-----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, SxKhl6btVKH07uTMr1Pwo5NysbN7ZD8YgVa2/htgXEtNU4NCtmry9oT912rB7z03 ZrlXLXRcsr2XZoQUO+aQdQ== 0000201533-97-000023.txt : 19970515 0000201533-97-000023.hdr.sgml : 19970515 ACCESSION NUMBER: 0000201533-97-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS ENERGY 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: 97605529 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 517-788-0550 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS POWER CO DATE OF NAME CHANGE: 19920703 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: 97605530 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 March 31, 1997 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 ENERGY COMPANY 38-0442310 (A Michigan Corporation) 212 West Michigan Avenue Jackson, Michigan 49201 (517)788-0550 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of each of the issuer's classes of common stock at April 30, 1997: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 95,337,648 CMS Energy Class G Common Stock, no par value 7,965,981 Consumers Energy Company, $10 par value, privately held by CMS Energy 84,108,789 ========================================================================== 2 CMS Energy Corporation and Consumers Energy Company Quarterly reports on Form 10-Q to the Securities and Exchange Commission for the Quarter Ended March 31, 1997 This combined Form 10-Q is separately filed by CMS Energy Corporation and Consumers Energy Company. Information contained herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Consumers Energy 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 Management's Discussion and Analysis . . . . . . . . . . . . . . . . 6 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . 19 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 20 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . 21 Consolidated Statements of Common Stockholders' Equity . . . . . . . 23 Condensed Notes to Consolidated Financial Statements . . . . . . . . 24 Report of Independent Public Accountants . . . . . . . . . . . . . . 31 Consumers Energy Company Management's Discussion and Analysis . . . . . . . . . . . . . . . . 32 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . 43 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 44 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . 45 Consolidated Statements of Common Stockholder's Equity . . . . . . . 47 Condensed Notes to Consolidated Financial Statements . . . . . . . . 48 Report of Independent Public Accountants . . . . . . . . . . . . . . 53 PART II: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 54 Item 4. Submission of Matters to a Vote of Security Holders . . . . 54 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 55 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 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 bcf . . . . . . . . . . . . . Billion cubic feet Board of Directors. . . . . . Board of Directors of CMS Energy Btu . . . . . . . . . . . . . British thermal unit 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 Energy. . . . . . . . . . CMS Energy Corporation CMS Energy Common Stock . . . One of two classes of common stock of CMS Energy, par value $.01 per share CMS Gas Transmission. . . . . CMS Gas Transmission and Storage Company, a subsidiary of Enterprises CMS Generation. . . . . . . . CMS Generation Co., a subsidiary of Enterprises CMS Holdings. . . . . . . . . CMS Midland Holdings Company, a subsidiary of Consumers CMS Midland . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers CMS MST . . . . . . . . . . . CMS Marketing, Services and Trading Company, a subsidiary of Enterprises CMS NOMECO. . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of Enterprises Common Stock. . . . . . . . . CMS Energy Common Stock and Class G Common Stock Consumers . . . . . . . . . . Consumers Energy Company, a subsidiary of CMS Energy Consumers Gas Group . . . . . The gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Court of Appeals. . . . . . . Michigan Court of Appeals CTM . . . . . . . . . . . . . Centrales Termicas Mendoza, an indirect subsidiary of CMS Generation Detroit Edison. . . . . . . . The Detroit Edison Company Dow . . . . . . . . . . . . . The Dow Chemical Company EDEER S.A.. . . . . . . . . . Empresa Distribuidora de Electricidad de Entre Rios S. A., the electric distribution utility in Entre Rios Province, Argentina ENDESA. . . . . . . . . . . . Empresa Nacional de Electricidad S.A., Chile's largest electric generation and transmission company Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy EPS . . . . . . . . . . . . . Earnings per share FASB. . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . Gas cost recovery GTNs. . . . . . . . . . . . . CMS Energy General Term Notes(Registered Trademark), $250 million Series A, $125 million Series B and $150 million Series C GVK . . . . . . . . . . . . . GVK Industries, the developer of an independent power project in Jegurupadu, Andhra Pradesh, India Kwh . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison 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 MMBtu . . . . . . . . . . . . Million British thermal unit MPSC. . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . Megawatts 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 power plant, owned by Consumers PPA . . . . . . . . . . . . . The Power Purchase Agreement between Consumers and the MCV Partnership with a 35- year term commencing in March 1990 PSCR. . . . . . . . . . . . . Power supply cost recovery PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935 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 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 subsidiary of CMS NOMECO TGN . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a natural gas pipeline located in Argentina 5 CMS Energy Corporation Management's Discussion and Analysis The MD&A of this Form 10-Q should be read along with the MD&A in CMS Energy's 1996 Form 10-K. This report 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, 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; acquisition, development and operation of independent power production facilities; energy marketing, risk management and energy management services to large customers; storage, transmission and processing of natural gas; and international energy distribution. Consolidated Earnings In Millions, Except Per Share Amounts March 31 1997 1996 Change Three months ended Consolidated Net Income $ 84 $ 88 $ (4) Net Income Attributable to Common Stocks: CMS Energy 75 76 (1) Class G 9 12 (3) Earnings Per Average Common Share: CMS Energy .79 .83 (.04) Class G 1.18 1.50 (.32) Twelve months ended Consolidated Net Income $ 236 $ 206 $ 30 Net Income Attributable to Common Stocks: CMS Energy 225 191 34 Class G 11 15 (4) Earnings Per Average Common Share: CMS Energy 2.41 2.12 .29 Class G 1.53 1.90(a) (.37) (a) Class G shares were issued on July 21, 1995. Proforma earnings per share, assuming Class G shares were outstanding during the entire twelve month period ended March 31, 1996, would be $1.88. The decrease in consolidated net income for the 1997 first quarter compared to 1996 reflects decreased Consumers' gas deliveries due to warmer 1997 first quarter temperatures, decreased Consumers' gas wholesale services revenues in 1997, and decreased Consumers' electric revenues from special contract discounts negotiated with large industrial customers. Partially offsetting these decreases were the favorable impact of Consumers' electric rate increase received in February 1996 which benefited the entire first quarter of 1997 and improved operating results from the MCV Facility in which Consumers has a 49 percent interest. The increase in consolidated net income for the twelve months ended March 1997 compared to the 1996 period reflects the favorable impact of Consumers' electric rate increase received in February 1996, revenues from value- added services and Consumers' wholesale services activities, and improved operating results from the MCV Facility. In addition, other operating income increased during the twelve months ended March 1997 due to a FERC- ordered refund received by the MCV Partnership from a gas pipeline supplier. Consolidated net income was also affected by increased earnings from CMS Gas Transmission's 25 percent ownership interest in TGN and increased equity earnings resulting from the buy-out of a power purchase agreement from a partnership in which CMS Generation owns a 50 percent ownership interest. Partially offsetting these increases were decreased Consumers' electric revenues because of special contract discounts negotiated with large industrial customers and decreased Consumers' gas deliveries due to warmer temperatures during the first quarter of 1997. 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. In April 1997, Consumers declared a $70 million common dividend to be paid to CMS Energy in May 1997. Consumers had temporarily suspended its common dividends from mid-1995 until early 1996 to improve its capital structure. In the first quarter of 1997, Enterprises paid common dividends and other distributions of $21 million to CMS Energy. Operating Activities: 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 $379 million and $349 million for the first three months of 1997 and 1996, respectively. The $30 million increase resulted from changes in the timing of cash receipts and payments related to Consumers' operations, offset by reduced cash from Consumers' gas sales. CMS Energy uses its operating cash primarily to expand its international businesses, maintain and expand Consumers' electric and gas systems, retire portions of its long-term debt and pay dividends. Investing Activities: Net cash used in investing activities totaled $157 million and $225 million for the first three months of 1997 and 1996, respectively. The decrease of $68 million primarily reflects a decrease in investments in partnerships and unconsolidated subsidiaries, partially offset by an increase in capital expenditures during 1997. CMS Energy's 1997 expenditures for its utility and international businesses were $82 million and $62 million, respectively. Financing Activities: Net cash used in financing activities totaled $221 million and $138 million for the first three months of 1997 and 1996, respectively. The increase of $83 million in cash outflows primarily reflects the issuance of preferred securities in 1996. In 1996, CMS Energy filed shelf registration statements with the SEC for the issuance and sale of up to $125 million of Series B GTNs and $150 million Series C GTNs, with net proceeds to be used for general corporate purposes. During the first quarter of 1997 CMS Energy issued $22 million of Series B and $11 million of Series C GTNs. At March 31, 1997, CMS Energy had $250 million of Series A GTNs, $125 million of Series B GTNs and $11 million of Series C GTNs issued and outstanding with weighted-average interest rates of 7.7 percent, 7.9 percent and 7.9 percent, respectively. In 1996, CMS Energy filed a shelf registration statement with the SEC for the issuance and the sale of up to $500 million of senior and subordinated debt securities. In May 1997, CMS Energy issued $350 million of senior unsecured notes due May 15, 2002, at an interest rate of 8.125 percent. Proceeds were used in part to pay down debt with the remainder to fund CMS Energy's equity commitment in connection with the acquisition of a 50 percent interest in the 2,000 MW Loy Yang A electric generating plant and associated mine facilities in the State of Victoria, Australia. In the first quarter of 1997, CMS Energy declared and paid $26 million in cash dividends to holders of CMS Energy Common Stock and $2 million in cash dividends to holders of Class G Common Stock. In April 1997, 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 to be paid in May 1997. Other Investing and Financing Matters: CMS Energy has available unsecured, committed lines of credit totaling $155 million and a $450 million unsecured revolving credit facility. At March 31, 1997 and 1996, the total amount utilized under these facilities was $216 million and $242 million, respectively. In addition, CMS Energy currently has an unsecured $125 million term loan. CMS Energy is negotiating with a group of banks to replace the unsecured revolving credit facility and the term loan with a credit facility or facilities consisting of a combination of unsecured revolving credit and term loan tranches. CMS Energy expects that the aggregate borrowing capacity under the new facility or facilities may range from $725 million to $1.125 billion. CMS Energy expects to enter into such new credit facility or facilities in the second quarter of 1997. CMS Energy would also continue to have available the unsecured, committed lines of credit totaling $155 million. CMS Energy will continue to evaluate capital markets in 1997 as a source of financing its subsidiaries' investing activities and required debt retirements. Consumers has several unsecured, committed lines of credit totaling $120 million and a $425 million working capital facility available to meet short-term borrowing requirements to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. At March 31, 1997 and 1996, the total outstanding under these facilities was $88 million and $38 million, respectively. Consumers has FERC authorization to issue or guarantee up to $900 million of short-term securities through 1998 and to issue $500 million of long-term securities through November 1998 for refinancing or refunding purposes. An agreement is also in place permitting the sales of certain accounts receivable for up to $500 million. At March 31, 1997 and 1996, receivables sold totaled $398 million and $280 million, respectively. At March 31,1997, the book value per share of CMS Energy Common Stock and Class G Common Stock was $17.62 and $12.06, respectively. Consumers' Electric Business Unit Results of Operations Electric Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales (including special contract discounts) $(3) $(12) Rate increases and other regulatory issues 9 51 Operations and maintenance (3) (4) General taxes and depreciation (3) (11) ---- ---- Total change $ - $ 24 ==== ==== Electric Sales: Total electric sales remained unchanged for the first quarter while showing a 3.4 percent increase for the twelve months ended March 31, 1997 over the comparable 1996 period. The table below reflects electric kWh sales by class of customer for both periods: In Billions of kWh Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Residential 2.9 3.0 (0.1) 10.9 10.9 - Commercial 2.4 2.4 - 10.0 9.8 0.2 Industrial 3.0 2.9 0.1 13.0 12.6 0.4 Other 0.7 0.7 - 3.2 2.6 0.6 ---- ---- ---- ---- ---- ---- Total sales 9.0 9.0 - 37.1 35.9 1.2 ==== ==== ==== ==== ==== ==== Power Costs: In Millions March 31 1997 1996 Change Three months ended $ 282 $ 260 $ 22 Twelve months ended 1,110 1,003 107 The cost increases for the three month and twelve month periods ended March 31, 1997 reflect greater power purchases from outside sources to meet sales demand. Consumers' Electric Business Unit Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. The MPSC currently allows Consumers to recover substantially all payments for 915 MW of capacity purchased from the MCV Partnership. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership and that estimate remains unchanged. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries totaled $10 million for the first three months of 1997. For further information, see Note 2. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $28 $23 $22 $21 $20 The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded and Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. Electric Rate Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover the costs associated with the purchase of the additional 325 MW of MCV Facility capacity and to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. It also established a direct access program. Rehearing petitions have been ruled upon by the MPSC and resulted in no material changes to the relief granted Consumers. For further discussion on these issues, see Notes 2 and 3. Nuclear Matters: In January 1997, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report rated all areas as good, unchanged from the previous assessment. 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. Based on continuing analysis of data from testing of similar materials, in 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003, before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. Palisades' on-site storage pool for spent nuclear fuel is at capacity. Consequently, NRC-approved dry casks, which are steel and concrete vaults, are being used for temporary on-site storage. For further information, see Note 7. Electric Environmental Matters: The Clean Air Act contains significant environmental constraints under which utilities will operate in the future. While the Act's provisions will require that certain capital expenditures be made to comply with nitrogen oxide emission limits, generating units are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Management does not believe that these expenditures will have a material effect on annual operating costs. Under the Michigan Natural Resources and Environmental Protection Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, and believes that these costs are properly recoverable in rates under current ratemaking policies. Consumers is a so-called potentially responsible party at several sites being administered under Superfund. In addition, 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 the liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on CMS Energy's financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 6. Stray Voltage: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. As of April 30, 1997, 18 separate stray voltage lawsuits were awaiting trial court action, down from 22 lawsuits at year end 1996. CMS Energy believes that the resolution of the remaining lawsuits will not have a material impact on its financial position, liquidity or results of operations. Consumers Gas Group Results of Operations Gas Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales $ (17) $(19) Recovery of gas costs and other issues - 4 Gas wholesale services activities (1) 5 Operations and maintenance 4 (3) General taxes, depreciation and other (1) - ---- ---- Total change $(15) $(13) ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, decreased 7.8 percent and 4.2 percent for the quarter and twelve months ended March 31, 1997, respectively. The decreased deliveries for both periods reflect warmer temperatures during 1997. The table below indicates total deliveries and the impact of weather. In bcf Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Weather-adjusted deliveries (variance reflects growth) 146 145 1 335 332 3 Impact of weather and leap year (4) 9 (13) 5 23 (18) ---- ---- ---- ---- ---- ---- System deliveries excluding transport to MCV Partnership 142 154 (12) 340 355 (15) Transport to MCV Partnership 17 17 - 66 56 10 Other Transportation 9 14 (5) 24 24 - ---- ---- ---- ---- ---- ---- Total deliveries 168 185 (17) 430 435 (5) ==== ==== ==== ==== ===== ==== Cost of Gas Sold: In Millions March 31 1997 1996 Change Three months ended $314 $346 $(32) Twelve months ended 718 739 (21) The decreases for the three month and twelve month periods ended March 31, 1997 were the result of decreased sales reflecting warmer temperatures and an extra day for leap year in 1996. Consumers Gas Group Issues Gas Rate Proceedings: 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 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 an MPSC-authorized gas transportation rate must be borne by Consumers' shareholders. In 1995, Consumers filed an appeal with the Court of Appeals, which is still pending, claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Matters: In 1995, the MPSC issued an order regarding a $44 million (excluding 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 correctly concludes that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The ALJ issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. Consumers will continue to oppose this view before the MPSC. 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, and 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 1997 costs. At March 31, 1997, 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. For further information regarding environmental matters, see Note 6. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three months ended March 31, 1997 was the same as the comparable period in 1996, as a result of higher oil production volumes offset by lower oil and gas prices and gas volumes, and higher operating expenses. Pretax operating income for the twelve months ended March 31, 1997 increased $15 million over the twelve months ended March 31, 1996, primarily due to higher sales volumes and oil sales prices and income attributable to the acquisition of Terra. Capital Expenditures: Capital expenditures for the three months ended March 31, 1997 relate primarily to the development of existing oil and gas reserves. Independent Power Production Pretax Operating Income: Pretax operating income for the three months ended March 31, 1997 increased $4 million from the same period in 1996, primarily reflecting higher electricity sales by the Midland Cogeneration Venture, additional generating capacity and improved equity earnings. These increases were partially offset because the first quarter 1996 included a gain resulting from a lawsuit settlement. Pretax operating income for the twelve months ended March 31, 1997 increased $33 million from the same period in 1996, 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 in 1996 and increased operating income resulting from higher electricity sales by the MCV and a refund received by the MCV Partnership. Capital Expenditures and Other: In 1996, CMS Generation, through a subsidiary, 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. Also in 1996, CMS Generation increased its ownership interest in the project from 39 percent to 100 percent by purchasing the remaining 61 percent from a consortium of Argentine investors. The Overseas Private Investment Corporation is expected to provide $75 million in non-recourse project financing for the facility. In 1996, CMS Generation, through a subsidiary, and an affiliate of ABB signed an agreement with Morocco's national utility, Office National de l'Electricite, for the privatization, expansion and operation of the 1,320 MW Jorf Lasfar coal-fueled power plant located southwest of Casablanca. The agreement covers the 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 plant. CMS Energy posted a $30 million conditional letter of credit to ensure closing under the agreement, which is targeted for the third quarter of 1997 and includes over $1 billion in debt financing. Construction of the second two units will begin shortly thereafter. In 1996, CMS Generation, through a subsidiary, increased its ownership interest in CTM to 81 percent. In 1996, CTM began a project to repower its electric generating plant in Western Argentina's Mendoza Province. CMS Generation currently plans to invest $185 million to refurbish and repower the facility resulting in an increase in the plant's available net output from 243 MW to 506 MW. Capital markets financing of $85 million is targeted for the first half of 1997. In the first quarter of 1997, the plant built by GVK began generating electricity from all three of its combustion turbines. CMS Generation holds a 25.25 percent interest in GVK and operates the 235 MW plant. Construction is continuing on the steam turbine of the combined-cycle facility which has an estimated total cost of $260 million. GVK has received a Government of India counter-guarantee of performance of certain obligations under the power purchase agreement by the Andhra Pradesh State Electricity Board and has completed financing in April 1997. As of January 1, 1997, Jamaica Private Power Company achieved commercial operation of the two diesel generators at its 60 MW diesel-fired independent power project in Kingston, Jamaica. CMS Generation, through a subsidiary, holds a 44 percent interest in Jamaica Private Power Company and a 60 percent interest in Private Power Operators Limited, which will operate the plant. Construction on the balance of the plant, including the 4 MW waste heat steam turbine, will be complete in the first half of 1997. In the first quarter of 1997, CMS Generation, through a subsidiary, acquired a 29.5 percent interest in a 48 MW fossil-fueled plant in Cavite, on the island of Luzon in the Philippines. CMS Generation also negotiated the purchase of a further interest which could take its ultimate interest to 44 percent, and has plans to increase the plant's generating capacity to 63 MW in 1998. In March 1997, CMS Generation formed a joint venture with the Thailand- based EGCO Engineering & Services Company Limited, an affiliate of Electric Generating Authority of Thailand, the country's national electric utility, to operate and maintain private power plants in Thailand. The joint venture, known as CMESCO, signed a contract with Thailand's Amata- EGCO Power Limited, to operate and maintain a 170 MW gas-fired cogeneration plant in July 1997. The combined-cycle power plant is now under construction, with completion scheduled in 1998. In May 1997, a consortium comprised of subsidiaries of CMS Generation and NRG Energy, Inc. as well as Horizon Energy Australia Investments acquired the Loy Yang A power facility in a privatization by the Australian State of Victoria. Loy Yang A is Victoria's largest electric generating plant and Australia's lowest-cost electric generating facility. The consortium purchased the 2,000 MW, brown coal-fueled Loy Yang A plant and an associated coal mine supplying both the Loy Yang A and B plants at a purchase price of $3.7 billion. Seventy seven percent of this acquisition cost was project financed by a consortium of banks with the remaining twenty three percent of the payment to the government comprised of partner equity. CMS Generation holds a fifty percent ownership interest and NRG Energy and Horizon Energy Australia Investments each hold twenty five percent. Certain operating and management services for Loy Yang A will be provided by the CMS Generation and NRG Energy subsidiaries and their affiliates. Natural Gas Transmission, Storage and Processing Pretax Operating Income: Pretax operating income for the three months ended March 31, 1997 increased $3 million from the same period in 1996, primarily reflecting new pipeline, storage and processing investments, continued growth of existing projects and a gain on the sale of a portion of the Ames gas gathering system. Pretax operating income for the twelve months ended March 31, 1997 increased $13 million from the twelve months ended March 31, 1996, reflecting new pipeline, storage and processing investments, primarily TGN, the continued growth of existing projects, and the exchange of ownership interests in the Moss Bluff and Grands Lacs partnerships. Capital Expenditures and Other: In the first quarter of 1997, CMS Gas Transmission and ENDESA, Chile's largest electricity generation and transmission company, signed an agreement to develop an integrated $820 million project to construct a 930 kilometer pipeline that will transport natural gas across the Andes Mountains from northern Argentina to markets in northern Chile. A 720 MW gas-fueled, combined-cycle generating plant is planned to be built in two stages at the end of the pipeline in Chile by a consortium including Enterprises. Construction is scheduled to begin in 1997, with gas transportation and plant operations expected in 1999. In the first quarter of 1997, CMS Gas Transmission with Columbia Gas System, Inc., MCN Energy Group and Westcoast Energy announced a proposed $600 million pipeline project to carry up to 650 million cubic feet per day of natural gas to New York and other eastern markets. The Millennium Pipeline would provide a new, 380-mile link through a connection with the Great Lakes and TransCanada pipeline systems, flowing western Canadian and U.S. gas to northeastern markets. Construction is scheduled to begin mid- 1999, and gas deliveries are planned to begin in time for the 1999 winter heating season. In May 1997, CMS Gas Transmission announced it will acquire the 420- kilometer (260-mile) Western Australia Natural Gas (WANG) Pipeline near Perth, Australia. CMS Gas Transmission agreed to purchase the West Australian Petroleum-operated assets from Chevron, Texaco, Mobil and Shell. Included in the acquisition are 30 bcf of proven natural gas reserves with two gas production licenses and an associated gas storage facility in pre-operational testing. Terms of the purchase were not disclosed. Marketing, Services and Trading CMS MST was formed as part of CMS Energy's expansion and reorganization of its energy marketing business. This restructuring is expected to significantly improve CMS Energy's competitive position in the energy marketplace throughout the U.S. and abroad. CMS MST will provide gas, electric, oil and coal marketing, risk management and energy management services throughout the United States and eventually worldwide. Gas marketed for end users was 33 bcf and 29 bcf for the first quarter of 1997 and 1996, respectively. International Energy Distribution Capital Expenditures: In 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 S.A. for $160 million. EDEER S.A. serves over 200,000 customers, primarily residential and commercial, in a 55,000 square kilometer area. In 1996, the Entre Rios Province transferred ownership and operating management of EDEER S.A. to the consortium. Forward-Looking Information Forward-looking information is included throughout this Form 10-Q. 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 domestic and foreign 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 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 the following capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total $3.2 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 1997 as a potential source of financing its subsidiaries' investing activities. CMS Energy estimates capital expenditures by business segment over the next three years as follows: In Millions Years Ended December 31 1997 1998 1999 Consumers electric operations (a) $ 270 $ 277 $ 257 Consumers gas operations (a) 115 103 103 Oil and gas exploration and production 135 150 165 Independent power production (b) 698 173 117 Natural gas transmission and storage 110 100 75 International energy distribution 120 100 100 Marketing, services and trading 17 7 3 ------ ------ ------ $1,465 $ 910 $ 820 ====== ====== ====== (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas businesses. (b) The 1997 amount includes approximately $500 million for the acquisition of a 50 percent ownership interest in the privatization of the Loy Yang A electric generating plant in Australia. CMS Energy currently plans to invest $450 million from 1997 to 1999 in its oil and gas exploration and production operations, primarily in North and South America, offshore West Africa and North Africa. CMS Energy also plans to invest $988 million in its independent power production operations from 1997 to 1999 to pursue acquisitions and development of electric generating plants in the United States, Latin America, Southern Asia, Australia, the Pacific Rim region and North Africa. Investments totaling $285 million from 1997 to 1999, relating to non-utility gas operations, are planned to continue development of natural gas storage, gathering and pipeline operations both domestically and internationally. CMS Energy plans to invest $320 million from 1997 to 1999 in its international energy distribution operations related to international expansion. CMS MST plans to invest $27 million from 1997 to 1999 to provide gas, electric, oil and coal marketing, risk management and energy management services throughout the United States and eventually worldwide. These estimates are prepared for planning purposes and are subject to revision. Consumers Electric Outlook: Consumers expects average annual growth of two to three percent per year in electric system sales over the next five years, based on the current industry configuration in Michigan. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions, or the developing competitive market for electricity. Consumers continues to work toward retaining its current retail service customers by offering electric rates that are competitive with those of other energy providers, and by improving reliability and customer communications. Consumers is also planning for a future environment in which open access is the predominant means by which retail service customers obtain their power requirements. Consumers' electric retail service is affected by competition in several areas, including the potential installation of cogeneration or other self- generation facilities by larger industrial customers; the formation of municipal utilities that would displace retail service to an entire community; competition from other utilities that offer flexible rate arrangements designed to encourage movement of facilities or production to their service areas; economic development competition between utilities; MPSC direct access programs and potential electric industry restructuring caused by regulatory decisions and new state or federal legislation. In 1996, the MPSC reduced the rate subsidization of residential customers by large industrial and commercial customers. In addition, in an effort to meet the challenge of competition, Consumers contracted with some of its largest industrial customers to serve certain facilities a number of years into the future. These contracts have been approved or are under review at the MPSC. FERC issued Orders 888 and 889, as amended on rehearing, requiring utilities to provide open access to the interstate transmission grid for wholesale transactions. Several FERC requirements have been implemented. However, one unresolved issue concerns the Michigan Electric Power Coordination Center Pool, currently operated jointly by Consumers and Detroit Edison. Consumers proposes to maintain the benefits of the pool, while Detroit Edison seeks to terminate the power pool agreement. The FERC is expected to rule on this issue in 1997. In 1996, the MPSC staff recommended: 1) a program of direct access to alternative sources of energy supply by retail electric customers starting in 1997 and phasing in all customers through 2004; and 2) that Consumers recover its transition costs through either a transition charge over a ten-year period ending 2007 only to customers electing direct access or, if the utility has been enabled to issue rate reduction bonds, through a securitization charge to all customers over the term of the bonds. Consumers would continue to provide delivery service to direct access customers. In March 1997, Consumers filed data with the MPSC which estimated that the portion of Consumers' transition costs which would be recovered in the transition charge to direct access customers through 2007 would be $1.8 billion. Direct access implementation costs aggregating an additional $200 million would also be recovered by a separate charge to direct access customers. Alternatively, if the securitization approach is pursued, the resulting securitization charge would be paid by all Consumers customers to service $4 billion of rate reduction bonds. The $4 billion in rate reduction bonds includes the $1.8 billion of costs that would otherwise have been recovered in the transition charge to direct access customers, as well as the costs that would otherwise have been recovered from customers on bundled rates prior to getting choice. Consumers' data indicate that the securitization approach results in more than a $200 million annual savings to customers compared to the rates they would pay under the MPSC staff program in the absence of securitization because the assumed 15-year repayment period of the bonds allows the cost reimbursement by the customer to be spread out over a longer period than without securitization and because securitization allows securitized costs to be financed at a lower rate. Several of the elements of electric utility restructuring will need to be addressed in legislation, including assurance of full transition cost recovery, securitization of rate reduction bonds and generation deregulation. Consumers currently expects that electric utility restructuring will occur in a manner consistent with the MPSC staff report, but cannot predict with certainty the timing of actual implementation, the extent of customer choice, or resultant financial impacts. Refer to the Consumers 1996 Form 10-K for further details. Consumers currently applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, Consumers recorded regulatory assets and liabilities related to its generation, transmission and distribution operations in its financial statements. If rate recovery of generation-related costs becomes unlikely or uncertain, whether due to competition or regulatory action, this accounting standard may no longer apply to Consumers' generation segment. Such a change could result in either full recovery of generation-related regulatory assets (net of related regulatory liabilities) or a loss, depending on whether Consumers' regulators adopt a transition mechanism for the recovery of all or a portion of these net regulatory assets. Based on a current evaluation of the various factors and conditions that are expected to affect future cost recovery, Consumers believes even if it was to discontinue application of SFAS 71 for the generation segment of its business, that its regulatory assets, including those related to generation, are probable of future recovery. Consumers Gas Group Outlook: Consumers currently anticipates gas deliveries (excluding transportation to the MCV Facility and off-system deliveries) to grow on an average annual basis between one and two percent over the next five years based primarily on a steadily growing customer base. Consumers has several strategies to increase load requirements. 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. Consumers is also offering a variety of energy-related services to its customers focused upon appliance maintenance, home safety, and home security. In 1996 the MPSC issued an order requesting Consumers and other local gas distribution companies, whose rates are regulated by the MPSC, to develop pilot programs that would allow customers to purchase gas directly from other suppliers and have the gas transported through local pipelines. These pilot programs are to last for two years and are intended to help the MPSC determine whether it is appropriate to extend this option to all retail customers. In December 1996, the MPSC approved Consumers' pilot program for 40,000 customers in Bay County. The first customer solicitation ended in March 1997 and resulted in one percent of the customers choosing an alternative supplier for the next year. Another solicitation period will begin in late 1997 for the period April 1998 - March 1999; expected customer interest is unknown at this time. Based on a regulated utility accounting standard, SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its regulatory assets related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs. Other New Accounting Standards: In 1997, the FASB issued SFAS 128, Earnings per Share, which is effective for year end 1997 financial statements. The Earnings per Share statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic EPS excludes such dilution. The company is in the process of quantifying the effect of applying the statement. 19 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions, Except Per Share Amounts Operating Revenue Electric utility $ 620 $ 591 $2,474 $2,328 Gas utility 498 548 1,231 1,261 Oil and gas exploration and production 35 31 134 107 Independent power production 29 27 143 100 Natural gas transmission, storage and processing 26 12 76 32 Marketing, services and trading 99 71 286 209 Other 6 3 19 19 ------ ------ ------ ------ 1,313 1,283 4,363 4,056 ------ ------ ------ ------ Operating Expenses Operation Fuel for electric generation 69 73 292 289 Purchased power - related parties 151 140 600 507 Purchased and interchange power 62 47 218 207 Cost of gas sold 416 411 1,002 927 Other 169 170 735 695 ------ ------ ------ ------ 867 841 2,847 2,625 Maintenance 41 40 179 180 Depreciation, depletion and amortization 131 124 448 426 General taxes 61 59 204 199 ------ ------ ------ ------ 1,100 1,064 3,678 3,430 ------ ------ ------ ------ Pretax Operating Income (Loss) Electric utility 106 106 412 388 Gas utility 78 93 143 156 Oil and gas exploration and production 9 9 39 24 Independent power production 10 6 72 39 Natural gas transmission, storage and processing 9 6 29 16 Marketing, services and trading 1 2 1 3 Other - (3) (11) - ------ ------ ------ ------ 213 219 685 626 ------ ------ ------ ------ Other Income (Deductions) Accretion income 2 3 9 11 Accretion expense (5) (7) (19) (30) Other, net 1 2 (1) 6 ------ ------ ------ ------ (2) (2) (11) (13) ------ ------ ------ ------ Fixed Charges Interest on long-term debt 60 57 233 225 Other interest 11 12 43 43 Capitalized interest (3) (2) (9) (9) Preferred dividends 7 7 28 28 Preferred securities distributions 2 1 8 1 ------ ------ ------ ------ 77 75 303 288 ------ ------ ------ ------ Income Before Income Taxes 134 142 371 325 Income Taxes 50 54 135 119 ------ ------ ------ ------ Consolidated Net Income $ 84 $ 88 $ 236 $ 206 ====== ====== ====== ====== Net Income Attributable to Common Stocks CMS Energy $ 75 $ 76 $ 225 $ 191 Class G $ 9 $ 12 $ 11 $ 15 ------ ----- ------ ----- Average Common Shares Outstanding CMS Energy 95 92 93 90 Class G 8 8 8 8 ------ ----- ------ ----- Earnings Per Average Common Share CMS Energy $ .79 $ .83 $ 2.41 $ 2.12 Class G $ 1.18 $ 1.50 $ 1.53 $ 1.90 ------ ----- ------ ----- Dividends Declared Per Common Share CMS Energy $ .27 $ .24 $ 1.05 $ .93 Class G $ .295 $ .28 $1.165 $ .84 ====== ===== ====== ===== The accompanying condensed notes are an integral part of these statements. /TABLE 20 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions Cash Flows from Operating Activities Consolidated net income $ 84 $ 88 $ 236 $ 206 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $13, $13, $48 and $51, respectively) 131 124 448 426 Capital lease and debt discount amortization 8 9 40 52 Deferred income taxes and investment tax credit 3 6 43 52 Accretion expense 5 7 19 30 Accretion income - abandoned Midland project (2) (3) (9) (11) Power purchases (15) (12) (66) (112) Undistributed earnings of related parties (13) (21) (56) (62) Other (6) 7 8 14 Changes in other assets and liabilities 184 144 28 106 ------ ------ ------ ------ Net cash provided by operating activities 379 349 691 701 ------ ------ ------ ------ Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (132) (110) (681) (514) Investments in nuclear decommissioning trust funds (13) (13) (48) (51) Investments in partnerships and unconsolidated subsidiaries (12) (71) (104) (301) Cost to retire property, net (4) (6) (28) (39) Acquisition of companies, net of cash acquired - (20) - (10) Deferred demand-side management costs - (2) (4) (10) Other (9) (3) - (12) Proceeds from sale of property 13 - 92 22 ------ ------ ------ ------ Net cash used in investing activities (157) (225) (773) (915) ------ ------ ------ ------ Cash Flows from Financing Activities Increase (decrease) in notes payable, net (245) (303) 50 (97) Payment of common stock dividends (28) (24) (107) (90) Repayment of bank loans (27) (246) (38) (255) Payment of capital lease obligations (8) (9) (38) (36) Retirement of bonds and other long-term debt - - (37) (33) Retirement of common stock - - (1) (1) Proceeds from bank loans, notes and bonds 70 339 164 464 Issuance of common stock 17 8 104 159 Proceeds from preferred securities - 97 - 97 ------ ------ ------ ------ Net cash provided by (used in) financing activities (221) (138) 97 208 ------ ------ ------ ------ Net Increase (Decrease) in Cash and Temporary Cash Investments 1 (14) 15 (6) Cash and Temporary Cash Investments, Beginning of Period 56 56 42 48 ------ ------ ------ ------ Cash and Temporary Cash Investments, End of Period $ 57 $ 42 $ 57 $ 42 ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
21 CMS Energy Corporation Consolidated Balance Sheets
ASSETS March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Plant and Property (At Cost) Electric $ 6,412 $ 6,333 $ 6,130 Gas 2,374 2,337 2,287 Oil and gas properties (full-cost method) 1,154 1,140 1,096 Other 95 94 86 -------- -------- -------- 10,035 9,904 9,599 Less accumulated depreciation, depletion and amortization 4,991 4,867 4,747 -------- -------- -------- 5,044 5,037 4,852 Construction work-in-progress 235 243 200 -------- -------- -------- 5,279 5,280 5,052 -------- -------- -------- Investments Independent power production 325 318 297 Natural gas transmission, storage and processing 235 233 235 First Midland Limited Partnership (Note 2) 235 232 226 Midland Cogeneration Venture Limited Partnership (Note 2) 140 134 104 Other 88 86 25 -------- -------- -------- 1,023 1,003 887 -------- -------- -------- Current Assets Cash and temporary cash investments at cost, which approximates market 57 56 42 Accounts receivable and accrued revenue, less allowances of $9, $10 and $3, respectively (Note 4) 301 373 356 Inventories at average cost Gas in underground storage 51 186 39 Materials and supplies 89 86 85 Generating plant fuel stock 44 30 16 Deferred income taxes 42 48 22 Prepayments and other 185 235 186 -------- -------- -------- 769 1,014 746 -------- -------- -------- Non-current Assets Postretirement benefits 427 435 458 Nuclear decommissioning trust funds 401 386 323 Abandoned Midland Project 108 113 126 Other 396 384 441 -------- -------- -------- 1,332 1,318 1,348 -------- -------- -------- Total Assets $ 8,403 $ 8,615 $ 8,033 ======== ======== ========
22
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Capitalization Common stockholders' equity $ 1,775 $ 1,702 $ 1,541 Preferred stock of subsidiary 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 100 100 Long-term debt 2,629 2,842 3,094 Non-current portion of capital leases 99 103 98 -------- -------- -------- 4,959 5,103 5,189 -------- -------- -------- Current Liabilities Current portion of long-term debt and capital leases 668 409 113 Notes payable 88 333 38 Accounts payable 323 348 267 Accrued taxes 228 262 223 Accounts payable - related parties 65 63 60 Accrued interest 49 47 49 Power purchases (Note 2) 47 47 90 Accrued refunds 6 8 28 Other 189 206 187 -------- -------- -------- 1,663 1,723 1,055 -------- -------- -------- Non-current Liabilities Deferred income taxes 689 698 638 Postretirement benefits 529 521 539 Power purchases (Note 2) 167 178 215 Deferred investment tax credit 158 161 168 Regulatory liabilities for income taxes, net 75 66 53 Other 163 165 176 -------- -------- -------- 1,781 1,789 1,789 -------- -------- -------- Commitments and Contingencies (Notes 2, 3, 6 and 7) Total Stockholders' Investment and Liabilities $ 8,403 $ 8,615 $ 8,033 ======== ======== ======== (a) As described in Note 4 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.
23 CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions Common Stock At beginning and end of period $ 1 $ 1 $ 1 $ 1 ------ ------ ------ ------ Other Paid-in Capital At beginning of period 2,045 1,951 1,959 1,734 Common stock reacquired - - (1) (1) Common stock issued: CMS Energy 16 7 99 100 Class G 1 1 5 125 Common stock reissued - - - 1 ------ ------ ------ ------ At end of period 2,062 1,959 2,062 1,959 ------ ------ ------ ------ Revaluation Capital At beginning of period (6) (8) (8) 1 Change in unrealized investment-gain (loss) - - 2 (9) ------ ------ ------ ------ At end of period (6) (8) (6) (8) ------ ------ ------ ------ Retained Earnings (Deficit) At beginning of period (338) (475) (411) (527) Consolidated net income 84 88 236 206 Common stock dividends declared: CMS Energy (26) (22) (98) (84) Class G (2) (2) (9) (6) ------ ------ ------ ------ At end of period (282) (411) (282) (411) ------ ------ ------ ------ Total Common Stockholders' Equity $1,775 $1,541 $1,775 $1,541 ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
24 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 1996 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants. Certain prior year amounts have been reclassified to conform with the presentation in the current year. 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; acquisition, development and operation of independent power production facilities; energy marketing, risk management and energy management services to large customers; storage, transmission and processing of natural gas; and international energy 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 and twelve month periods ended March 31, 1997, undistributed equity earnings were $13 million and $56 million, respectively, and $21 million and $62 million for the three and twelve months periods ended March 31, 1996. 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 Dow. 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. Summarized Statements of Income for CMS Midland and CMS Holdings: In Millions Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 Pretax operating income $8 $2 $46 $27 Income taxes and other 2 - 14 7 --- --- --- --- Net income $6 $2 $32 $20 === === === === Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. 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. Consumers is recovering 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. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. Consumers previously recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. Consumers believes that the original loss recorded remains adequate. At March 31, 1997 and December 31, 1996, the after-tax present value of the PPA liability totaled $140 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $10 million partially offset by after-tax accretion expense of $3 million. The undiscounted after-tax amount associated with the liability totaled $535 million at March 31, 1997. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $28 $23 $22 $21 $20 === === === === === The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded and Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of a 1995 decision in the PSCR reconciliation case for 1993, 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 an earlier 1993 settlement order and appealed. The MCV Partnership and ABATE also filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's 1995 order. Consumers and the MCV Partnership filed petitions for rehearing of the Court of Appeals opinion, which were denied in January 1997. 3: Rate Matters Electric Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover costs associated with the purchase of the additional 325 MW of MCV Facility capacity (see Note 2) and to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. It also established a direct access program. Customers having a maximum demand of at least 2 MW are eligible to purchase generation services directly from any eligible third-party power supplier. The program is limited to 650 MW of sales, of which 410 MW has already been filled by existing contracts. An additional 140 MW may be filled by new special contracts which Consumers has signed and submitted to the MPSC for approval or direct access customers and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. In April 1997, a lottery was held to select the customers to purchase 100 MW by direct access. Gas Proceedings: In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The ALJ issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. Consumers will continue to oppose this view before the MPSC. In 1996, the MPSC authorized Consumers to implement a pilot gas transportation program in Bay County, Michigan. The pilot program will provide residential and small commercial customers the opportunity to purchase gas from suppliers other than Consumers for a two-year period beginning April 1997. Out of the 40,000 eligible customers, fewer than 500 volunteered to participate in the program. Consumers will retain its role as transporter and distributor of this gas. In 1995, the MPSC issued an order regarding a $44 million (excluding 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 changes 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 correctly concludes 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 effect on CMS Energy's financial position or results of operations. 4: Short-Term and Long-Term Financings, and Capitalization CMS Energy CMS Energy has available unsecured, committed lines of credit totaling $155 million and a $450 million unsecured revolving credit facility. At March 31, 1997 and 1996, the total amount utilized under these facilities was $216 million and $242 million, respectively. In addition, CMS Energy currently has an unsecured $125 million term loan. CMS Energy is negotiating with a group of banks to replace the unsecured revolving credit facility and the term loan with a credit facility or facilities consisting of a combination of unsecured revolving credit and term loan tranches. CMS Energy expects that the aggregate borrowing capacity under the new facility or facilities may range from $725 million to $1.125 billion. CMS Energy expects to enter into such new credit facility or facilities in the second quarter of 1997. CMS Energy would also continue to have available the unsecured, committed lines of credit totaling $155 million. During the first quarter of 1997 CMS Energy issued $22 million of Series B and $11 million of Series C GTNs. At March 31, 1997, CMS Energy had issued and outstanding $250 million of Series A GTNs, $125 million of Series B GTNs and $11 million of Series C GTNs with weighted-average interest rates of 7.7 percent, 7.9 percent and 7.9 percent, respectively. In May 1997, CMS Energy issued $350 million of senior unsecured notes due May 15, 2002, at an interest rate of 8.125 percent. Proceeds were used in part to pay down debt with the remainder to fund CMS Energy's equity commitment in connection with the acquisition of a 50 percent interest in the 2,000 MW Loy Yang A electric generating plant and associated mine facilities in the State of Victoria, Australia.. Consumers Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through 1998. Consumers has an unsecured $425 million facility, and unsecured committed lines of credit aggregating $120 million that are used to finance seasonal working capital requirements. At March 31, 1997, a total of $88 million was outstanding at a weighted average interest rate of 6.8 percent, compared with $38 million outstanding at March 31, 1996, at a weighted average interest rate of 6.2 percent. Consumers has also in place a $500 million trade receivables purchase and sale program. At March 31, 1997 and 1996, receivables sold under the agreement totaled $398 million and $280 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In 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. Consumers Power Company Financing I was formed for the sole purpose of issuing the Trust Originated Preferred Securities. Its primary asset is $103 million principal amount of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers which mature in 2015. Consumers' obligations with respect to the Trust Originated Preferred Securities under the notes, under the indenture under which the notes have been issued, under Consumers' guarantee of the Trust Originated Preferred Securities, and under the declaration by the trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. Under the provisions of its Articles of Incorporation at March 31, 1997, Consumers had $343 million of unrestricted retained earnings available to pay common dividends. In April 1997, Consumers declared a $70 million common dividend to be paid in May 1997. 5: Earnings Per Share and Dividends In April 1997, Consumers declared a $70 million common dividend to be paid to CMS Energy in May 1997. In the first quarter of 1997, Enterprises paid common dividends and other distributions of $21 million to CMS Energy. Earnings per share attributable to Common Stock, for the three and twelve month periods ended March 31, 1997 and the three months ended March 31, 1996 reflect the performance of the Consumers Gas Group. Earnings per share attributable to Common Stock, for the twelve months ended March 31, 1996 reflect the performance of the Consumers Gas Group since initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock has participated in earnings and dividends from its issue date. The allocation of earnings (loss) attributable to each class of common stock and the related amounts per share are computed by considering the weighted average number of shares outstanding. Earnings (loss) attributable to Outstanding Shares are equal to Consumers Gas Group net income (loss) multiplied by a fraction; the numerator is the weighted average number of Outstanding Shares during the period and the denominator represents the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis, for the three months ended March 31, 1997 and 1996, are based on 24.29 percent of the income of the Consumers Gas Group and 23.72 percent of the income of the Consumers Gas Group since the initial issuance, respectively. In January and April 1997, 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, payable in February and May 1997, respectively. 6: 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 known sites will be between $2 million and $9 million. At March 31, 1997, Consumers has accrued $2 million for its estimated losses. Under the Michigan Natural Resources and Environmental Protection Act, 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. Four of the five plans submitted by Consumers have been approved by the appropriate environmental regulatory authority in the State of Michigan. Findings for the two completed remedial investigations indicate that the expenditures for those two sites are likely to be less than the amounts projected before the studies were performed. 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 1997 costs. At March 31, 1997, 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 1996, environmental clean-up costs above the amount currently being recovered in rates will be deferred and amortized 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 Act's provisions required Consumers to make capital expenditures totaling $40 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and proposed modifications at other coal-fired units to be an additional $35 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected as a result of these expenditures. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $1,465 million for 1997, $910 million for 1998 and $820 million for 1999. For further information regarding capital expenditures, see Forward-Looking Information in the MD&A. Other: As of March 31, 1997, CMS Energy and Enterprises have guaranteed up to $102 million in contingent obligations of unconsolidated affiliates and unrelated parties. CMS NOMECO periodically enters into oil and gas price hedging arrangements to mitigate its exposure to price fluctuations on the sale of crude oil and natural gas. As of December 31, 1996, CMS NOMECO had contracts on 13.8 bcf of gas for the delivery months of January though December 1997 at prices ranging from $1.92 to $2.80 per MMBtu and on 2.0 million barrels of oil at prices ranging from $19.50 to $22.90 per barrel. CMS NOMECO had made net payments of $4.0 million for settlement of January, February, and March 1997 contracts on 4.0 bcf of gas and 810,000 bbls of oil. As of March 31, 1997, the fair value of the remaining 1997 gas and oil contracts reflected a net payment due to CMS NOMECO of $1.6 million. These arrangements are accounted for as hedges; accordingly, gains or losses are deferred and recognized at such time as the hedged transaction is completed. If there was a loss of correlation between the changes in (1) the market value of the commodity price contracts and (2) the market price ultimately received for the hedged item, and the impact was material, the open commodity price contracts would be marked to market and gains and losses would be recognized in the income statement currently. CMS NOMECO also has one arrangement which is used to fix the prices that CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed, escalated price starting at $2.82 per MMBtu in 2001. The settlement periods are each a one-year period ending December 31, 2001 through 2006 on 3.65 MMBtu. If the floating price, essentially the then current Gulf Coast spot price, for a period is higher than the fixed price, the seller pays CMS NOMECO the difference, and vice versa. If a party's exposure at any time exceeds $5 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $5 million and up to $10 million. At March 31, 1997, neither party was required to post a letter of credit. As of March 31, 1997, the fair value of this contract reflected [$13] million due to the seller, representing the amount CMS NOMECO would have to pay to terminate the agreement. A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. 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 and has an ongoing mitigation program to modify the service of all customers with livestock. As of April 30, 1997, Consumers had 18 separate stray voltage lawsuits awaiting trial court action, down from 22 lawsuits at year end 1996. In addition to the matters disclosed in these notes, CMS Energy and Consumers and certain of their 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 CMS Energy's financial position or results of operations. 7: Nuclear Matters Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. In a review of the cask manufacturer's quality assurance program, indications of minor flaws in welds in the steel liner of one of the loaded casks were detected. Radiographic examination of the casks 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. Nevertheless, Consumers plans to remove the spent fuel and insert it into a transportable cask. Bids are currently being taken for the design and fabrication of the transportable cask. 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. Based on continuing analysis of data from testing of similar materials, in 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003 before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. 8: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the periods ended March 31 were: In Millions Three Months Ended Twelve Months Ended 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $ 63 $ 60 $257 $215 Income taxes paid (net of refunds) - 2 80 36 Non-cash transactions Nuclear fuel placed under capital lease $ 3 $ - $ 31 $ 20 Other assets placed under capital leases 2 1 4 4 Common Stock issued to acquire companies - - - 66 Assumption of debt - - - 4 Capital leases refinanced - - - 21 31 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have reviewed the accompanying consolidated balance sheets of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, common stockholders' equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 1996, 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 24, 1997, 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, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 9, 1997. 32 Consumers Energy Company Management's Discussion and Analysis The MD&A of this Form 10-Q should be read along with the MD&A in Consumers' 1996 Form 10-K. This report 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, 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, a 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 In Millions March 31 1997 1996 Change Three months ended $ 88 $ 94 $ (6) Twelve months ended 254 234 20 The decrease in earnings for the first quarter of 1997 compared to the same 1996 period reflects decreased gas deliveries due to warmer 1997 temperatures, decreased gas wholesale services revenues in 1997 and decreased electric revenues because of special contract discounts negotiated with large industrial customers. Partially offsetting these decreases were the favorable impact of an electric rate increase received in February 1996 which benefited the entire first quarter of 1997 and improved operating results from the MCV Facility in which Consumers has a 49 percent interest. The increase in earnings for the twelve months ended 1997 compared to the 1996 period reflects the favorable impact of an electric rate increase received in February 1996, revenues from value- added services and gas wholesale services activities, and improved operating results from the MCV Facility. In addition, other operating income increased during the twelve months ended 1997 due to a FERC-ordered refund received by the MCV Partnership from a gas pipeline supplier. Partially offsetting these increases were decreased electric revenues because of special contract discounts negotiated with large industrial customers and decreased gas deliveries due to warmer temperatures during the first quarter of 1997. For further information, see the Electric and Gas Utility Results of Operations sections and Note 3. Cash Position, Investing and Financing Operating Activities: 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 $368 million and $308 million for the first three months of 1997 and 1996, respectively. The $60 million increase resulted from changes in the timing of cash receipts and payments related to Consumers' operations, offset by reduced cash from gas sales. Operating cash is used primarily to maintain and expand electric and gas systems, retire portions of long-term debt, and pay dividends. Investing Activities: Cash used in investing activities totaled $98 million and $103 million for the first three months of 1997 and 1996, respectively. The cash was used primarily for capital expenditures. Financing Activities: Cash used in financing activities totaled $262 million and $211 million for the first three months of 1997 and 1996, respectively. The increase of $51 million in cash used reflects the 1997 absence of proceeds from preferred securities sold in 1996 offset by a reduction in the decrease of notes payable. Other Investing and Financing Matters: Several unsecured, committed lines of credit totaling $120 million and a $425 million working capital facility are available to meet short-term borrowing requirements to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. At March 31, 1997 and 1996, the total outstanding under these facilities was $88 million and $38 million, respectively. Consumers has FERC authorization to issue or guarantee up to $900 million of short-term securities through 1998 and to issue $500 million of long-term securities through November 1998 for refinancing or refunding purposes. An agreement is also in place permitting the sales of certain accounts receivable for up to $500 million. At March 31, 1997 and 1996, receivables sold totaled $398 million and $280 million, respectively. Electric Utility Results of Operations Electric Pretax Operating Income: In Millions March 31 1997 1996 Change Three months ended $ 106 $ 106 $ - Twelve months ended 412 388 24 Electric pretax operating income for all periods ending March 31, 1997 benefited from the favorable impact of an electric rate increase received in February 1996. The first quarter of 1997 reflects three months of rate increase compared to two months for the comparable quarter in 1996. The twelve months ended 1997 reflects a full twelve months of rate increase compared to only two months for the comparable period in 1996. The twelve months ended 1997 also benefited from increased electric sales and lower maintenance expenses when compared to the 1996 period. The increases in both periods were partly offset by decreased revenues because of special contract discounts negotiated with large industrial customers. The first quarter of 1997 also reflects higher operating expenses than the comparable 1996 period. During the twelve months ended 1997 there were higher operation, depreciation and general tax expenses than in the comparable prior period. The following table quantifies these impacts on Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales (including special contract discounts) $(3) $(12) Rate increases and other regulatory issues 9 51 Operations and maintenance (3) (4) General taxes and depreciation (3) (11) ---- ---- Total change $ - $ 24 ==== ==== Electric Sales: Total electric sales remained unchanged for the first quarter while showing a 3.4 percent increase for the twelve months ended March 31, 1997 over the comparable 1996 period. The table below reflects electric kWh sales by class of customer for both periods: In Billions of kWh Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Residential 2.9 3.0 (0.1) 10.9 10.9 - Commercial 2.4 2.4 - 10.0 9.8 0.2 Industrial 3.0 2.9 0.1 13.0 12.6 0.4 Other 0.7 0.7 - 3.2 2.6 0.6 ---- ---- ---- ---- ---- ---- Total sales 9.0 9.0 - 37.1 35.9 1.2 ==== ==== ==== ==== ==== ==== Power Costs: In Millions March 31 1997 1996 Change Three months ended $ 282 $ 260 $ 22 Twelve months ended 1,110 1,003 107 The cost increases for the three month and twelve month periods ended March 31, 1997 reflect greater power purchases from outside sources to meet sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. The MPSC currently allows Consumers to recover substantially all payments for 915 MW of capacity purchased from the MCV Partnership. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership and that estimate remains unchanged. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries totaled $10 million for the first three months of 1997. For further information, see Note 2. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $28 $23 $22 $21 $20 The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded and Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. Electric Rate Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover the costs associated with the purchase of the additional 325 MW of MCV Facility capacity and to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. It also established a direct access program. Rehearing petitions have been ruled upon by the MPSC and resulted in no material changes to the relief granted Consumers. For further discussion on these issues, see Notes 2 and 3. Nuclear Matters: In January 1997, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report rated all areas as good, unchanged from the previous assessment. 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. Based on continuing analysis of data from testing of similar materials, in 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003, before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. Palisades' on-site storage pool for spent nuclear fuel is at capacity. Consequently, NRC-approved dry casks, which are steel and concrete vaults, are being used for temporary on-site storage. For further information, see Note 6. Electric Environmental Matters: The Clean Air Act contains significant environmental constraints under which utilities will operate in the future. While the Act's provisions will require that certain capital expenditures be made to comply with nitrogen oxide emission limits, generating units are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Management does not believe that these expenditures will have a material effect on annual operating costs. Under the Michigan Natural Resources and Environmental Protection Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, and believes that these costs are properly recoverable in rates under current ratemaking policies. Consumers is a so-called potentially responsible party at several sites being administered under Superfund. In addition, 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 the 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 5. Stray Voltage: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. As of April 30, 1997, 18 separate stray voltage lawsuits were awaiting trial court action, down from 22 lawsuits at year end 1996. Consumers believes that the resolution of the remaining 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: In Millions March 31 1997 1996 Change Three months ended $ 78 $ 93 $(15) Twelve months ended 143 156 (13) Gas pretax operating income decreased in both the three month and twelve month periods ended March 31, 1997, as a result of decreased gas deliveries due to warmer temperatures during the first quarter of 1997 and an extra day for leap year in 1996. The first quarter of 1997 also reflects higher depreciation and general tax expenses, partially offset by lower operation and maintenance expenses. The decrease in gas pretax operating income for the twelve months ended March 31, 1997 also reflects higher operation, depreciation and general tax expenses, partially offset by lower maintenance expenses and benefits from gas wholesale services activities. The following table quantifies these impacts on Pretax Operating Income: In Millions Three Months Twelve Months Ended March 31 Ended March 31 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 Sales $(17) $(19) Recovery of gas costs and other issues - 4 Gas wholesale services activities (1) 5 Operations and maintenance 4 (3) General taxes, depreciation and other (1) - ---- ---- Total change $(15) $(13) ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, decreased 7.8 percent and 4.2 percent for the quarter and twelve months ended March 31, 1997, respectively. The decreased deliveries for both periods reflect warmer temperatures during 1997. The table below indicates total deliveries and the impact of weather. In bcf Three Months Ended Twelve Months Ended March 31 1997 1996 Change 1997 1996 Change Weather-adjusted deliveries (variance reflects growth) 146 145 1 335 332 3 Impact of weather and leap year (4) 9 (13) 5 23 (18) --- --- --- --- --- --- System deliveries excluding transport to MCV Partnership 142 154 (12) 340 355 (15) Transport to MCV Partnership 17 17 - 66 56 10 Other Transportation 9 14 (5) 24 24 - --- --- --- --- --- --- Total deliveries 168 185 (17) 430 435 (5) === === === === === === Cost of Gas Sold: In Millions March 31 1997 1996 Change Three months ended $314 $346 $(32) Twelve months ended 718 739 (21) The decreases for the three month and twelve month periods ended March 31, 1997 were the result of decreased sales reflecting warmer temperatures and an extra day for leap year in 1996. Gas Utility Issues Gas Rate Proceedings: 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 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 an MPSC-authorized gas transportation rate must be borne by Consumers' shareholders. In 1995, Consumers filed an appeal with the Court of Appeals, which is still pending, claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Matters: In 1995, the MPSC issued an order regarding a $44 million (excluding 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 correctly concludes that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The ALJ issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. Consumers will continue to oppose this view before the MPSC. 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, and 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 1997 costs. At March 31, 1997, 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. For further information regarding environmental matters, see Note 5. Forward-Looking Information Forward-looking information is included throughout this report. Material contingencies are also described in the 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. These estimates are prepared for planning purposes and are subject to revision. In Millions Years Ended December 31 1997 1998 1999 Consumers Construction $356 $334 $330 Nuclear fuel lease 14 27 13 Capital leases other than nuclear fuel 12 16 14 Michigan Gas Storage 3 3 3 ---- ---- ---- $385 $380 $360 ==== ==== ==== Electric utility operations (a) $270 $277 $257 Gas utility operations (a) 115 103 103 ---- ---- ---- $385 $380 $360 ==== ==== ==== (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. Electric Outlook: Consumers expects average annual growth of two to three percent per year in electric system sales over the next five years, based on the current industry configuration in Michigan. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions, or the developing competitive market for electricity. Consumers continues to work toward retaining its current retail service customers by offering electric rates that are competitive with those of other energy providers, and by improving reliability and customer communications. Consumers is also planning for a future environment in which open access is the predominant means by which retail service customers obtain their power requirements. Consumers' electric retail service is affected by competition in several areas, including the potential installation of cogeneration or other self- generation facilities by larger industrial customers; the formation of municipal utilities that would displace retail service to an entire community; competition from other utilities that offer flexible rate arrangements designed to encourage movement of facilities or production to their service areas; economic development competition between utilities; MPSC direct access programs and potential electric industry restructuring caused by regulatory decisions and new state or federal legislation. In 1996, the MPSC reduced the rate subsidization of residential customers by large industrial and commercial customers. In addition, in an effort to meet the challenge of competition, Consumers contracted with some of its largest industrial customers to serve certain facilities a number of years into the future. These contracts have been approved or are under review at the MPSC. FERC issued Orders 888 and 889, as amended on rehearing, requiring utilities to provide open access to the interstate transmission grid for wholesale transactions. Several FERC requirements have been implemented. However, one unresolved issue concerns the Michigan Electric Power Coordination Center Pool, currently operated jointly by Consumers and Detroit Edison. Consumers proposes to maintain the benefits of the pool, while Detroit Edison seeks to terminate the power pool agreement. The FERC is expected to rule on this issue in 1997. In 1996, the MPSC staff recommended: 1) a program of direct access to alternative sources of energy supply by retail electric customers starting in 1997 and phasing in all customers through 2004; and 2) that Consumers recover its transition costs through either a transition charge over a ten-year period ending 2007 only to customers electing direct access or, if the utility has been enabled to issue rate reduction bonds, through a securitization charge to all customers over the term of the bonds. Consumers would continue to provide delivery service to direct access customers. In March 1997, Consumers filed data with the MPSC which estimated that the portion of Consumers' transition costs which would be recovered in the transition charge to direct access customers through 2007 would be $1.8 billion. Direct access implementation costs aggregating an additional $200 million would also be recovered by a separate charge to direct access customers. Alternatively, if the securitization approach is pursued, the resulting securitization charge would be paid by all Consumers customers to service $4 billion of rate reduction bonds. The $4 billion in rate reduction bonds includes the $1.8 billion of costs that would otherwise have been recovered in the transition charge to direct access customers, as well as the costs that would otherwise have been recovered from customers on bundled rates prior to getting choice. Consumers' data indicate that the securitization approach results in more than a $200 million annual savings to customers compared to the rates they would pay under the MPSC staff program in the absence of securitization because the assumed 15-year repayment period of the bonds allows the cost reimbursement by the customer to be spread out over a longer period than without securitization and because securitization allows securitized costs to be financed at a lower rate. Several of the elements of electric utility restructuring will need to be addressed in legislation, including assurance of full transition cost recovery, securitization of rate reduction bonds and generation deregulation. Consumers currently expects that electric utility restructuring will occur in a manner consistent with the MPSC staff report, but cannot predict with certainty the timing of actual implementation, the extent of customer choice, or resultant financial impacts. Refer to the Consumers 1996 Form 10-K for further details. Consumers currently applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, Consumers recorded regulatory assets and liabilities related to its generation, transmission and distribution operations in its financial statements. If rate recovery of generation-related costs becomes unlikely or uncertain, whether due to competition or regulatory action, this accounting standard may no longer apply to Consumers' generation segment. Such a change could result in either full recovery of generation-related regulatory assets (net of related regulatory liabilities) or a loss, depending on whether Consumers' regulators adopt a transition mechanism for the recovery of all or a portion of these net regulatory assets. Based on a current evaluation of the various factors and conditions that are expected to affect future cost recovery, Consumers believes even if it was to discontinue application of SFAS 71 for the generation segment of its business, that its regulatory assets, including those related to generation, are probable of future recovery. Gas Outlook: Consumers currently anticipates gas deliveries (excluding transportation to the MCV Facility and off-system deliveries) to grow on an average annual basis between one and two percent over the next five years based primarily on a steadily growing customer base. Consumers has several strategies to increase load requirements. 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. Consumers is also offering a variety of energy-related services to its customers focused upon appliance maintenance, home safety, and home security. In 1996 the MPSC issued an order requesting Consumers and other local gas distribution companies, whose rates are regulated by the MPSC, to develop pilot programs that would allow customers to purchase gas directly from other suppliers and have the gas transported through local pipelines. These pilot programs are to last for two years and are intended to help the MPSC determine whether it is appropriate to extend this option to all retail customers. In December 1996, the MPSC approved Consumers' pilot program for 40,000 customers in Bay County. The first customer solicitation ended in March 1997 and resulted in one percent of the customers choosing an alternative supplier for the next year. Another solicitation period will begin in late 1997 for the period April 1998 - March 1999; expected customer interest is unknown at this time. Based on a regulated utility accounting standard, SFAS 71, Consumers is allowed to defer certain costs to the future and record regulatory assets, based on the recoverability of those costs through the MPSC's approval. Consumers has evaluated its regulatory assets related to its gas business, and believes that sufficient regulatory assurance exists to provide for the recovery of these deferred costs. Other New Accounting Standards: In 1997, the FASB issued SFAS 128, Earnings per Share and SFAS 129, Disclosure of Information about Capital Structure, which are effective for year end 1997 financial statements. Consumers does not expect the application of these statements to have a material effect on its financial position, liquidity or results of operations. 42 (This page intentionally left blank) 43 Consumers Energy Company Consolidated Statements of Income (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions Operating Revenue Electric $ 620 $ 591 $2,474 $2,328 Gas 498 548 1,231 1,261 Other 9 4 49 33 ------ ------ ------ ------ 1,127 1,143 3,754 3,622 ------ ------ ------ ------ Operating Expenses Operation Fuel for electric generation 69 73 292 289 Purchased power - related parties 151 140 600 507 Purchased and interchange power 62 47 218 207 Cost of gas sold 314 346 718 739 Other 130 132 583 574 ------ ------ ------ ------ 726 738 2,411 2,316 Maintenance 40 39 174 178 Depreciation, depletion and amortization 111 108 374 364 General taxes 57 56 192 191 ------ ------ ------ ------ 934 941 3,151 3,049 ------ ------ ------ ------ Pretax Operating Income Electric 106 106 412 388 Gas 78 93 143 156 Other 9 3 48 29 ------ ------ ------ ------ 193 202 603 573 ------ ------ ------ ------ Other Income (Deductions) Dividends from affiliates 4 4 17 16 Accretion income 2 3 9 11 Accretion expense (5) (7) (19) (30) Other, net 1 - (4) 4 ------ ------ ------ ------ 2 - 3 1 ------ ------ ------ ------ Interest Charges Interest on long-term debt 35 35 138 140 Other interest 8 8 31 37 Capitalized interest - (1) (1) (3) ------ ------ ------ ------ 43 42 168 174 ------ ------ ------ ------ Net Income Before Income Taxes 152 160 438 400 Income Taxes 55 58 148 137 ------ ------ ------ ------ Net Income 97 102 290 263 Preferred Stock Dividends 7 7 28 28 Preferred Securities Distributions 2 1 8 1 ------ ------ ------ ------ Net Income Available to Common Stockholder $ 88 $ 94 $ 254 $ 234 ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
44 Consumers Energy Company Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Million Cash Flows from Operating Activities Net income $ 97 $ 102 $ 290 $ 263 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $13, $13, $48 and $51, respectively) 111 108 374 364 Capital lease and other amortization 8 9 39 36 Deferred income taxes and investment tax credit - 3 46 37 Accretion expense 5 7 19 30 Accretion income - abandoned Midland project (2) (3) (9) (11) Undistributed earnings of related parties (9) (4) (46) (30) Power purchases (15) (12) (66) (112) Other 1 3 3 6 Changes in other assets and liabilities 172 95 80 58 ----- ----- ----- ----- Net cash provided by operating activities 368 308 730 641 ----- ----- ----- ----- Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (77) (83) (404) (422) Investments in nuclear decommissioning trust funds (13) (13) (48) (51) Cost to retire property, net (4) (6) (28) (39) Other (4) 1 (4) 2 Deferred demand-side management costs - (2) (4) (10) ----- ----- ----- ----- Net cash used in investing activities (98) (103) (488) (520) ----- ----- ----- ----- Cash Flows from Financing Activities Increase (decrease) in notes payable, net (245) (303) 50 (97) Payment of capital lease obligations (8) (9) (38) (36) Payment of preferred stock dividends (7) (7) (28) (28) Preferred securities distributions (2) (1) (8) (1) Retirement of bonds and other long-term debt - (1) (37) (1) Proceeds from preferred securities - 97 - 97 Contribution from stockholder - 13 - 13 Payment of common stock dividends - - (200) (70) Proceeds from bank loans - - 23 - ----- ----- ----- ----- Net cash used in financing activities (262) (211) (238) (123) ----- ----- ----- ----- Net Increase (Decrease) in Cash and Temporary Cash Investments 8 (6) 4 (2) Cash and Temporary Cash Investments, Beginning of Period 4 14 8 10 ----- ----- ----- ----- Cash and Temporary Cash Investments, End of Period $ 12 $ 8 $ 12 $ 8 ===== ===== ===== ===== The accompanying condensed notes are an integral part of these statements.
45 Consumers Energy Company Consolidated Balance Sheets
ASSETS March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Plant (At original cost) Electric $6,412 $6,333 $6,130 Gas 2,242 2,203 2,207 Other 26 26 26 ------ ------ ------ 8,680 8,562 8,363 Less accumulated depreciation, depletion and amortization 4,378 4,269 4,195 ------ ------ ------ 4,302 4,293 4,168 Construction work-in-progress 114 158 199 ------ ------ ------ 4,416 4,451 4,367 ------ ------ ------ Investments Stock of affiliates 295 298 336 First Midland Limited Partnership (Note 2) 235 232 226 Midland Cogeneration Venture Limited Partnership (Note 2) 140 134 104 Other 9 8 9 ------ ------ ------ 679 672 675 ------ ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 12 4 8 Accounts receivable and accrued revenue, less allowances of $8, $10 and $3, respectively (Note 4) 61 148 173 Accounts receivable - related parties 62 63 12 Inventories at average cost Gas in underground storage 51 186 39 Materials and supplies 72 68 74 Generating plant fuel stock 44 30 16 Postretirement benefits 25 25 25 Deferred income taxes 21 27 23 Prepayments and other 132 183 143 ------ ------ ------ 480 734 513 ------ ------ ------ Non-current Assets Postretirement benefits 427 435 458 Nuclear decommissioning trust funds 401 386 323 Abandoned Midland Project 108 113 126 Other 239 234 309 ------ ------ ------ 1,175 1,168 1,216 ------ ------ ------ Total Assets $6,750 $7,025 $6,771 ====== ====== ======
46
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Capitalization Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 504 504 504 Revaluation capital 36 37 29 Retained earnings since December 31, 1992 385 297 331 ------ ------ ------ 1,766 1,679 1,705 Preferred stock 356 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 100 100 Long-term debt 1,652 1,900 1,923 Non-current portion of capital leases 97 100 96 ------ ------ ------ 3,971 4,135 4,180 ------ ------ ------ Current Liabilities Current portion of long-term debt and capital leases 348 98 89 Accrued taxes 190 211 201 Accounts payable 164 212 165 Notes payable 88 333 38 Accounts payable - related parties 70 68 64 Power purchases (Note 2) 47 47 90 Accrued interest 25 33 26 Accrued refunds 6 8 28 Other 147 176 166 ------ ------ ------ 1,085 1,186 867 ------ ------ ------ Non-current Liabilities Deferred income taxes 633 646 599 Postretirement benefits 508 500 520 Power purchases (Note 2) 167 178 215 Deferred investment tax credit 157 159 166 Regulatory liabilities for income taxes, net 75 66 53 Other 154 155 171 ------ ------ ------ 1,694 1,704 1,724 ------ ------ ------ Commitments and Contingencies (Notes 2, 3, 5 and 6) Total Stockholders' Investment and Liabilities $6,750 $7,025 $6,771 ====== ====== ====== (a) As described in Note 4 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.
47 Consumers Energy Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions Common Stock At beginning and end of period $ 841 $ 841 $ 841 $ 841 ------- ------- ------- ------- Other Paid-in Capital At beginning of period 504 491 504 491 Stockholder's contribution - 13 - 13 ------- ------- ------- ------- At end of period 504 504 504 504 ------- ------- ------- ------- Revaluation Capital At beginning of period 37 29 29 17 Change in unrealized investment-gain (loss) (1) - 7 12 ------- ------- ------- ------- At end of period 36 29 36 29 ------- ------- ------- ------- Retained Earnings At beginning of period 297 237 331 167 Net income 97 102 290 263 Common stock dividends declared - - (200) (70) Preferred stock dividends declared (7) (7) (28) (28) Preferred securities distributions (2) (1) (8) (1) ------- ------- ------- ------- At end of period 385 331 385 331 ------- ------- ------- ------- Total Common Stockholder's Equity $ 1,766 $ 1,705 $ 1,766 $ 1,705 ======= ======= ======= ======= The accompanying condensed notes are an integral part of these statements.
48 Consumers Energy 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 Consumers 1996 Form 10-K 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, a 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 Dow. 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. Summarized Statements of Income for CMS Midland and CMS Holdings: In Millions Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 Pretax operating income $8 $2 $46 $27 Income taxes and other 2 - 14 7 --- --- --- --- Net income $6 $2 $32 $20 === === === === Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. 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. Consumers is recovering 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. Beginning January 1, 1996, Consumers was also permitted to recover an average capacity charge of 2.86 cents per kWh for the remaining 325 MW of MCV Facility capacity. The approved average capacity charge increased to 3.62 cents per kWh for 109 MW by January 1, 1997. The recoverable portion of the capacity charge for the last 216 MW of the 325 MW increases each year until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA term. Consumers previously recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. Consumers believes that the original loss recorded remains adequate. At March 31, 1997 and December 31, 1996, the after-tax present value of the PPA liability totaled $140 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $10 million partially offset by after-tax accretion expense of $3 million. The undiscounted after-tax amount associated with the liability totaled $535 million at March 31, 1997. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $28 $23 $22 $21 $20 The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded and Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of a 1995 decision in the PSCR reconciliation case for 1993, 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 an earlier 1993 settlement order and appealed. The MCV Partnership and ABATE also filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's 1995 order. Consumers and the MCV Partnership filed petitions for rehearing of the Court of Appeals opinion, which were denied in January 1997. 3: Rate Matters Electric Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover costs associated with the purchase of the additional 325 MW of MCV Facility capacity (see Note 2) and to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. It also established a direct access program. Customers having a maximum demand of at least 2 MW are eligible to purchase generation services directly from any eligible third-party power supplier. The program is limited to 650 MW of sales, of which 410 MW has already been filled by existing contracts. An additional 140 MW may be filled by new special contracts which Consumers has signed and submitted to the MPSC for approval or direct access customers and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. In April 1997, a lottery was held to select the customers to purchase 100 MW by direct access. Gas Proceedings: In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The ALJ issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. As of March 31, 1997, $7 million would be subject to refund if the MPSC adopts the ALJ position. Consumers will continue to oppose this view before the MPSC. In 1996, the MPSC authorized Consumers to implement a pilot gas transportation program in Bay County, Michigan. The pilot program will provide residential and small commercial customers the opportunity to purchase gas from suppliers other than Consumers for a two-year period beginning April 1997. Out of the 40,000 eligible customers, fewer than 500 volunteered to participate in the program. Consumers will retain its role as transporter and distributor of this gas. In 1995, the MPSC issued an order regarding a $44 million (excluding 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 changes 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 correctly concludes 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 effect on Consumers' financial position or results of operations. 4: Short-Term Financings and Capitalization Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through 1998. Consumers has an unsecured $425 million facility, and unsecured committed lines of credit aggregating $120 million that are used to finance seasonal working capital requirements. At March 31, 1997, a total of $88 million was outstanding at a weighted average interest rate of 6.8 percent, compared with $38 million outstanding at March 31, 1996, at a weighted average interest rate of 6.2 percent. Consumers has also in place a $500 million trade receivables purchase and sale program. At March 31, 1997 and 1996, receivables sold under the agreement totaled $398 million and $280 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In 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. Consumers Power Company Financing I was formed for the sole purpose of issuing the Trust Originated Preferred Securities. Its primary asset is $103 million principal amount of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers which mature in 2015. Consumers' obligations with respect to the Trust Originated Preferred Securities under the notes, under the indenture under which the notes have been issued, under Consumers' guarantee of the Trust Originated Preferred Securities, and under the declaration by the trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. Under the provisions of its Articles of Incorporation at March 31, 1997, Consumers had $343 million of unrestricted retained earnings available to pay common dividends. In April 1997, Consumers declared a $70 million common dividend to be paid in May 1997. 5: 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 known sites will be between $2 million and $9 million. At March 31, 1997, Consumers has accrued $2 million for its estimated losses. Under the Michigan Natural Resources and Environmental Protection Act, 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. Four of the five plans submitted by Consumers have been approved by the appropriate environmental regulatory authority in the State of Michigan. Findings for the two completed remedial investigations indicate that the expenditures for those two sites are likely to be less than the amounts projected before the studies were performed. 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 1997 costs. At March 31, 1997, 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 1996, environmental clean-up costs above the amount currently being recovered in rates will be deferred and amortized 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 Act's provisions required Consumers to make capital expenditures totaling $40 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and proposed modifications at other coal-fired units to be an additional $35 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected as a result of these expenditures. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $385 million for 1997, $380 million for 1998 and $360 million for 1999. For further information regarding capital expenditures, see Forward-Looking Information in the MD&A. Other: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. 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 and has an ongoing mitigation program to modify the service of all customers with livestock. As of April 30, 1997, Consumers had 18 separate stray voltage lawsuits awaiting trial court action, down from 22 lawsuits at year end 1996. 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. 6: Nuclear Matters Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. In a review of the cask manufacturer's quality assurance program, indications of minor flaws in welds in the steel liner of one of the loaded casks were detected. Radiographic examination of the casks 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. Nevertheless, Consumers plans to remove the spent fuel and insert it into a transportable cask. Bids are currently being taken for the design and fabrication of the transportable cask. 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. Based on continuing analysis of data from testing of similar materials, in 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003 before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. 7: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities were: In Millions Three Months Twelve Months Ended Ended March 31 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $ 48 $ 45 $160 $164 Income taxes paid (net of refunds) 1 5 115 48 Non-cash transactions Nuclear fuel placed under capital lease $ 3 $ - $ 31 $ 20 Other assets placed under capital leases 2 1 4 4 Capital leases refinanced - - - 21 53 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To Consumers Energy Company: We have reviewed the accompanying consolidated balance sheets of CONSUMERS ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers Energy Company and subsidiaries as of December 31, 1996, 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 24, 1997, 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, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 9, 1997. 54 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' Forms 10-K for the year ended December 31, 1996. Reference is made to the Condensed Notes to the Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating and environmental matters. CMS ENERGY EXEMPTION UNDER PUHCA CMS Energy is exempt from registration under PUHCA. In addition to a specific challenge to CMS Energy's exemption, there have been various generic administrative and legislative proposals to repeal or revise PUHCA in recent years. In April 1997, a bill was introduced in the United States Senate which would repeal PUHCA without at the same time deregulating the electric industry. The bill was referred to the Senate Banking, Housing and Urban Affairs Committee, the chairman of which is a co-sponsor of the bill. CONSUMERS STRAY VOLTAGE LAWSUITS Consumers has a number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. At April 30, 1997, Consumers had 18 separate stray voltage cases awaiting action at the trial court level. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Consumers' Special Meeting of Shareholders held on March 10, 1997, the shareholders approved an amendment to Consumers' Articles of Incorporation changing the name from Consumers Power Company to Consumers Energy Company. The vote was 84,108,789 shares in favor of the amendment, with no shares voted against or abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (4) - CMS Energy: Third Supplemental Indenture dated as of May 6, 1997 between CMS Energy and NBD Bank, as Trustee (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) - CMS Energy: Restated 1996 Financial Data Schedules (27)(c) - CMS Energy: Restated 1995 Financial Data Schedules (27)(d) - CMS Energy: Restated 1994 Financial Data Schedules (27)(e) - Consumers: Financial Data Schedule (27)(f) - Consumers: Restated 1996 Financial Data Schedules (27)(g) - Consumers: Restated 1995 Financial Data Schedules (27)(h) - Consumers: Restated 1994 Financial Data Schedules (99) - CMS Energy: Consumers Gas Group Financials (b) Reports on Form 8-K A Current Report on Form 8-K dated March 7, 1997 was filed by each of CMS Energy and Consumers covering matters pursuant to "Item 5. Other Events." 56 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) Dated: May 14, 1997 By A. M. Wright ------------------------------------ Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS ENERGY COMPANY ------------------------------------ (Registrant) Dated: May 14, 1997 By A. M. Wright ----------------------------------- Alan M. Wright Senior Vice President and Chief Financial Officer EX-4 2 CMS ENERGY 3RD SUPP INDENTURE EXHIBIT (4) THIRD SUPPLEMENTAL INDENTURE dated as of May 6, 1997 ____________________ This Third Supplemental Indenture, dated as of the 6th day of May, 1997 between CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (hereinafter called the "Issuer") and having its principal office at Fairlane Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan 48126, and NBD Bank, a Michigan banking corporation (hereinafter called the "Trustee") and having its principal Corporate Trust Office at 611 Woodward Avenue, Detroit, Michigan 48226. WITNESSETH: WHEREAS, the Issuer and the Trustee (formerly known as NBD Bank, National Association) entered into an Indenture, dated as of September 15, 1992 (the "Original Indenture"), pursuant to which one or more series of debt securities of the Issuer (the "Securities") may be issued from time to time; and WHEREAS, Section 2.3 of the Original Indenture permits the terms of any series of Securities to be established in an indenture supplemental to the Original Indenture; and WHEREAS, Section 8.1(e) of the Original Indenture provides that a supplemental indenture may be entered into by the Issuer and the Trustee without the consent of any Holders of the Securities to establish the form and terms of the Securities of any series; and WHEREAS, the Issuer has requested the Trustee to join with it in the execution and delivery of this Third Supplemental Indenture in order to supplement and amend the Original Indenture by, among other things, establishing the form and terms of a series of Securities to be known as the Issuer's "8-1/8% Senior Unsecured Notes Due 2002" (the "2002 Notes"), providing for the issuance of the 2002 Notes and amending and adding certain provisions thereof for the benefit of the Holders of the 2002 Notes; and WHEREAS, the Issuer and the Trustee desire to enter into this Third Supplemental Indenture for the purposes set forth in Sections 2.3 and 8.1(e) of the Original Indenture as referred to above; and WHEREAS, the Issuer has furnished the Trustee with a copy of the resolutions of its Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of this Third Supplemental Indenture; and WHEREAS, all things necessary to make this Third Supplemental Indenture a valid agreement of the Issuer and the Trustee and a valid supplement to the Original Indenture have been done, NOW, THEREFORE, THIS THIRD SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the 2002 Notes to be issued hereunder by holders thereof, the Issuer and the Trustee mutually covenant and agree, for the equal and proportionate benefit of the respective holders from time to time of the 2002 Notes, as follows: ARTICLE I STANDARD PROVISIONS; DEFINITIONS SECTION 1.01. STANDARD PROVISIONS. The Original Indenture together with this Third Supplemental Indenture and all previous indentures supplemental thereto entered into pursuant to the applicable terms thereof are hereinafter sometimes collectively referred to as the "Indenture." All capitalized terms which are used herein and not otherwise defined herein are defined in the Indenture and are used herein with the same meanings as in the Indenture. SECTION 1.02. Definitions. Section 1.1 of the Original Indenture is amended to insert the new definitions applicable to the 2002 Notes, in the appropriate alphabetical sequence, as follows: "Amortization Expense" means, for any period, amounts recognized during such period as amortization of capital leases, depletion, nuclear fuel, goodwill and assets classified as intangible assets in accordance with generally accepted accounting principles. "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (x) the number of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness and (y) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Lease Obligation" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligation shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty; and such obligation shall be deemed secured by a Lien on any property or assets to which such lease relates. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock or Letter Stock. "Change in Control" means an event or series of events by which (i) the Issuer ceases to own beneficially, directly or indirectly, at least 80% of the total voting power of all classes of Capital Stock then outstanding of Consumers (whether arising from issuance of securities of the Issuer or Consumers, any direct or indirect transfer of securities by the Issuer or Consumers, any merger, consolidation, liquidation or dissolution of the Issuer or Consumers or otherwise); (ii) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all shares that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the Voting Stock of the Issuer; or (iii) the Issuer consolidates with or merges into another corporation or directly or indirectly conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates with or merges into the Issuer, in either event pursuant to a transaction in which the outstanding Voting Stock of the Issuer is changed into or exchanged for cash, securities, or other property, other than any such transaction in which (A) the outstanding Voting Stock of the Issuer is changed into or exchanged for Voting Stock of the surviving corporation and (B) the holders of the Voting Stock of the Issuer immediately prior to such transaction retain, directly or indirectly, substantially proportionate ownership of the Voting Stock of the surviving corporation immediately after such transaction. "CMS Electric and Gas" means CMS Electric and Gas Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS Gas Transmission and Storage" means CMS Gas Transmission and Storage Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS Generation" means CMS Generation Co., a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS MST" means CMS Marketing, Services and Trading Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "Consolidated Assets" means, at any date of determination, the aggregate assets of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Capital" means, at any date of determination, the sum of (a) Consolidated Indebtedness, (b) consolidated equity of the common stockholders of the Issuer and the Consolidated Subsidiaries, (c) consolidated equity of the preference stockholders of the Issuer and the Consolidated Subsidiaries and (d) consolidated equity of the preferred stockholders of the Issuer and the Consolidated Subsidiaries, in each case determined at such date in accordance with generally accepted accounting principles. "Consolidated Coverage Ratio" with respect to any period means the ratio of (i) the aggregate amount of Operating Cash Flow for such period to (ii) the aggregate amount of Consolidated Interest Expense for such period. "Consolidated Current Liabilities" means, for any period, the aggregate amount of liabilities of the Issuer and its Consolidated Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), after (i) eliminating all inter- company items between the Issuer and any Consolidated Subsidiary and (ii) deducting all current maturities of long-term Indebtedness, all as determined in accordance with generally accepted accounting principles. "Consolidated Indebtedness" means, at any date of determination, the aggregate Indebtedness of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means, for any period, the total interest expense in respect of Indebtedness of the Issuer and its Consolidated Subsidiaries, including, without duplication, (i) interest expense attributable to capital leases, (ii) amortization of debt discount, (iii) capitalized interest, (iv) cash and noncash interest payments, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs under Interest Rate Protection Agreements (including amortization of discount) and (vii) interest expense in respect of obligations of other Persons deemed to be Indebtedness of the Issuer or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of Indebtedness, provided, however, that Consolidated Interest Expense shall exclude (a) any costs otherwise included in interest expense recognized on early retirement of debt and (b) any interest expense in respect of any Indebtedness of any Subsidiary of Consumers, CMS Generation, NOMECO, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated Enterprises Subsidiary, provided that such Indebtedness is without recourse to any assets of the Issuer, Consumers, Enterprises, CMS Generation, NOMECO, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated Enterprises Subsidiary. "Consolidated Net Income" means, for any period, the net income of the Issuer and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person if such Person is not a Subsidiary, except that (A) the Issuer's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Issuer or a Consolidated Subsidiary as a dividend or other distribution and (B) the Issuer's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income of any Person acquired by the Issuer or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any gain or loss realized upon the sale or other disposition of any property, plant or equipment of the Issuer or its Consolidated Subsidiaries which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; and (iv) any net income of any Subsidiary of Consumers, CMS Generation, NOMECO, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated Enterprises Subsidiary whose interest expense is excluded from Consolidated Interest Expense, provided, however, that for purposes of this subsection (iv), any cash, dividends or distributions of any such Subsidiary to the Issuer shall be included in calculating Consolidated Net Income. "Consolidated Net Tangible Assets" means, for any period, the total amount of assets (less accumulated depreciation or amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) as set forth on the most recently available quarterly or annual consolidated balance sheet of the Issuer and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, and after giving effect to purchase accounting and after deducting therefrom, to the extent otherwise included, the amounts of: (i) Consolidated Current Liabilities; (ii) minority interests in Consolidated Subsidiaries held by Persons other than the Issuer or a Restricted Subsidiary; (iii) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors as evidenced by Board resolutions; (iv) any revaluation or other write-up in value of assets subsequent to December 31, 1996, as a result of a change in the method of valuation in accordance with generally accepted accounting principles; (v) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses organization or developmental expenses and other intangible items; (vi) treasury stock; and (vii) any cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities. "Consolidated Net Worth" of any Person means the total of the amounts shown on the consolidated balance sheet of such Person and its consolidated subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles, as of any date selected by such Person not more than 90 days prior to the taking of any action for the purpose of which the determination is being made (and adjusted for any material events since such date), as (i) the par or stated value of all outstanding Capital Stock plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit, (B) any amounts attributable to Redeemable Stock and (C) any amounts attributable to Exchangeable Stock. "Consolidated Subsidiary" means, any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Issuer in accordance with generally accepted accounting principles. "Consumers" means Consumers Energy Company, a Michigan corporation, all of whose common stock is on the date hereof owned by the Issuer. "Designated Enterprises Subsidiary" means any wholly-owned subsidiary of Enterprises formed after the date of this Third Supplemental Indenture which is designated a Designated Enterprises Subsidiary by the Board of Directors. "Enterprises" means CMS Enterprises Company, a Michigan corporation and wholly-owned subsidiary of the Issuer. "Event of Default" with respect to the 2002 Notes has the meaning specified in Article V of this Third Supplemental Indenture. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchangeable Stock" means any Capital Stock of a corporation that is exchangeable or convertible into another security (other than Capital Stock of such corporation that is neither Exchangeable Stock or Redeemable Stock). "Indebtedness" of any Person means, without duplication, (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all Capital Lease Obligations of such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all obligations under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (v) all obligations of the type referred to in clauses (i) through (iv) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured. "Interest Payment Date" means November 15, 1997 and each May 15 and November 15 in each year thereafter. "Interest Rate Protection Agreement" means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect the Issuer or any Subsidiary against fluctuations in interest rates. "Letter Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is intended to reflect the separate performance of certain of the businesses or operations conducted by such corporation or any of its subsidiaries. "Lien" means any lien, mortgage, pledge, security interest, conditional sale, title retention agreement or other charge or encumbrance of any kind. "Net Cash Proceeds" means, (a) with respect to any Asset Sale , the aggregate proceeds of such Asset Sale including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Issuer, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Issuer and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Issuer or any Restricted Subsidiary of the Issuer as a reserve against any liabilities associated with such Asset Sale including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with generally accepted accounting principles and (b) with respect to any issuance or sale or contribution in respect of Capital Stock, the aggregate proceeds of such issuance, sale or contribution, including the fair market value (as determined by the Board of Directors and net of any associated debt and of any consideration other than Capital Stock received in return) of property other than cash, received by the Issuer, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof, provided, however, that if such fair market value as determined by the Board of Directors of property other than cash is greater than $25 million, the value thereof shall be based upon an opinion from an independent nationally recognized firm experienced in the appraisal or similar review of similar types of transactions. "NOMECO" means, CMS NOMECO Oil & Gas Co., a Michigan corporation and wholly-owned subsidiary of the Issuer. "Non-Convertible Capital Stock" means, with respect to any corporation, any non-convertible Capital Stock of such corporation and any Capital Stock of such corporation convertible solely into non-convertible Capital Stock other than Preferred Stock of such corporation; provided, however, that Non-Convertible Capital Stock shall not include any Redeemable Stock or Exchangeable Stock. "Operating Cash Flow" means, for any period, with respect to the Issuer and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net Income after adding thereto Consolidated Interest Expense (adjusted to include costs recognized on early retirement of debt), income taxes, depreciation expense, Amortization Expense and any noncash amortization of debt issuance costs, any nonrecurring, noncash charges to earnings and any negative accretion recognition. "Other Rating Agency" shall mean any one of Duff & Phelps Credit Rating Co., Fitch Investors Service, L.P. or Moody's Investors Service, Inc., and any successor to any of these organizations which is a nationally recognized statistical rating organization. "Paying Agent" means any person authorized by the Issuer to pay the principal of (and premium, if any) or interest on any of the 2002 Notes on behalf of the Issuer. "Predecessor 2002 Note" of any particular 2002 Note means every previous 2002 Note evidencing all or a portion of the same debt as that evidenced by such particular 2002 Note; and, for the purposes of the definition, any 2002 Note authenticated and delivered under Section 2.9 of the Indenture in exchange for or in lieu of a mutilated, destroyed, lost or stolen 2002 Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen 2002 Note. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Redeemable Stock" means any Capital Stock that by its terms or otherwise is required to be redeemed prior to the first anniversary of the Stated Maturity of the Outstanding 2002 Notes or is redeemable at the option of the holder thereof at any time prior to the first anniversary of the Stated Maturity of the Outstanding 2002 Notes. "Restricted Subsidiary" means any Subsidiary (other than Consumers and its subsidiaries) of the Issuer which, as of the date of the Issuer's most recent quarterly consolidated balance sheet, constituted at least 10% of the total Consolidated Assets of the Issuer and its Consolidated Subsidiaries and any other Subsidiary which from time to time is designated a Restricted Subsidiary by the Board of Directors provided that no Subsidiary may be designated a Restricted Subsidiary if, immediately after giving effect thereto, an Event of Default or event that, with the lapse of time or giving of notice or both, would constitute an Event of Default would exist or the Issuer and its Restricted Subsidiaries could not incur at least $1 of additional Indebtedness under Section 4.03, and (i) any such Subsidiary so designated as a Restricted Subsidiary must be organized under the laws of the United States or any State thereof, (ii) more than 80% of the Voting Stock of such Subsidiary must be owned of record and beneficially by the Issuer or a Restricted Subsidiary and (iii) such Restricted Subsidiary must be a Consolidated Subsidiary. "Standard & Poor's" shall mean Standard & Poor's Ratings Group, a division of McGraw Hill Inc., and any successor thereto which is a nationally recognized statistical rating organization, or if such entity shall cease to rate the 2002 Notes or shall cease to exist and there shall be no such successor thereto, any other nationally recognized statistical rating organization selected by the Issuer which is acceptable to the Trustee. "Subordinated Indebtedness" means any Indebtedness of the Issuer (whether outstanding on the date of this Third Supplemental Indenture or thereafter incurred) which is contractually subordinated or junior in right of payment to the 2002 Notes. "Support Obligations" means, for any person, without duplication, any financial obligation, contingent or otherwise, of such person guaranteeing or otherwise supporting any debt or other obligation of any other person in any manner, whether directly or indirectly, and including, without limitation, any obligation of such person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such debt, (ii) to purchase property, securities or services for the purpose of assuring the owner of such debt of the payment of such debt, (iii) to maintain working capital, equity capital, available cash or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such debt, (iv) to provide equity capital under or in respect of equity subscription arrangements (to the extent that such obligation to provide equity capital does not otherwise constitute debt), or (v) to perform, or arrange for the performance of, any non-monetary obligations or non-funded debt payment obligations of the primary obligor. "Tax-Sharing Agreement" means the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as amended or supplemented from time to time, by and among Issuer, each of the members of the Consolidated Group (as defined therein), and each of the corporations that become members of the Consolidated Group. "Voting Stock" means securities of any class or classes the holders of which are ordinarily, in the absence of contingencies, entitled to vote for corporate directors (or persons performing similar functions). Certain terms, used principally in Articles Three, Four and Seven of this Third Supplemental Indenture, are defined in those Articles. ARTICLE II DESIGNATION AND TERMS OF THE 2002 NOTES; FORMS SECTION 2.01. ESTABLISHMENT OF SERIES. (a) There is hereby created a series of Securities to be known and designated as the "8-1/8% Senior Unsecured Notes Due 2002" and limited in aggregate principal amount (except as contemplated in Section 2.3(f)(2) of the Indenture) to $350,000,000. The Stated Maturity of the 2002 Notes is May 15, 2002. (b) The 2002 Notes will bear interest from the Original Issue Date, or from the most recent date to which interest has been paid or duly provided for, at the rate of 8-1/8% per annum stated therein until the principal thereof is paid or made available for payment. Interest will be payable semiannually on each Interest Payment Date and at Maturity, as provided in the form of the 2002 Note in Section 2.03 hereof. (c) The Record Date referred to in Section 2.3(f)(4) of the Indenture for the payment of the interest on any 2002 Note payable on any Interest Payment Date (other than at Maturity) shall be the 1st day (whether or not a Business Day) of the calendar month in which such Interest Payment Date occurs and, in the case of interest payable at Maturity, the Record Date shall be the date of Maturity. (d) The payment of the principal of, premium (if any) and interest on the 2002 Notes shall not be secured by a security interest in any property. (e) The 2002 Notes shall not be redeemable. The 2002 Notes shall be purchased by the Issuer at the option of the Holders thereof as provided in Sections 3.01 and 4.05 hereof. (f) The 2002 Notes shall not be convertible. (g) The 2002 Notes will not be subordinated to the payment of Senior Debt. (h) The Issuer will not pay any additional amounts on the 2002 Notes held by a Person who is not a U.S. Person in respect of any tax, assessment or government charge withheld or deducted. (i) The events specified in Events of Default with respect to the 2002 Notes shall include the events specified in Article Five of this Third Supplemental Indenture. In addition to the covenants set forth in Article Three of the Original Indenture, the Holders of the 2002 Notes shall have the benefit of the covenants of the Issuer set forth in Article Four hereto. SECTION 2.02. FORMS GENERALLY. The 2002 Notes and Trustee's certificates of authentication shall be in substantially the form set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such 2002 Notes, as evidenced by their execution thereof. The definitive 2002 Notes shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such 2002 Notes, as evidenced by their execution thereof. 18 SECTION 2.03. FORM OF FACE OF 2002 NOTE. CMS ENERGY CORPORATION 8-1/8% SENIOR UNSECURED NOTES DUE 2002 No. ________ $__________ CMS Energy Corporation, a corporation duly organized and existing under the laws of the State of Michigan (herein called the "Issuer", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _________________________________, or registered assigns, the principal sum of ____________________ Dollars on May 15, 2002 ("Maturity") and to pay interest thereon from May 6, 1997 (the "Original Issue Date") or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on May 15 and November 15 in each year, commencing November 15, 1997 and at Maturity at the rate of 8-1/8% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this 2002 Note (or one or more Predecessor 2002 Notes) is registered at the close of business on the Record Date for such interest, which shall be the 1st day of the calendar month in which such Interest Payment Date occurs (whether or not a Business Day) except that the Record Date for interest payable at Maturity shall be the date of Maturity. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Record Date and may either be paid to the Person in whose name this 2002 Note (or one or more Predecessor 2002 Notes) is registered at the close of business on a subsequent Record Date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of 2002 Notes not less than 15 days preceding such subsequent Record Date. Payment of the principal of (and premium, if any) and interest, if any, on this 2002 Note will be made at the office or agency of the Issuer maintained for that purpose in New York, New York (the "Place of Payment"), in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Issuer payment of interest (other than interest payable at Maturity) may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or by wire transfer to an account designated by such Person not later than ten days prior to the date of such payment. If the date on which payment of principal or interest on this 2002 Note becomes due is not a Business Day, then such principal or interest shall be due and payable on the next succeeding Business Day. Reference is hereby made to the further provisions of this 2002 Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this 2002 Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its corporate seal. Dated: CMS ENERGY CORPORATION By____________________________ Its: By____________________________ Its: Attest: 19 SECTION 2.04. FORM OF REVERSE OF 2002 NOTE. This 8-1/8% Senior Unsecured Note Due 2002 is one of a duly authorized issue of securities of the Issuer (herein called the "2002 Notes"), issued and to be issued under an Indenture, dated as of September 15, 1992, as supplemented by certain supplemental indentures, including the Third Supplemental Indenture, dated as of May 6, 1997 (herein collectively referred to as the "Indenture"), between the Issuer and NBD Bank, a Michigan banking corporation (formerly known as NBD Bank, National Association), as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee, the Holders of the 2002 Notes and of the terms upon which the 2002 Notes are, and are to be, authenticated and delivered. This 2002 Note is one of the series designated on the face hereof, limited in aggregate principal amount to $350,000,000. The 2002 Notes are not subject to redemption. If a Change in Control occurs, the Issuer shall notify the Holder of this 2002 Note of such occurrence and such Holder shall have the right to require the Issuer to make a Required Repurchase of all or any part of this 2002 Note at a Change in Control Purchase Price equal to 101% of the principal amount of this 2002 Note to be so purchased as more fully provided in the Indenture and subject to the terms and conditions set forth therein. In the event of a Required Repurchase of only a portion of this 2002 Note, a new 2002 Note or Notes for the unrepurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default with respect to this 2002 Note shall occur and be continuing, the principal of this 2002 Note may be declared due and payable in the manner and with the effect provided in the Indenture. In any case where any Interest Payment Date, repurchase date, Stated Maturity or Maturity of any 2002 Note shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of the Indenture or this 2002 Note), payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, repurchase date or at the Stated Maturity or Maturity; provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, redemption date, repurchase date, Stated Maturity or Maturity, as the case may be, to such Business Day. The Indenture contains provisions for defeasance at any time of (i) the entire indebtedness of this 2002 Note or (ii) certain restrictive covenants and Events of Default with respect to this 2002 Note, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of all Outstanding 2002 Notes under the Indenture at any time by the Issuer and the Trustee with the consent of the Holders of not less than a majority in principal amount of Securities of all series then Outstanding and affected (voting as one class). The Indenture permits the Holders of not less than a majority in principal amount of Securities of all series at the time Outstanding with respect to which a default shall have occurred and be continuing (voting as one class) to waive on behalf of the Holders of all Outstanding Securities of such series any past default by the Issuer, provided that no such waiver may be made with respect to a default in the payment of the principal of or the interest on any Security of such series or the default by the Issuer in respect of certain covenants or provisions of the Indenture, the modification or amendment of which must be consented to by the Holder of each Outstanding Security of each series affected. As set forth in, and subject to, the provisions of the Indenture, no Holder of any 2002 Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default, the Holders of not less than 25% in principal amount of the Outstanding Securities of each affected series (voting as one class) shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of the Outstanding Securities of each affected series (voting as one class) a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days; provided, however, that such limitations do not apply to a suit instituted by the Holder hereof for the enforcement of payment of the principal of (and premium, if any) or any interest on this 2002 Note on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this 2002 Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and any premium and interest on this 2002 Note at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this 2002 Note is registerable in the Security Register, upon surrender of this 2002 Note for registration of transfer at the office or agency of the Issuer in any place where the principal of and any premium and interest on this 2002 Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new 2002 Notes of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The 2002 Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, 2002 Notes are exchangeable for a like aggregate principal amount of 2002 Notes and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this 2002 Note for registration of transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Person in whose name this 2002 Note is registered as the owner hereof for all purposes, whether or not this 2002 Note be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this 2002 Note without definition which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 2.05. Form of Trustee's Certificate of Authentication. The Trustee's certificates of authentication shall be in substantially the following form: This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. ________________________________________, as Trustee By______________________________________ Authorized Officer ARTICLE III CHANGE OF CONTROL SECTION 3.01. CHANGE OF CONTROL. Upon the occurrence of a Change in Control (the effective date of such Change in Control being the "Change in Control Date"), each Holder of a 2002 Note shall have the right to require that the Issuer repurchase (a "Required Repurchase") all or any part of such Holder's 2002 Note at a repurchase price payable in cash equal to 101% of the principal amount of such 2002 Note plus accrued interest to the Purchase Date (the "Change in Control Purchase Price"). (a) Within 30 days following the Change in Control Date, the Issuer shall mail a notice (the "Required Repurchase Notice") to each Holder with a copy to the Trustee stating: (i) that a Change in Control has occurred and that such Holder has the right to require the Issuer to repurchase all or any part of such Holder's 2002 Notes at the Change of Control Purchase Price; (ii) the Change of Control Purchase Price; (iii) the date on which any Required Repurchase shall be made (which shall be no earlier than 60 days nor later than 90 days from the date such notice is mailed) (the "Purchase Date"); (iv) the name and address of the Paying Agent; and (v) the procedures that Holders must follow to cause the 2002 Notes to be repurchased, which shall be consistent with this Section and the Indenture. (b) Holders electing to have a 2002 Note repurchased must deliver a written notice (the "Change in Control Purchase Notice") to the Paying Agent (initially the Trustee) at its corporate trust office in Detroit, Michigan, or any other office of the Paying Agent maintained for such purposes, not later than 30 days prior to the Purchase Date. The Change in Control Purchase Notice shall state: (i) the portion of the principal amount of any 2002 Notes to be repurchased, which portion must be $1,000 or an integral multiple thereof; (ii) that such 2002 Notes are to be repurchased by the Issuer pursuant to the change in control provisions of the Indenture; and (iii) unless the 2002 Notes are represented by one or more Global Notes, the certificate numbers of the 2002 Notes to be delivered by the Holder thereof for repurchase by the Issuer. Any Change in Control Purchase Notice may be withdrawn by the Holder by a written notice of withdrawal delivered to the Paying Agent not later than three Business Days prior to the Purchase Date. The notice of withdrawal shall state the principal amount and, if applicable, the certificate numbers of the 2002 Notes as to which the withdrawal notice relates and the principal amount of such 2002 Notes, if any, which remains subject to a Change in Control Purchase Notice. If a 2002 Note is represented by a Global Note (as described in Article VI below), the Depositary or its nominee will be the Holder of such 2002 Note and therefore will be the only entity that can elect a Required Repurchase of such 2002 Note. To obtain repayment pursuant to this Section 3.01 with respect to such 2002 Note, the beneficial owner of such 2002 Note must provide to the broker or other entity through which it holds the beneficial interest in such 2002 Note (i) the Change in Control Purchase Notice signed by such beneficial owner, and such signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, and (ii) instructions to such broker or other entity to notify the Depositary of such beneficial owner's desire to obtain repayment pursuant to this Section 3.01. Such broker or other entity will provide to the Paying Agent (i) the Change of Control Purchase Notice received from such beneficial owner and (ii) a certificate satisfactory to the Paying Agent from such broker or other entity stating that it represents such beneficial owner. Such broker or other entity will be responsible for disbursing any payments it receives pursuant to this Section 3.01 to such beneficial owner. (c) Payment of the Change of Control Purchase Price for a 2002 Note for which a Change in Control Purchase Notice has been delivered and not withdrawn is conditioned (except in the case of a 2002 Note represented by one or more Global Notes) upon delivery of such 2002 Note (together with necessary endorsements) to the Paying Agent at its office in Detroit, Michigan, or any other office of the Paying Agent maintained for such purpose, at any time (whether prior to, on or after the Purchase Date) after the delivery of such Change in Control Purchase Notice. Payment of the Change of Control Purchase Price for such 2002 Note will be made promptly following the later of the Purchase Date or the time of delivery of such 2002 Note. If the Paying Agent holds, in accordance with the terms of the Indenture, money sufficient to pay the Change in Control Purchase Price of such 2002 Note on the Business Day following the Purchase Date, then, on and after such date, interest will cease accruing, and all other rights of the Holder shall terminate (other than the right to receive the Change of Control Purchase Price upon delivery of the 2002 Note). (d) The Issuer shall comply with the provisions of Regulation 14E and any other tender offer rules under the Exchange Act, which may then be applicable in connection with any offer by the Issuer to repurchase 2002 Notes at the option of Holders upon a Change in Control. (e) No 2002 Note may be repurchased by the Issuer as a result of a Change in Control if there has occurred and is continuing an Event of Default (other than a default in the Payment of the Change in Control Purchase Price with respect to the 2002 Notes). ARTICLE IV ADDITIONAL COVENANTS OF THE ISSUER WITH RESPECT TO THE 2002 NOTES SECTION 4.01. LIMITATION ON CERTAIN LIENS. (a) So long as any of the 2002 Notes are outstanding, the Issuer shall not create, incur, assume or suffer to exist any lien, mortgage, pledge, security interest, conditional sale, title retention agreement or other charge or encumbrance of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor of the Issuer or any Subsidiary a preferential interest (hereinafter in this Section referred to as a "Lien") upon or with respect to any of its property of any character, including without limitation any shares of Capital Stock of Consumers or Enterprises, without making effective provision whereby the 2002 Notes shall (so long as any such other creditor shall be so secured) be equally and ratably secured (along with any other creditor similarly entitled to be secured) by a direct Lien on all property subject to such Lien, provided, however, that the foregoing restrictions shall not apply to: (i) Liens for taxes, assessments or governmental charges or levies to the extent not past due; (ii) pledges or deposits to secure (a) obligations under workmen's compensation laws or similar legislation, (b) statutory obligations of the Issuer or (c) Support Obligations at any one time outstanding; (iii) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which have been fully bonded and are being contested in good faith; (iv) purchase money Liens upon or in property acquired and held by the Issuer in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred solely for the purpose of financing the acquisition of any such property to be subject to such Liens, or Liens existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien shall extend to or cover any property other than the property being acquired and no such extension, renewal or replacement shall extend to or cover property not theretofore subject to the Lien being extended, renewed or replaced, and provided, further, that the aggregate principal amount of the Indebtedness at any one time outstanding secured by Liens permitted by this clause (iv) shall not exceed $10,000,000; and (v) Liens not otherwise permitted by clauses (i) through (iv) of this Section securing Indebtedness of the Issuer; provided that on the date such Liens are created, and after giving effect to such Indebtedness, the aggregate principal amount at maturity of all of the secured Indebtedness of the Issuer at such date shall not exceed 5% of Consolidated Net Tangible Assets at such date. SECTION 4.02. LIMITATION ON CONSOLIDATION, MERGER, SALE OR CONVEYANCE. So long as any of the 2002 Notes are Outstanding and until the 2002 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), and subject also to Article Nine of the Indenture, at which time the Issuer will be permanently released from the provisions of this Section 4.02, the Issuer shall not consolidate with or merge into any other Person or sell, lease or convey the property of the Issuer in the entirety or substantially as an entirety, unless (i) immediately after giving effect to such transaction the Consolidated Net Worth of the surviving entity is at least equal to the Consolidated Net Worth of the Issuer immediately prior to the transaction, and (ii) after giving effect to such transaction, the surviving entity would be entitled to incur at least one dollar of additional Indebtedness (other than revolving Indebtedness to banks) without violation of the limitations in Section 4.03 hereof. SECTION 4.03. LIMITATION ON CONSOLIDATED INDEBTEDNESS. (a) So long as any of the 2002 Notes are Outstanding and until the 2002 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 4.013, the Issuer shall not, and shall not permit any Consolidated Subsidiary of the Issuer to, issue, create, assume, guarantee, incur or otherwise become liable for (collectively, "issue"), directly or indirectly, any Indebtedness unless the Consolidated Coverage Ratio of the Issuer and its Consolidated Subsidiaries for the four consecutive fiscal quarters immediately preceding the issuance of such Indebtedness (as shown by a pro forma consolidated income statement of the Issuer and its Consolidated Subsidiaries for the four most recent fiscal quarters ending at least 30 days prior to the issuance of such Indebtedness after giving effect to (i) the issuance of such Indebtedness and (if applicable) the application of the net proceeds thereof to refinance other Indebtedness as if such Indebtedness was issued at the beginning of the period, (ii) the issuance and retirement of any other Indebtedness since the first day of the period as if such Indebtedness was issued or retired at the beginning of the period and (iii) the acquisition of any company or business acquired by the Issuer or any Subsidiary since the first day of the period (including giving effect to the pro forma historical earnings of such company or business), including any acquisition which will be consummated contemporaneously with the issuance of such Indebtedness, as if in each case such acquisition occurred at the beginning of the period) exceeds a ratio of 1.7 to 1.0. (b) Notwithstanding the foregoing paragraph, the Issuer or any Restricted Subsidiary may issue, directly or indirectly, the following Indebtedness: (1) Indebtedness of the Issuer to banks not to exceed $1,000,000,000 in aggregate outstanding principal amount at any time; (2) Indebtedness (other than Indebtedness described in clause (1) of this Subsection) outstanding on the date of this Third Supplemental Indenture, as set forth on Schedule 4.03(b)(2) attached hereto and made a part hereof, and Indebtedness issued in exchange for, or the proceeds of which are used to refund or refinance, any Indebtedness permitted by this clause (2); provided, however, that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the 2002 Notes, the Indebtedness is subordinated to the 2002 Notes in right of payment; (3) Indebtedness of the Issuer owed to and held by a Subsidiary and Indebtedness of a Subsidiary owed to and held by the Issuer; provided, however, that, in the case of Indebtedness of the Issuer owed to and held by a Subsidiary, (i) any subsequent issuance or transfer of any Capital Stock that results in any such Subsidiary ceasing to be a Subsidiary or (ii) any transfer of such Indebtedness (except to the Issuer or a Subsidiary) shall be deemed for the purposes of this Subsection to constitute the issuance of such Indebtedness by the Issuer; (4) Indebtedness of the Issuer issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of the Issuer issued in accordance with Subsection (a) of this Section, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced, (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced and (C) if the Indebtedness to be exchanged, refunded or refinanced is subordinated to the 2002 Notes, the Indebtedness so issued is subordinated to the 2002 Notes in right of payment; (5) Indebtedness of a Restricted Subsidiary issued in exchange for, or the proceeds of which are used to refund or refinance, Indebtedness of a Restricted Subsidiary issued in accordance with Subsection (a) of this Section, provided that (i) the principal amount (or accreted value in the case of Indebtedness issued at a discount) of the Indebtedness so issued shall not exceed the principal amount (or accreted value in the case of Indebtedness issued at a discount) of, premium, if any, and accrued but unpaid interest on, the Indebtedness so exchanged, refunded or refinanced and (ii) the Indebtedness so issued (A) shall not mature prior to the stated maturity of the Indebtedness so exchanged, refunded or refinanced and (B) shall have an Average Life equal to or greater than the remaining Average Life of the Indebtedness so exchanged, refunded or refinanced. (6) Indebtedness of a Consolidated Subsidiary issued to acquire, develop, improve, construct or to provide working capital for a gas, oil or electric generation, exploration, production, distribution, storage or transmission facility and related assets, provided that such Indebtedness is without recourse to any assets of the Issuer, Consumers, Enterprises, CMS Generation, NOMECO, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated Enterprises Subsidiary; (7) Indebtedness of a Person existing at the time at which such person became a Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary. Such Indebtedness shall be deemed to be incurred on the date the acquired Person becomes a Consolidated Subsidiary; (8) Indebtedness issued by the Issuer not to exceed $150,000,000 in aggregate principal amount at any time; and (9) Indebtedness of a Consolidated Subsidiary in respect of rate reduction bonds issued to recover electric restructuring transition costs of Consumers provided that such Indebtedness is without recourse to the assets of Consumers. SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. (a) So long as the 2002 Notes are Outstanding and until the 2002 Notes are rated BBB- or above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency (or, if Standard & Poor's shall change its rating system, an equivalent of such rating then employed by such organization), at which time the Issuer will be permanently released from the provisions of this Section 4.04, the Issuer shall not, and shall not permit any Restricted Subsidiary of the Issuer, directly or indirectly, to (i) declare or pay any dividend or make any distribution on the Capital Stock of the Issuer to the direct or indirect holders of its Capital Stock (except dividends or distributions payable solely in its Non-Convertible Capital Stock or in options, warrants or other rights to purchase such Non-Convertible Capital Stock and except dividends or distributions payable to the Issuer or a Subsidiary), (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Issuer, or (iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity or scheduled repayment thereof, any Subordinated Indebtedness (any such dividend, distribution, purchase, redemption, repurchase, defeasing, other acquisition or retirement being hereinafter referred to as a "Restricted Payment") if at the time the Issuer or such Subsidiary makes such Restricted Payment: (1) an Event of Default, or an event that with the lapse of time or the giving of notice or both would constitute an Event of Default, shall have occurred and be continuing (or would result therefrom); or (2) the aggregate amount of such Restricted Payment and all other Restricted Payments made since the date of this Third Supplemental Indenture would exceed the sum of: (A) $100,000,000; (B) 100% of Consolidated Net Income, accrued during the period (treated as one accounting period) from the date of this Third Supplemental Indenture to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such sum shall be a deficit, minus 100% of the deficit); and (C) the aggregate Net Cash Proceeds received by the Issuer from the issue or sale of or contribution with respect to its Capital Stock subsequent to the date of this Third Supplemental Indenture. For the purpose of determining the amount of any Restricted Payment not in the form of cash, the amount shall be the fair value of such Restricted Payment as determined in good faith by the Board of Directors, provided that if the value of the non-cash portion of such Restricted Payment as determined by the Board of Directors is in excess of $25 million, such value shall be based on the opinion from a nationally recognized firm experienced in the appraisal of similar types of transactions. (b) The provisions of Section 4.04(a) shall not prohibit: (i) any purchase or redemption of Capital Stock of the Issuer made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Issuer (other than Redeemable Stock or Exchangeable Stock); provided, however, that such purchase or redemption shall be excluded from the calculation of the amount of Restricted Payments; (ii) dividends or other distributions paid in respect of any class of the Issuer's Capital Stock issued in respect of the acquisition of any business or assets by the Issuer or a Restricted Subsidiary if the dividends or other distributions with respect to such Capital Stock are payable solely from the net earnings of such business or assets; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section; provided, however, that at the time of payment of such dividend, no Event of Default shall have occurred and be continuing (or result therefrom), and provided further, however, that such dividends shall be included (without duplication) in the calculation of the amount of Restricted Payments; or (iv) payments pursuant to the Tax-Sharing Agreement. SECTION 4.05. LIMITATION ON ASSET SALES. So long as any of the 2002 Notes are outstanding, the Issuer may not sell, transfer or otherwise dispose of any property or assets of the Issuer, including Capital Stock of any Consolidated Subsidiary, in one transaction or a series of transactions in an amount which exceeds $50,000,000 (an "Asset Sale") unless the Issuer shall (i) apply an amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness of a Consolidated Subsidiary or Indebtedness of the Issuer which is pari passu with the 2002 Notes or (ii) invest an equal amount not so used in clause (i) in property or assets of related business within 24 months after the date of the Asset Sale (the "Application Period") or (iii) apply such excess Net Cash Proceeds not so used in (i) or (ii) (the "Excess Proceeds") to make an offer, within 30 days after the end of the Application Period, to purchase from the Holders on a pro rata basis an aggregate principal amount of 2002 Notes on the relevant purchase date equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the 2002 Notes on the relevant purchase date and unpaid interest, if any, to the purchase date. The Issuer shall only be required to make an offer to purchase 2002 Notes from Holders pursuant to subsection (iii) if the Excess Proceeds equal or exceed $25,000,000 at any given time. The procedures to be followed by the Issuer in making an offer to purchase 2002 Notes from the Holders with Excess Proceeds, and for the acceptance of such offer by the Holders, shall be the same as those set forth in Section 3.01 herein with respect to a Change in Control. ARTICLE V ADDITIONAL EVENTS OF DEFAULT WITH RESPECT TO THE 2002 NOTES SECTION 5.01. DEFINITION. All of the events specified in clauses (a) through (h) of Section 5.1 of the Original Indenture shall be "Events of Default" with respect to the 2002 Notes. SECTION 5.02. AMENDMENTS TO SECTION 5.1 OF THE ORIGINAL INDENTURE. Solely for the purpose of determining Events of Default with respect to the 2002 Notes, paragraphs (e), (f) and (h) of Section 5.1 of the Original Indenture shall be amended such that each and every reference therein to the Issuer shall be deemed to mean either the Issuer or Consumers. ARTICLE VI GLOBAL NOTES The 2002 Notes will be issued initially in the form of Global Notes. "Global Note" means a registered 2002 Note evidencing one or more 2002 Notes issued to a depositary (the "Depositary") or its nominee, in accordance with this Article and bearing the legend prescribed in this Article. One or more Global Notes will represent all 2002 Notes. The Issuer shall execute and the Trustee shall, in accordance with this Article and the Issuer Order with respect to the 2002 Notes, authenticate and deliver one or more Global Notes in temporary or permanent form that (i) shall represent and shall be denominated in an aggregate amount equal to the aggregate principal amount of the 2002 Notes to be represented by such Global Note or Notes, (ii) shall be registered in the name of the Depositary for such Global Note or Notes or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions and (iv) shall bear a legend substantially to the following effect: "Unless the Global 2002 Note is presented by an authorized representative of the Depository to the Issuer or its agent for registration of transfer, exchange or payment, and any 2002 Note issued is registered in the name of a nominee of the Depository, or in such other name as is requested by an authorized representative of the Depository (and any payment is made to the nominee of the Depository, or to such other entity as is requested by an authorized representative of the Depository), any transfer, pledge or other use hereof for value or otherwise by or to any Person is wrongful inasmuch as the registered owner hereof has an interest herein." Notwithstanding Section 2.8 of the Indenture, unless and until it is exchanged in whole or in part for 2002 Notes in definitive form, a Global Note representing one or more 2002 Notes may not be transferred except as a whole by the Depositary, to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for 2002 Notes or a nominee of such successor Depositary. If at any time the Depositary for the 2002 Notes is unwilling or unable to continue as Depositary for the 2002 Notes, the Issuer shall appoint a successor Depositary with respect to the 2002 Notes. If a successor Depositary for the 2002 Notes is not appointed by the Issuer by the earlier of (i) 90 days from the date the Issuer receives notice to the effect that the Depositary is unwilling or unable to act, or the Issuer determines that the Depositary is unable to act or (ii) the effectiveness of the Depositary's resignation or failure to fulfill its duties as Depositary, the Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the authentication and delivery of definitive 2002 Notes, will authenticate and deliver 2002 Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Notes representing such 2002 Notes in exchange for such Global Note or Notes. The Issuer may at any time and in its sole discretion determine that the 2002 Notes issued in the form of one or more Global Notes shall no longer be represented by such Global Note or Notes. In such event the Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the authentication and delivery of definitive 2002 Notes, will authenticate and deliver 2002 Notes in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Notes representing such 2002 Notes in exchange for such Global Note or Notes. The Depositary for such 2002 Notes may surrender a Global Note or Notes for such 2002 Notes in exchange in whole or in part for 2002 Notes in definitive form on such terms as are acceptable to the Issuer and such Depositary. Thereupon, the Issuer shall execute, and the Trustee shall authenticate and deliver, without service charge: (i) to each Person specified by such Depositary a new 2002 Note or Notes, of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Global Note; and (ii) to such Depositary a new Global Note in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Note and the aggregate principal amount of 2002 Notes in definitive form delivered to Holders thereof. In any exchange provided for in this Article, the Issuer will execute and the Trustee will authenticate and deliver 2002 Notes in definitive registered form in authorized denominations. Upon the exchange of a Global Note for 2002 Notes in definitive form, such Global Note shall be cancelled by the Trustee. 2002 Notes in definitive form issued in exchange for a Global Note pursuant to this Article shall be registered in such names and in such authorized denominations as the Depositary for such Global Note, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or Security Registrar. The Trustee shall deliver such 2002 Notes to the persons in whose names such 2002 Notes are so registered. ARTICLE VII DEFEASANCE All of the provisions of Article Ten of the Original Indenture shall be applicable to the 2002 Notes. Upon satisfaction by the Issuer of the requirements of Section 10.1(c) of the Indenture, in connection with any covenant defeasance (as provided in Section 10.1(c) of the Indenture), the Issuer shall be released from its obligations under Article Nine of the Original Indenture and under Articles III and IV of this Third Supplemental Indenture with respect to the 2002 Notes. ARTICLE VIII SUPPLEMENTAL INDENTURES This Third Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Third Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Third Supplemental Indenture shall together constitute one and the same instrument. TESTIMONIUM This Third Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. CMS ENERGY CORPORATION By: /s/ A. M. Wright Attest: /s/ T. A. McNish (Corporate Seal) NBD BANK as Trustee By: /s/ Ernest J. Peck Attest: /s/ Monica M. Barbour (Corporate Seal) 1 Rev 05/06/97 SCHEDULE 4.03(B)(2) INDEBTEDNESS SCHEDULE As of May 5, 1997 I. CMS ENERGY - DIRECT OBLIGATIONS A. Letter of Credit dated as of December 9, 1994, issued by Bank of Tokyo-Mitsubishi pursuant to CMS Energy $450MM Credit Agreement on behalf of CMS Energy in connection with the obligation of CMS NOMECO Oil & Gas Co. for the Colon Project in Venezuela. Beneficiary - Banco Latino Americano de Exportaciones SA (BLADEX). Termination Date: June 30, 1997 Outstanding ___________ $22,107,168 B. Letter of Credit July 18, 1991, issued by Bank of Tokyo-Mitsubishi pursuant to CMS Energy $450MM Credit Agreement on behalf of CMS Energy in connection with the obligation of CMS Generation Co. for the Chateaugay Project. Beneficiary - New York State Electric & Gas Corporation. Termination Date: April 29, 1998 Outstanding ___________ $ 6,000,000 C. Deferred Coupon Notes, Series A due 1997 and Series B due 1999. Outstanding ___________ Series A - $172,000,000 Series B - $175,098,000 D. General Term Notes, various maturities, 3-year, 5-year and 7-year tenors; The latest maturity for General Term Notes outstanding as of March 31, 1997 is March 15, 2004. Outstanding ___________ Series A - $249,637,000 Series B - $ 124,810,000 Series C - $ 40,038,000 E. CMS Energy, as Indemnitor of various CMS subsidiaries' surety bonds. Outstanding ___________ $604,000 Oxford Tire Recycling, Inc: $500,000 St Clair Underground Storage: $104,000 F. Amended and Restated Aircraft Lease, dated as of January 29, 1995, (Supplement No. 1 thereto,), between Fleet Credit Corporation and CMS Capital; sublease to CMS Energy dated January 29, 1995 [those rights suspended from June 25, 1996 - May 26, 1997-- the term of a subsequent sublease to Aetna Life Insurance Company]. The lease between Fleet Credit Corporation and CMS Capital was subsequently assigned to MDFC Equipment Leasing Corporation as of June 28, 1995. Termination Date: January 28, 2000 Cumulative Remaining Lease Payments ___________________________________ $4,092,000 G. Aircraft Lease Agreement, dated as of December 29, 1995, between Pitney Bowes Credit Corporation and CMS Energy Corporation. Termination Date: April 1, 2006 Cumulative Remaining Lease Payments ___________________________________ $15,150,248 H. Letter of Credit issued by Union Bank of California pursuant to the terms of the Bank Guaranty, dated as of April 30, 1996 made by BNP in favor of ONE on behalf of CMS Energy for the purpose of securing the performance by JLEC of its obligations under the Protocol dated April 26, 1996 between JLEC and ONE to secure the financial closing of the project in accordance with the terms of the Protocol. Termination Date: August 29, 1997 Outstanding ___________ $30,000,000 I. $50MM Letter of Credit Reimbursement Agreement dated as of March 20, 1996 among CMS Energy and The Chase Manhattan Bank as Agent. Termination Date: March 19, 1999 Outstanding ___________ $21,301,873* *Of this amount, $0 Direct Obligation of CMS Energy; $21,301,873 Contingent Obligation of CMS Energy. Letters of Credit issued pursuant to Accession Agreements are as follows: CMS Generation Grayling Company - $1,264,002 Centrales Termicas Mendoza, S.A. - $10,037,871 Sociedad Inversora En Distribucion De Electricidad S.A. - $10,000,000 [Contingent Obligations of CMS Energy, Items E, J and K] II. CMS ENERGY - CONTINGENT OBLIGATIONS CMS MARKETING, SERVICES AND TRADING A. CMS Energy Guaranty of CMS Marketing, Services and Trading Company transportation obligations to Great Lakes Gas Transmission Company dated October 31, 1990. [See also CMS MS&T - Direct Obligations, Item A] B. Credit Agreement for transportation service between ANR and CMS Marketing, Services and Trading; guaranteed by CMS Energy, dated as of June 2, 1988. [See also CMS MS&T - Direct Obligations, Item B] CMS LAND COMPANY C. $2.3MM Bay Harbor Company, L.L.C. Promissory Note to Holnam Inc., dated as of July 14, 1994. CMS Energy Guaranty for not more than 50% of the total note. Termination Date: July 14, 1997 [Direct obligation of Bay Harbor Company, L.L.C.] Outstanding ___________ $1,150,000 CMS GENERATION CO. AND ITS SUBSIDIARIES D. CMS Generation Filer City, Inc. and Western Michigan Cogeneration Limited Partnership Letter of Credit Reimbursement Agreement, dated August 31, 1990, with Comerica required to cover a Construction and Term Loan dated July 1, 1988 (Series A) and July 1, 1990 (Series B). CMS Energy Corporation, Guarantor. Beneficiary - Prudential Insurance Company, Trustee - Connecticut Bank & Trust. [Direct obligation of CMS Generation Filer City, Inc.] Outstanding ___________ Series A - $3,210,664 (Termination Date: 9/30/97) Series B - $ 664,756 (Termination Date: 9/30/97) E. Letter of Credit dated as of July 7, 1993, issued pursuant to CMS Energy $50MM Letter of Credit Reimbursement Agreement with Chase Manhattan, dated March 20, 1996, for the account of CMS Generation Grayling Company (per Accession Agreement dated March 20, 1996) for the 8 megawatt increase occurring August 13, 1991. Beneficiary - Consumers Power Company. Termination Date: June 9, 1997 [Direct obligation of CMS Generation Grayling Company] Outstanding ___________ $1,264,002 F. CMS Generation Co. (El Chocon Project) Letter of Credit Reimbursement Agreement, dated as of August 18, 1993 with Chase Manhattan originally three letters of credit issued under facility for a total amount of $66,315,934, each letter of credit dated as of July 14, 1993. CMS Energy Corporation, Guarantor. Beneficiary - Estado Nacional Argentino. Termination Date: August 29, 1997 [See also CMS Generation - Direct Obligations, Item B] Outstanding ___________ $380,000 G. $56.1MM Credit Agreement dated as of December 15, 1993 between Hidroelectra El Chocon S.A. and Chase Manhattan. CMS Energy Corporation, Guarantor of 25%. Beneficiary - Chase Argentina. [Direct obligation of Hidroelectra El Chocon S.A.] Termination Date: April 1, 2003 Outstanding ___________ $12,990,100 H. Exeter Energy Limited Partnership ("Exeter") obligation under an Electricity Purchase Agreement (the "Agreement") with Connecticut Light and Power ("CL&P") and as additional collateral for CL&P's financial accommodations to Exeter under the Agreement. CMS Energy Corporation, Guarantor of such obligations as per Guarantee Agreement dated as of August 1, 1993. Termination Date: November 1, 2021 [Direct obligation of Exeter Energy Limited Partnership] Outstanding ___________ $8,600,000 I. Service Fee Support Agreement dated as of March 1, 1994, between CMS Energy Corporation and Comerica Bank, the Trustee for the Genesee Power Station Limited Partnership Tax Exempt bond financing. CMS Energy is required to make support payments to the Trustee for the benefit of bondholders in the event that Genesee experiences a debt service deficiency caused by high fuel prices. Termination Date: 2021 [Direct obligation of Genesee Power Station Limited Partnership] Maximum Exposure ________________ $3,000,000 J. Letter of Credit dated August 15, 1996, issued pursuant to CMS Energy $50MM Letter of Credit Reimbursement Agreement with The Chase Manhattan Bank, dated March 20, 1996, for the account of Centrales Termicas Mendoza, S.A. (per Accession Agreement dated July 31, 1996) in support of gas transportation contract. Beneficiary - TGN. Termination Date: August 15, 1997 Automatic one-year extensions. [Direct obligation of Centrales Termicas Mendoza, S.A. - CMS = 80.55%] Outstanding ___________ $10,037,871 K. Letter of Credit dated April 10, 1997, issued pursuant to CMS Energy $50MM Letter of Credit Reimbursement Agreement with The Chase Manhattan Bank, dated March 20, 1996, for the account of Sociedad Inversora En Distribucion De Electricidad S.A. in support of ESEBA bid. Beneficiary - Provincia De Buenos Aires (Ministerio De Orbras Y Servicios Publicos). Termination Date: June 21, 1997 [Direct obligation of Sociedad Inversora En Distribucion De Electricidad S.A.] Outstanding ___________ $5,261,000 EX-12 3 CMS ENERGY RATIO OF EARNING TO F.C. Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges (Millions of Dollars) Three Months Ended Years Ended December 31 March 31, 1997 1996 1995 1994 1993 1992 (b) Earnings as defined (a) Consolidated net income (loss) $ 84 $ 240 $ 204 $ 179 $ 155 $(297) Income taxes 50 139 118 92 75 (146) Exclude equity basis subsidiaries (16) (85) (57) (18) (6) 10 Fixed charges as defined, adjusted to exclude capitalized interest of $3, $8, $8, $6, $5, and $3 million for the three months ended March 31, 1997 and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively 80 310 295 249 253 236 ----- ----- ----- ----- ----- ----- Earnings as defined $ 198 $ 604 $ 560 $ 502 $ 477 $(197) ===== ===== ===== ===== ===== ===== Fixed charges as defined (a) Interest on long-term debt $ 60 $ 230 $ 224 $ 193 $ 204 $ 169 Estimated interest portion of lease rental 2 10 9 9 11 16 Other interest charges 11 43 42 30 32 43 Preferred securities dividends and distributions 14 54 42 36 17 16 ----- ----- ----- ----- ----- ----- Fixed charges as defined $ 87 $ 337 $ 317 $ 268 $ 264 $ 244 ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 2.28 1.79 1.77 1.87 1.81 - ===== ===== ===== ===== ===== ===== 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 1.29 excluding these amounts.
EX-15 4 CMS ENERGY ARTHUR ANDERSEN LETTER 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. 33-64044, No. 33-60007, No. 33-61595, No. 33-62573, No. 333-16793 and No. 333-17289 its Form 10-Q for the quarter ended March 31, 1997, which includes our report dated May 9, 1997 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Arthur Andersen LLP Detroit, Michigan, May 9, 1997. EX-27 5 CMS ENERGY 1Q97 FIN. DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 PER-BOOK 4,393 1,909 769 1,332 0 8,403 1 2,062 (282) 1,775 100 356 1,667 88 962 0 628 0 99 40 2,682 8,403 1,313 50 1,100 1,150 163 (2) 161 68 93 9 84 28 0 379 .79 0 EPS for CMS Energy Common Stock $ .79 EPS for Class G Common Stock $1.18
EX-27 6 CMS ENERGY 1996 RESTATED FIN. DATA SCHED.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 4,344 4,358 4,396 4,428 1,595 1,708 1,773 1,855 746 746 785 1,014 1,348 1,339 1,337 1,318 0 0 0 0 8,033 8,151 8,291 8,615 1 1 1 1 1,959 1,967 1,979 2,045 (411) (385) (354) (338) 1,541 1,575 1,619 1,702 100 100 100 100 356 356 356 356 1,868 2,145 2,044 1,892 38 108 341 333 1,226 971 952 950 0 0 0 0 68 93 161 370 0 0 0 0 98 94 92 103 45 38 37 39 2,685 2,663 2,582 2,764 8,033 8,151 8,291 8,615 1,283 2,221 3,150 4,333 54 85 116 139 1,064 1,843 2,603 3,642 1,121 1,934 2,728 3,795 162 287 422 538 (2) (6) (9) (11) 163 287 422 541 67 131 199 265 96 156 223 276 8 18 27 36 88 138 196 240 24 48 75 103 0 0 0 133 349 486 520 661 .83 1.37 2.02 2.45 0 0 0 0 EPS for CMS Energy Common Stock $ .83 $1.37 $2.02 $2.45 EPS for Class G Common Stock $1.50 $1.66 $1.38 $1.82
EX-27 7 CMS ENERGY 1995 RESTATED FIN. DATA SCHED.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1995 DEC-31-1995 DEC-31-1995 DEC-31-1995 JAN-01-1995 JAN-01-1995 JAN-01-1995 JAN-01-1995 MAR-31-1995 JUN-30-1995 SEP-30-1995 DEC-31-1995 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 4,263 4,294 4,318 4,377 1,184 1,226 1,447 1,515 598 651 742 910 1,293 1,312 1,343 1,341 0 0 0 0 7,338 7,483 7,850 8,143 1 1 1 1 1,734 1,740 1,935 1,951 (527) (513) (489) (475) 1,209 1,229 1,439 1,469 0 0 0 0 356 356 356 356 2,021 2,038 1,997 1,866 135 309 474 341 766 710 766 1,040 0 0 0 0 142 142 164 161 0 0 0 0 103 109 101 106 38 39 43 46 2,569 2,552 2,502 2,750 7,338 7,483 7,850 8,143 1,117 1,952 2,821 3,890 53 74 103 118 905 1,613 2,330 3,271 958 1,692 2,441 3,400 159 260 380 490 0 (3) (8) (11) 159 262 380 490 66 129 193 258 93 133 187 232 7 14 21 28 86 119 166 204 18 37 60 84 0 0 0 135 330 405 389 682 .99 1.36 1.90 2.27 0 0 0 0 EPS for CMS Energy Common Stock $1.90 $2.27 EPS for Class G Common Stock $(.17) $ .38
EX-27 8 CMS ENERGY 1994 RESTATED FIN. DATA SCHED.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 6-MOS 9-MOS 12-MOS DEC-31-1994 DEC-31-1994 DEC-31-1994 JAN-01-1994 JAN-01-1994 JAN-01-1994 JUN-30-1994 SEP-30-1994 DEC-31-1994 PER-BOOK PER-BOOK PER-BOOK 4,165 4,216 4,285 969 1,008 1,029 642 670 832 1,233 1,271 1,232 0 0 0 7,009 7,165 7,378 1 1 1 1,688 1,694 1,701 (630) (608) (595) 1,058 1,087 1,107 0 0 0 356 356 356 2,005 2,015 2,001 129 401 339 402 363 708 0 0 0 226 200 21 0 0 0 124 118 108 36 38 43 2,672 2,587 2,695 7,009 7,165 7,378 1,935 2,701 3,614 64 88 92 1,647 2,285 3,100 1,718 2,382 3,203 217 319 411 (5) (8) (3) 219 320 419 101 155 216 118 165 203 10 17 24 108 148 179 31 49 67 0 0 113 444 424 612 1.27 1.73 2.09 0 0 0
EX-27 9 CONSUMERS 1Q97 FINANCIAL DATA SCHED.
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 ENERGY COMPANY 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 PER-BOOK 4,393 702 480 1,175 0 6,750 841 504 385 1,766 100 356 1,228 88 424 0 308 0 97 40 2,379 6,750 1,127 55 934 989 138 2 140 43 97 9 88 0 0 368 0 0
EX-27 10 CONSUMERS 1996 RESTATED FIN. DATA SCHED.
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 ENERGY COMPANY 1,000,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 4,344 4,358 4,396 4,428 698 711 726 695 513 501 579 734 1,216 1,199 1,197 1,168 0 0 0 0 6,771 6,769 6,898 7,025 841 841 841 841 504 504 504 504 331 305 326 297 1,705 1,681 1,701 1,679 100 100 100 100 356 356 356 356 1,520 1,522 1,473 1,475 38 108 340 333 403 403 403 425 0 0 0 0 45 46 60 59 0 0 0 0 96 92 89 100 44 37 37 39 2,493 2,455 2,369 2,496 6,771 6,769 6,898 7,025 1,141 1,938 2,740 3,770 58 88 125 150 939 1,607 2,261 3,159 1,000 1,702 2,395 3,321 141 236 345 449 0 0 0 1 144 243 354 462 42 82 124 166 102 161 230 296 8 18 27 36 94 143 203 260 0 75 114 200 0 0 0 133 308 453 458 672 0 0 0 0 0 0 0 0
EX-27 11 CONSUMERS 1995 RESTATED FIN. DATA SCHED.
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 ENERGY COMPANY 1,000,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1995 DEC-31-1995 DEC-31-1995 DEC-31-1995 JAN-01-1995 JAN-01-1995 JAN-01-1995 JAN-01-1995 MAR-31-1995 JUN-30-1995 SEP-30-1995 DEC-31-1995 PER-BOOK PER-BOOK PER-BOOK PER-BOOK 4,263 4,294 4,318 4,377 655 667 681 697 464 561 618 686 1,174 1,185 1,200 1,194 0 0 0 0 6,556 6,707 6,817 6,954 841 841 841 841 491 491 491 491 167 136 191 237 1,516 1,487 1,545 1,598 0 0 0 0 356 356 356 356 1,550 1,551 1,518 1,519 135 309 474 341 404 404 403 403 0 0 0 0 10 10 45 45 0 0 0 0 103 109 101 104 38 39 43 45 2,461 2,461 2,354 2,572 6,556 6,707 6,817 6,954 1,032 1,783 2,554 3,511 54 79 112 133 840 1,477 2,109 2,947 896 1,562 2,230 3,092 136 221 324 419 1 1 1 2 139 228 334 433 45 88 132 178 94 140 202 255 7 14 21 28 87 126 181 227 0 70 70 70 0 0 0 135 309 344 318 642 0 0 0 0 0 0 0 0
EX-27 12 CONSUMERS 1994 RESTATED FIN. DATA SCHED.
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 ENERGY COMPANY 1,000,000 6-MOS 9-MOS 12-MOS DEC-31-1994 DEC-31-1994 DEC-31-1994 JAN-01-1994 JAN-01-1994 JAN-01-1994 JUN-30-1994 SEP-30-1994 DEC-31-1994 PER-BOOK PER-BOOK PER-BOOK 4,165 4,216 4,285 622 631 644 622 660 717 1,182 1,211 1,163 0 0 0 6,591 6,718 6,809 841 841 841 491 491 491 93 107 80 1,436 1,450 1,427 0 0 0 356 356 356 1,554 1,556 1,549 129 401 339 192 145 404 0 0 0 214 189 9 0 0 0 116 109 108 35 37 36 2,570 2,486 2,596 6,591 6,718 6,809 1,808 2,513 3,356 72 99 107 1,524 2,110 2,861 1,603 2,219 2,981 205 294 375 (3) (4) 1 209 300 389 78 117 163 131 183 226 10 17 24 121 166 202 82 113 176 0 0 113 370 349 598 0 0 0 0 0 0
EX-99 13 CMS ENERGY - CONSUMERS GAS GROUP FINANCIALS 1 Consumers Gas Group Management's Discussion and Analysis This MD&A should be read along with the MD&A in the 1996 Form 10-K of CMS Energy included and incorporated by reference herein. CMS Energy has issued 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 the businesses of CMS Energy, including the nature and issuance of Class G Common Stock, see the MD&A of CMS Energy. Earnings In Millions March 31 1997 1996 Change Three months ended $39 $48 $(9) Twelve months ended 50 61 (11) The decrease in earnings for both the three months and twelve months ended periods in 1997 compared to 1996 reflect lower gas deliveries resulting from warmer temperatures during the first quarter of 1997. In addition, the reduced deliveries reflect an extra day for leap year in 1996. The quarter ended earnings comparison also reflects higher depreciation and general tax expenses, partially offset by lower operation and maintenance expenses. The twelve-month ended earnings comparison reflects higher operation, depreciation and general tax expenses, partially offset by lower maintenance expenses. Cash Position, Investing and Financing Operating Activities: 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 three months of 1997 and 1996 totaled $157 million and $98 million, respectively. The $59 million increase primarily reflects changes in the timing of cash receipts and 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: Cash used in investing activities totaled $25 million for the first three months of 1997 and 1996. Financing Activities: Cash used in financing activities during the first three months of 1997 and 1996 totaled $139 million and $75 million, respectively. The $64 million increase reflects the reduction of allocated long-term debt and the 1997 absence of proceeds from preferred securities sold in 1996. Other Investing and Financing Matters: Consumers has an agreement permitting the sale of certain accounts receivable for up to $500 million. At March 31, 1997, receivables sold totaled $398 million. Consumers Gas Group's attributed portion of these receivables sold totaled $178 million. For further information, see Cash Position, Investing and Financing in CMS Energy's MD&A. Results of Operations For a discussion of results of operations, see Consumers Gas Group Results of Operations in CMS Energy's MD&A. Gas Issues For a discussion of Gas Rate Proceedings, GCR Matters and Gas Environmental Matters, see Consumers Gas Group Issues in CMS Energy's MD&A. 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. Capital Expenditures: CMS Energy estimates the following capital expenditures for Consumers Gas Group, including new lease commitments, over the next three years. These estimates are prepared for planning purposes and are subject to revision. In Millions Years Ended December 31 1997 1998 1999 Gas utility (a) $112 $100 $100 Michigan Gas Storage 3 3 3 ---- ---- ---- $115 $103 $103 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to Consumers' gas and electric utility businesses. 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 forward-looking information, see the Consumers Gas Group Outlook discussion in CMS Energy's MD&A. 3 (This page intentionally left blank) 4 Consumers Gas Group Statements of Income (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions, Except Per Share Amounts Operating Revenue $ 498 $ 548 $1,231 $1,261 ------ ------ ------ ------ Operating Expenses Operation Cost of gas sold 314 346 718 739 Other 39 42 190 187 ------ ------ ------ ------ 353 388 908 926 Maintenance 8 9 38 38 Depreciation, depletion and amortization 38 37 88 87 General taxes 21 21 54 54 ------ ------ ------ ------ 420 455 1,088 1,105 ------ ------ ------ ------ Pretax Operating Income 78 93 143 156 ------ ------ ------ ------ Other Income (Deductions) (1) (1) (6) (1) ------ ------ ------ ------ Fixed Charges Interest on long-term debt 7 8 29 29 Other interest 3 3 12 12 Capitalized interest - - (1) (1) Preferred dividends 1 1 6 6 ------ ------ ------ ------ 11 12 46 46 ------ ------ ------ ------ Income Before Income Taxes 66 80 91 109 Income Taxes 27 32 41 48 ------ ------ ------ ------ Net Income $ 39 $ 48 $ 50 $ 61 ====== ====== ====== ====== Net Income Attributable to CMS Energy Shareholders through Retained Interest $ 30 $ 36 $ 39 $ 46 ====== ====== ====== ====== Net Income Attributable to Class G Shareholders $ 9 $ 12 $ 11 $ 15 ====== ====== ====== ====== Average Class G Common Shares Outstanding 8 8 8 8 ====== ====== ====== ====== Earnings Per Average Class G Common Share $ 1.18 $ 1.50 $ 1.53 $ 1.90 ====== ====== ====== ====== Dividend Declared Per Class G Common Share $ .295 $ .28 $1.165 $ .84 ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
5 Consumers Gas Group Statements of Cash Flows (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions Cash Flows from Operating Activities Net income $ 39 $ 48 $ 50 $ 61 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 38 37 88 87 Capital lease and other amortization 1 1 4 5 Deferred income taxes and investment tax credit 4 5 12 2 Other (2) 1 (1) 2 Changes in other assets and liabilities 77 6 47 5 ------ ------ ------ ------ Net cash provided by operating activities 157 98 200 162 ------ ------ ------ ------ Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (22) (24) (135) (127) Cost to retire property, net (2) (2) (9) (10) Other (1) 1 (1) 4 ------ ------ ------ ------ Net cash used in investing activities (25) (25) (145) (133) ------ ------ ------ ------ Cash Flows from Financing Activities Increase (decrease) in notes payable, net (97) (90) 2 5 Retirement of bonds and other long-term debt (23) - (31) (5) Payment of common stock dividends (10) (9) (38) (67) Repayment of bank loans (6) - (6) (1) Repayment of long-term note (2) - (2) - Payment of capital lease obligations (1) (1) (4) (5) Proceeds from bank loans - - 23 - Proceeds from long-term note - 22 - 22 Contribution from CMS Energy stockholders - 3 - 21 ------ ------ ------ ------ Net cash used in financing activities (139) (75) (56) (30) ------ ------ ------ ------ Net Decrease in Cash and Temporary Cash Investments (7) (2) (1) (1) Cash and Temporary Cash Investments, Beginning of Period 9 5 3 4 ------ ------ ------ ------ Cash and Temporary Cash Investments, End of Period $ 2 $ 3 $ 2 $ 3 ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
6 Consumers Gas Group Balance Sheets
ASSETS March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Plant and Property (At cost) Plant and property $2,242 $2,203 $2,207 Less accumulated depreciation, depletion and amortization 1,177 1,133 1,216 ------ ------ ------ 1,065 1,070 991 Construction work-in-progress 21 46 48 ------ ------ ------ 1,086 1,116 1,039 ------ ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 2 9 3 Accounts receivable and accrued revenue, less allowances of $2, $4 and $1, respectively (Note 4) 152 97 254 Inventories at average cost Gas in underground storage 51 186 39 Materials and supplies 8 8 10 Trunkline settlement 18 25 30 Deferred income taxes 5 4 8 Prepayments and other 36 49 39 ------ ------ ------ 272 378 383 ------ ------ ------ Non-current Assets Postretirement benefits 150 153 162 Deferred income taxes 11 11 14 Other 60 59 76 ------ ------ ------ 221 223 252 ------ ------ ------ Total Assets $1,579 $1,717 $1,674 ====== ====== ======
7
STOCKHOLDERS' INVESTMENT AND LIABILITIES March 31 March 31 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Capitalization Common stockholders' equity $ 393 $ 364 $ 381 Preferred stock 78 78 78 Long-term debt 364 446 433 Non-current portion of capital leases 16 17 20 ------ ------ ------ 851 905 912 ------ ------ ------ Current Liabilities Current portion of long-term debt and capital leases 73 24 23 Accrued taxes 58 61 70 Accounts payable 69 85 84 Trunkline settlement 18 25 30 Notes payable 17 114 15 Accrued interest 5 7 6 Accrued refunds 5 7 25 Other 41 52 46 ------ ------ ------ 286 375 299 ------ ------ ------ Non-current Liabilities Postretirement benefits 173 171 178 Regulatory liabilities for income taxes, net 175 169 167 Deferred investment tax credit 26 27 28 Other 68 70 90 ------ ------ ------ 442 437 463 ------ ------ ------ Commitments and Contingencies (Notes 3 and 5) Total Stockholders' Investment and Liabilities $1,579 $1,717 $1,674 ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
8 Consumers Gas Group Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Twelve Months Ended March 31 1997 1996 1997 1996 In Millions Common Stock At beginning and end of period $184 $184 $184 $184 ---- ---- ---- ---- Other Paid-in Capital At beginning of period 128 125 128 107 CMS Energy stockholders' contribution - 3 - 21 ---- ---- ---- ---- At end of period 128 128 128 128 ---- ---- ---- ---- Retained Earnings At beginning of period 52 30 69 75 Net income 39 48 50 61 Common stock dividends declared (10) (9) (38) (67) ---- ---- ---- ---- At end of period 81 69 81 69 ---- ---- ---- ---- Total Common Stockholders' Equity $393 $381 $393 $381 ==== ==== ==== ==== The accompanying condensed notes are an integral part of these statements.
9 Consumers Gas Group Condensed Notes to Financial Statements These financial statements and their related notes should be read along with the financial statements and notes contained in the 1996 Form 10-K of CMS Energy Corporation that includes the Report of Independent Public Accountants, included and incorporated by reference herein. 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. CMS Energy has issued 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 the nature and issuance of the Class G Common Stock, see Note 5 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 2: Earnings Per Share and Dividends Earnings per share for the three and twelve month periods ended March 31, 1997 and the three months ended March 31, 1996, reflects the performance of Consumers Gas Group. Earnings per share for the twelve months ended March 31, 1996 reflects the performance of Consumers Gas Group since the initial issuance of the Class G Common Stock in 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 attributable to outstanding Class G Common Stock are equal to Consumers Gas Group's net income 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 three months ended March 31, 1997 and 1996, are based on 24.29 percent and 23.72 percent of the income of Consumers Gas Group. In January and April 1997, the Board of Directors declared a quarterly dividend of $.295 per share on Class G Common Stock, payable in February and May 1997, respectively. 3: Rate Matters For information regarding rate matters directly affecting Consumers Gas Group, see the Gas Proceedings discussion in Note 3 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 4: Short-Term and Long-Term Financings Consumers' short-term and long-term financings are discussed in Note 4 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 March 31, 1997 and 1996, is estimated by management to be $178 million and $141 million, respectively. Accounts receivable and accrued revenue in the balance sheets have been reduced to reflect receivables sold. The portions of short-term debt and receivables sold attributed to Consumers Gas Group reflect the high utilization of short-term borrowing to finance the purchase of gas for storage in the summer and fall periods. Management believes these allocations to be reasonable. 5: Commitments and Contingencies Capital Expenditures: Consumers Gas Group estimates capital expenditures, including new lease commitments, of $115 million for 1997 and $103 million for 1998 and 1999. 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 6 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 6: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Consumers Gas Group's other cash flow activities and non-cash investing and financing activities were: In Millions Three Months Twelve Months Ended Ended March 31 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $12 $11 $39 $39 Income taxes paid (net of refunds) - 2 31 27 Non-cash transactions Assets placed under capital lease $ 1 $ - $ 2 $ 1 Capital leases refinanced - - - 9 11 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 Energy Company and its wholly- owned subsidiary, Michigan Gas Storage Company) as of March 31, 1997 and 1996, and the related statements of income, common stockholders' equity and cash flows for the three-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Consumers Gas Group as of December 31, 1996, 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 24, 1997, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Arthur Andersen LLP Detroit, Michigan, May 9, 1997. -----END PRIVACY-ENHANCED MESSAGE-----