Energy's MD&A included and incorporated by reference herein. Forward-Looking Information For cautionary statements relating to Consumers Gas Group's forward- looking information, see "Forward-Looking Information" in CMS Energy's MD&A included and incorporated by reference herein. Capital Expenditures: CMS Energy estimates the following capital expenditures for Consumers Gas Group, including new lease commitments, over the next three years. In Millions Years Ended December 31 1996 1997 1998 Gas utility (a) $126 $107 $ 97 Michigan Gas Storage 9 3 3 ---- ---- ---- $135 $110 $100 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to Consumers' gas and electric utility businesses. These estimates are prepared for planning purposes and are subject to revision. Consumers Gas Group expects that cash from operations and the ability to access debt markets will provide necessary working capital and liquidity to fund future capital expenditures, required debt payments, and other cash needs in the foreseeable future. For further information regarding Consumers Gas Group's forward-looking information, see the Gas Outlook, Competition and Deliveries and Forward- Looking Information discussions in CMS Energy's MD&A included and incorporated by reference herein. -----END PRIVACY-ENHANCED MESSAGE-----