-----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, UxUNMc+LiWiQxKepnNggPa1c8RhP20IpPWm0BxsH+1l981ko5AgGWhJCKL1kJFQz HGUulVrPkCJO7lAQAgj93g== 0000201533-97-000050.txt : 19971117 0000201533-97-000050.hdr.sgml : 19971117 ACCESSION NUMBER: 0000201533-97-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-05611 FILM NUMBER: 97719788 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177880550 MAIL ADDRESS: STREET 1: 212 W MICHIGAN AVE STREET 2: M 946 CITY: JACKSON STATE: MI ZIP: 49201 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: SEC FILE NUMBER: 001-09513 FILM NUMBER: 97719789 BUSINESS ADDRESS: STREET 1: FAIRLANE PLZ SOUTH STE 1100 STREET 2: 330 TOWN CENTER DR CITY: DEARBORN STATE: MI ZIP: 48126 BUSINESS PHONE: 3134369200 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 3RD QTR FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 1997: CMS Energy Corporation: CMS Energy Common Stock, $.01 par value 96,435,348 CMS Energy Class G Common Stock, no par value 8,154,928 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 September 30,1997 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............................21 Consolidated Statements of Cash Flows........................22 Consolidated Balance Sheets..................................23 Consolidated Statements of Common Stockholders' Equity.......25 Condensed Notes to Consolidated Financial Statements.........26 Report of Independent Public Accountants.....................36 Consumers Energy Company Management's Discussion and Analysis.........................37 Consolidated Statements of Income............................49 Consolidated Statements of Cash Flows........................50 Consolidated Balance Sheets..................................51 Consolidated Statements of Common Stockholder's Equity.......53 Condensed Notes to Consolidated Financial Statements.........54 Report of Independent Public Accountants.....................61 PART II: Item 1. Legal Proceedings.................................62 Item 6. Exhibits and Reports on Form 8-K..................62 Signatures.............................................................64 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 Ames. . . . . . . . . . . . . . . Crescent and Ames gas gathering systems and processing plant in Oklahoma. bcf . . . . . . . . . . . . . . . Billion cubic feet Big Rock. . . . . . . . . . . . . Big Rock Point nuclear power plant, owned by Consumers 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 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 . . . . . . . . . . . . . . . Earning per share FASB. . . . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . . . Gas cost recovery Grand Lacs Partnership. . . . . . Grand Lacs Limited Partnership, a marketing center for natural gas. GTNs. . . . . . . . . . . . . . . CMS Energy General Term Notes (Registered Trademark), $250 million Series A, $125 million Series B, $150 million Series C and $200 million Series D. GVK . . . . . . . . . . . . . . . GVK Industries, the owner of an independent power project in Jegurupadu, Andhra Pradesh, India in which CMS Generation owns 25.25% Jorf Lasfar . . . . . . . . . . . A 1,320 MW coal-fueled power plant in Morocco, Africa, jointly owned by CMS Generation and ABB. kWh . . . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison Loy Yang. . . . . . . . . . . . . A 2,000 MW brown coal fueled Loy Yang A power plant and an associated coal mine in Victoria, Australia, in which CMS Generation holds a fifty percent ownership interest. MCV Facility. . . . . . . . . . . A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . . . Midland Cogeneration Venture Limited Partnership in which Consumers has a 49 percent interest through CMS Midland. MD&A. . . . . . . . . . . . . . . Management's Discussion and Analysis Michigan Gas Storage. . . . . . . Michigan Gas Storage Company, a subsidiary of Consumers MMBtu . . . . . . . . . . . . . . Million British thermal unit Moss Bluff. . . . . . . . . . . . Moss Bluff Gas Storage Systems, a partnership that owns a gas storage facility 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 Securitization. . . . . . . . . . A financing authorized by statute in which the statutorily assured flow of revenues from a portion of the rates charged by utilities to their customers is set aside and pledged as security for the repayment of rate reduction bonds issued by a special purpose vehicle affiliated with such utilities. Senior Credit Facilities. . . . . $1.125 billion senior credit facilities consisting of a $400 million 364-day revolving credit facility, a $600 million three-year revolving credit facility and a five-year $125 million term loan facility. 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 Transition Costs. . . . . . . . . Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, but which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation, regulatory assets, and costs incurred in the transition to competition. Trust Preferred Securities. . . . Undivided beneficial interest in the assets of statutory business trusts, these interests have a preference with respect to certain trust distributions over the interests of either CMS Energy or Consumers, as applicable, as owner of the common beneficial interests of the trusts. 6 CMS Energy Corporation Management's Discussion and Analysis The MD&A of this Form 10-Q should be read along with the MD&A and other parts of CMS Energy's 1996 Form 10-K. This MD&A also refers to, and in some sections specifically incorporates by reference from CMS Energy's Condensed Notes to Consolidated Financial Statements and should be read in conjunction with such Statements and Notes. 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 report. 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; storage, transmission and processing of natural gas; energy marketing, services and trading; and international energy distribution. Consolidated Earnings In Millions, Except Per Share Amounts September 30 1997 1996 Change Quarter ended Consolidated net income $ 66 $ 58 $ 8 Net income (loss) attributable to common stocks: CMS Energy 68 61 7 Class G (2) (3) 1 Earnings (loss) per average common share: CMS Energy .70 .65 .05 Class G (.21) (.28) .07 Nine months ended Consolidated net income $204 $196 $ 8 Net income attributable to common stocks: CMS Energy 195 186 9 Class G 9 10 (1) Earnings per average common share: CMS Energy 2.04 2.02 .02 Class G 1.13 1.38 (.25) Twelve months ended Consolidated net income $248 $234 $ 14 Net income attributable to common stocks: CMS Energy 235 220 15 Class G 13 14 (1) Earnings per average common share: CMS Energy 2.47 2.39 .08 Class G 1.57 1.92 (.35) Consolidated net income for the three months ended September 30, 1997 increased over the comparable period in 1996 as a result of reduced operating expenses of Consumers, increased independent power production earnings and higher oil production, partially offset by lower oil and gas prices and lower gas production in the exploration and production business. The third quarter of 1997 included recognition of a gain on the sale of the entire interest in oil and gas properties in Yemen, offset by the 1996 gain on the sale of a partnership interest. Consolidated net income for the nine months ended September 30, 1997 increased over the comparable period in 1996 as a result of the favorable impact of an electric rate increase received by Consumers in February 1996 which benefited all of 1997, increased electric sales of Consumers', improved operating results from the MCV Facility in which Consumers has a 49 percent interest, increased independent power production operating income, and higher oil production in the exploration and production business. Partially offsetting these increases were decreased gas deliveries of Consumers due to warmer temperatures during the early part of 1997, reduced gas wholesale services revenues of Consumers in 1997, and lower gas production and lower oil and gas prices in the exploration and production business. The nine months ended September 1997 also included recognition of an industry expertise service fee in connection with the Loy Yang A acquisition and the gain on the sale of oil and gas properties, while the comparable 1996 period included a gain on the sale of a power purchase agreement by a partnership in which CMS Generation owned a 50 percent interest, a gain on the sale of a partnership interest and a refund received by the MCV Partnership. Consolidated net income for the twelve months ended September 30, 1997 increased over the comparable period in 1996 reflecting the favorable impact of an electric rate increase received by Consumers in February 1996, increased electric sales of Consumers, increased revenues related to Consumers' transmission of electricity for others, improved operating results from the MCV Facility, increased independent power production operating income and higher oil production in the exploration and production business. Partially offsetting the increases for the twelve months ended period were decreased electric revenues of Consumers because of special contract discounts negotiated with large industrial customers and decreased gas deliveries of Consumers due to warmer temperatures during the first quarter of 1997. The twelve months ended September 1997 also included recognition of the industry expertise service fee and the gain on the sale of oil and gas properties. 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 subsidiaries. In the second and third quarters of 1997, Consumers paid $70 million and $43 million in common dividends, respectively, to CMS Energy. In October 1997, Consumers declared a $57 million common dividend to be paid in November 1997. In October 1997, Consumers returned $50 million of paid in capital to CMS Energy. During 1997, Enterprises and its subsidiaries paid common dividends and other distributions of $143 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 the sale and transportation of natural gas by Consumers, the generation, transmission, and sale of electricity by Consumers; the sale of oil and natural gas; the transportation and storage of natural gas; and the independent power production of electricity . Consolidated cash from operations totaled $363 million and $520 million for the first nine months of 1997 and 1996, respectively. The $157 million decrease resulted from timing differences related to cash payments, cash receipts and the recognition of revenues for routine operations. CMS Energy uses its operating cash primarily to expand its international businesses, maintain and expand electric and gas systems of Consumers, retire portions of its long-term debt and pay dividends. Investing Activities: Net cash used in investing activities totaled $1,170 million and $622 million for the first nine months of 1997 and 1996, respectively. The increase of $548 million primarily reflects increases in capital expenditures and investments in partnerships and unconsolidated subsidiaries during 1997. CMS Energy's 1997 expenditures for its utility and international businesses were $260 million and $866 million, respectively. Financing Activities: Net cash provided by financing activities totaled $885 million and $101 million for the first nine months of 1997 and 1996, respectively. The increase of $784 million in net cash from financing activities resulted from the issuances of senior unsecured notes, Series C and D GTNs and Trust Preferred Securities; the increase in notes payable, and the reduction in the repayment of bank loans. This increase was partially offset by the retirement of preferred stock in 1997. 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 repay debt and in part to fund CMS Energy's equity investment in Loy Yang. In June 1997, 3.45 million units of 7.75 percent Trust Preferred Securities were issued and sold through CMS Energy Trust I, a wholly owned business trust which CMS Energy consolidates. These Trust Preferred Securities are convertible into CMS Energy Common Stock at a rate equivalent to a conversion price of $40.80 per share of CMS Energy Common Stock. Net proceeds from the sale totaled $170 million. For additional information regarding the sale of these securities refer to Note 4 to the Consolidated Financial Statements of CMS Energy. For additional information, see footnote (b) to the Consolidated Balance Sheet. In September 1997, CMS Energy issued $180 million of senior unsecured notes due November 15, 2004, at an interest rate of 7.625 percent. Proceeds from the sale together with other funds were used on October 1, 1997 to discharge, at maturity, $172 million of CMS Energy's Series A senior deferred coupon notes, and to redeem $175 million of CMS Energy's Series B senior deferred coupon notes at a premium of $3 million. At September 30, 1997, CMS Energy had $179 million of Series A GTNs, $125 million of Series B GTNs, $150 million of Series C GTNs, and $6 million of Series D GTNs issued and outstanding with weighted-average interest rates of 7.8 percent, 7.9 percent, 7.7 percent, and 7.3 percent, respectively. In September 1997, 4.8 million shares of 8.20 percent Trust Preferred Securities were issued and sold through Consumers Energy Company Financing II, a wholly owned business trust which Consumers consolidates. Net proceeds from the sale totaled $116 million. For additional information regarding the sale of these securities refer to Note 4. For additional information, see footnote (a) to the Consolidated Balance Sheets. In November 1997, CMS Energy issued $300 million of senior unsecured notes due November 15, 2000, at an interest rate of 7.375 percent. Proceeds from the sale were used to repay a significant portion of the outstanding balance under CMS Energy's Senior Credit Facilities. During the nine months ended September 30, 1997, CMS Energy paid $80 million in cash dividends to holders of CMS Energy Common Stock and $7 million in cash dividends to holders of Class G Common Stock. In October 1997, the Board of Directors declared a quarterly dividend of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock, each to be paid in November 1997. In July 1997, the Board of Directors declared quarterly dividends of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock that were paid in August 1997, representing an increase in the annualized dividend on CMS Energy Common Stock to $1.20 per share from the previous amount of $1.08 per share (an 11.1 percent increase) and an increase in the annualized dividend on Class G Common Stock to $1.24 per share from the previous dividend of $1.18 per share (a 5.1 percent increase). Other Investing and Financing Matters: At September 30, 1997, the book value per share of CMS Energy Common Stock and Class G Common Stock was $18.04 and $11.67, respectively. As of September 30, 1997, CMS Energy was authorized to issue $406 million in deferred coupon notes, GTNs, CMS Energy Common Stock, subordinated debentures, stock purchase contracts, stock purchase units and Trust Preferred Securities under various outstanding shelf registration statements on file with the SEC. For information regarding the amounts previously issued, see the short-term and long-term Financings, and Capitalization in Note 4. In October 1997, CMS Energy and affiliated business trusts filed a shelf registration statement with the SEC pursuant to Rule 462 (b) of the Securities Act, for the issuance and the sale of an additional $26 million of CMS Energy Common Stock, subordinated debentures, stock purchase contracts, stock purchase units and Trust Preferred Securities. When combined with an existing shelf registration, CMS Energy now has an aggregate $153 million in such securities registered for future issuance and sale. In July 1997, CMS Energy refinanced a $450 million unsecured revolving credit facility and a $125 million term loan with the $1.125 billion Senior Credit Facilities consisting of a $400 million 364-day revolving credit facility, a $600 million three year-revolving credit facility and a five-year $125 million term loan facility . Also, CMS Energy has available unsecured lines of credit and letters of credit in an aggregate amount of $155 million. At September 30, 1997, the total amount utilized under the Senior Credit Facilities and unsecured lines of credit and letters of credit was $395 million and $15 million, respectively. Consumers has FERC authorization to: 1) issue or guarantee up to $900 million of short-term securities through 1998; and 2) to issue $380 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes, through November 1998. Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million that are available to finance seasonal working capital requirements and pay for capital expenditures between long-term financings. At September 30, 1997, the total amount remaining available under these facilities was $156 million. Consumers also has in place a $500 million trade receivables sale program. At September 30, 1997, $250 million in receivables remained available for sale under the program. For further information, see Note 4. Consumers' Electric Business Unit Results of Operations Electric Pretax Operating Income: In Millions Three Months Nine Months Twelve Months Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 1997 vs 1996 - ------------------------------------------------------------------------ Sales (including special contract discounts) $ - $ 4 $ 8 Rate increases and other regulatory issues 2 12 26 Operations and maintenance 9 8 3 General taxes, depreciation and other (7) (12) (13) ---- ---- ---- Total change $ 4 $ 12 $ 24 ==== ==== ==== Electric Sales: Total electric sales remained constant for the three month periods ended September 30, 1997 and 1996 but increased for the nine months ended (0.6 percent) and twelve months ended (2.0 percent) September 30, 1997 over the comparable 1996 periods. The table below reflects electric kWh sales by class of customer for each period: In Billions of kWh Three Nine Twelve Months Ended Months Ended Months Ended Sept. 30 1997 1996 Change 1997 1996 Change 1997 1996 Change Residential 2.8 2.8 - 8.1 8.2 (0.1) 10.8 10.8 - Commercial 2.7 2.7 - 7.6 7.5 0.1 10.1 9.8 0.3 Industrial 3.4 3.4 - 9.8 9.5 0.3 13.2 12.7 0.5 Other 0.9 0.9 - 2.3 2.5 (0.2) 3.1 3.2 (0.1) ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Sales 9.8 9.8 - 27.8 27.7 0.1 37.2 36.5 0.7 ==== ==== ==== ==== ==== ==== ==== ==== ==== Power Costs: In Millions September 30 1997 1996 Change Three months ended $ 296 $ 282 $ 14 Nine months ended 847 802 45 Twelve months ended 1,132 1,041 91 The cost increases for all periods ended September 30, 1997 reflect increased power purchases from outside sources to meet the sales demand and the accelerated amortization of nuclear fuel costs related to the early closing of Big Rock. Consumers Electric business Unit Issues Power Purchases from the MCV Partnership: In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries were based on the assumption that the MCV Facility would be available over its expected life to generate electricity 90 percent of the time. However, for the first nine months of 1997, the MCV Facility was available 98.9 percent of the time, resulting in after-tax cash underrecoveries of $31 million. The underrecovery shown in the table below has been revised to reflect the anticipated availability of the MCV Facility for the year 1997. For further information, see Power Purchases from the MCV Partnership in Note 2. In Millions 1997 1998 1999 2000 2001 Estimated cash under- recoveries, net of tax $40 $23 $22 $21 $20 The amount of estimated underrecoveries of power costs continues to be based, in part, on an estimate 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, losses will need to be recognized for the amount of future underrecoveries in excess of 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 MCV Facility operations. Electric Rate Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover costs associated with the purchase of an additional 325 MW of MCV Facility capacity and to accelerate recovery of its nuclear plant investment by increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. The order also established an experimental 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 information on these issues, see Notes 2 and 3 which are incorporated by reference herein. 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. In 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades can be operated to the end of its license life in the year 2007. 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. Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. The plant was originally scheduled to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and is expected to take five to ten years to return the site to its original condition. The current decommissioning fund, together with future collections from customers and future earnings of the fund, is expected to be adequate to cover the plant decommissioning expenses. For further information on nuclear matters, see Note 8 which is incorporated by reference herein. Electric Environmental Matters: The Clean Air Act contains significant environmental provisions specific to utilities. Consumers anticipates that it will have incurred capital expenditures totaling $85 million by the year 2000 in order to comply with the current nitrogen oxide emission limits established by the EPA. The Clean Air Act also contains national air quality standards. Consumers and certain other subsidiaries of CMS Energy currently operate within these standards and meet current ozone and small particle related emission limits. The EPA recently revised these standards to further limit small particle and ozone related emissions and proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fuel emitters, such as Consumers' generating units. The preliminary estimate of costs to reduce ozone related emissions for Consumers' fossil-fueled generating units is approximately $175 million. A potentially equivalent amount may be needed to comply with the new small particle standards. CMS Energy and Consumers support the bipartisan effort in Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established. Consumers is a so-called potentially responsible party at several contaminated sites being administered under Superfund. There are many other creditworthy potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding these and other environmental matters, see Electric Environmental Matters in Note 7 which is incorporated by reference herein. Other: In October 1997, two independent power producers filed a lawsuit against Consumers and CMS Energy in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers as well as claims relating to independent power production projects. The plaintiffs claim damages of $100 million (which can be trebled in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by and subject to the jurisdiction of the MPSC. CMS Energy believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter. Consumers Gas Group Results of Operations Gas Pretax Operating Income: In Millions Three Nine Twelve Months Ended Months Ended Months Ended Sept. 30 Sept. 30 Sept. 30 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 1997 vs 1996 Sales $ - $(15) $(19) Gas wholesale and retail services activities (2) (9) (5) Operations and maintenance 1 11 12 General taxes, depreciation and other - (3) (4) ---- ---- ---- Total change $(1) $(16) $(16) ==== ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, decreased 1.1 percent, 3.8 percent and 3.3 percent, for the three months, nine months and twelve months ended September 30, 1997, respectively. The table below indicates total deliveries and the impact of weather. In bcf Three Nine Twelve Months Ended Months Ended Months Ended September 30 1997 1996 Change 1997 1996 Change 1997 1996 Change Weather-adjusted deliveries 30 30 - 228 231 (3) 333 333 - Impact of weather and leap year - - - 4 10 (6) 9 22 (13) System deliveries excluding transport to MCV Facility 30 30 - 232 241 (9) 342 355 (13) Transport to MCV Facility 17 16 1 49 49 - 65 62 3 Other Transport- ation 2 6 (4) 12 25 (13) 17 29 (12) ---- ---- ---- ---- ---- ---- ---- ---- ---- Total deliveries 49 52 (3)) 293 315 (22) 424 446 (22) ==== ==== ==== ==== ==== ==== ==== ==== ==== Cost of Gas Sold: In Millions September 30 1997 1996 Change Three months ended $ 39 $ 51 $ (12) Nine months ended 472 504 (32) Twelve months ended 718 742 (24) The decrease in gas costs for the three months ended September 30, 1997 reflects lower gas prices during 1997. The decreases for the nine month and twelve month periods ended September 30, 1997 were the result of decreased 1997 sales reflecting warmer temperatures and an extra day for leap year in 1996. Consumer Gas Group Issues Gas Rate Proceedings: Consumers entered into a special natural gas transportation contract in response to the customer's proposal to bypass Consumers' system in favor of a competitive alternative. 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 claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. In October 1997, the Court of Appeals issued an opinion affirming the MPSC's order. Consumers has sought rehearing of the Court of Appeals opinion. GCR Matters: In 1995, the MPSC issued an order favorable to Consumers' position in a $44 million pricing dispute (excluding interest) between Consumers and certain gas producers gas supply contracts. The court of appeals has upheld the MPSC order and the producers have now appealed to the Michigan Supreme Court. 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. 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. Consumers estimates its costs related to investigation and remedial action at $48 million to $98 million. This estimate is based on undiscounted 1997 costs. Any significant change in assumptions, such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of investigation and remedial action costs for the sites. For further information regarding environmental matters, see Note 7. Oil and Gas Exploration and Production Pretax Operating Income: Pretax operating income for the three and nine months ended September 30, 1997 increased $7 million and $9 million, respectively, over the comparable periods in 1996, as a result of a gain on the sale of the entire interest in oil and gas properties in Yemen, and higher oil production, offset by lower oil and gas prices and gas production, and higher operating expenses. Pretax operating income for the twelve months ended September 30, 1997 increased $17 million over the comparable period in 1996, as a result of a gain on the sale of oil and gas properties and higher oil production and prices, offset by lower gas production and higher operating expenses. Independent Power Production Pretax Operating Income: Pretax operating income for the three months ended September 30, 1997 increased $3 million over the same period in 1996, primarily reflecting increased earnings attributed to the Loy Yang and Jorf Lasfar projects offset by the 1996 sale of a partnership interest. Pretax operating income for the nine and twelve months ended September 30, 1997 was $5 million more than the same periods in 1996, primarily reflecting increased operating income resulting from increased international earnings, higher electricity sales by the MCV Facility and the industry expertise service fee income earned in connection with the Loy Yang transaction in 1997, offset by the 1996 nonrecurring gains, including the gain on the sale of a power purchase agreement by a partnership in which CMS Generation owns a 50 percent interest. Capital Expenditures: In September 1997, a joint venture of CMS Generation and a unit of ABB, purchased the concession to possess, operate, maintain and expand the Jorf Lasfar coal-fueled power plant, a two unit, 660 megawatt facility, in Morocco. This is the first step in the $1.5 billion transaction for the privatization and expansion of Jorf Lasfar. CMS Generation and ABB collectively invested approximately $395 million for their equity contribution in the project company. Funds obtained for the equity investment were provided through equity bridge loans by a number of private banks. CMS Energy guaranteed CMS Generation's 50 percent share of the approximately $395 million borrowing to fund the equity contribution. The initial disbursement of an estimated additional $920 million of non-recourse debt financing from a consortium of governmental, multilateral and private financial institutions in several countries is expected to be drawn later in 1997. Reinvested cash from operations estimated at $190 million is expected to provide the balance of the financing needed for the project. Construction has begun on two new generating units totaling 696 gross megawatts. In the second quarter of 1997, a consortium comprised of subsidiaries of CMS Generation and Northern States Power Company as well as Horizon Energy Australia Investments acquired Loy Yang, Victoria's largest electric generating plant and Australia's lowest-cost electric generating facility, in a privatization by the Australian State of Victoria. The associated coal mine supplies both the Loy Yang A and B plants. Seventy-seven percent of the consortium's $3.7 billion payment to the government was financed on a non-recourse basis to CMS Energy and CMS Generation by a consortium of banks. CMS Generation holds a fifty percent ownership interest and an affiliate of Northern States Power Company and Horizon Energy Australia Investments each hold twenty-five percent. Certain operating and management services for Loy Yang will be provided by the CMS Generation and Northern States Power Company subsidiaries and their affiliates. Natural Gas Transmission, Storage and Processing Pretax Operating Income: Pretax operating income for the three months ended September 30, 1997 increased $4 million over the comparable 1996 period, primarily reflecting income attributable to the Australian pipeline acquired in 1997 and expanded domestic operations. Pretax operating income for the nine and twelve months ended September 30, 1997 increased $7 million and $10 million, respectively, from the same periods in 1996, reflecting income attributable to domestic and international operations and a gain on the sale of a portion of the Ames gas gathering system, partially offset by the 1996 gain resulting from the dissolution of the Moss Bluff and Grand Lacs Partnerships. Marketing, Services and Trading Pretax operating income for the three months ended September 30, 1997 was unchanged from the comparable 1996 period. Pretax operating income for the nine and twelve months ended September 30, 1997 decreased $1 million and $2 million, respectively, from the year-earlier periods, reflecting lower margins caused by unusually high natural gas prices and higher operating costs due to business expansion. CMS MST provides energy commodity marketing, risk management and energy management services throughout the United States and plans to expand operations worldwide. Gas marketed for end users was 144 bcf and 84 bcf for the nine months ended 1997 and 1996, respectively. 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 FERC and the MPSC) with respect to rates, proposed electric industry restructuring, change in industry and rate structure, operation of a nuclear power facility, 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 other important factors. 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 $4.0 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 $ 295 $ 295 Consumers gas operations (a) 120 120 115 Oil and gas exploration and production 135 150 160 Independent power production (b) 740 368 469 Natural gas transmission and storage 115 156 61 International energy distribution 120 125 125 Marketing, services and trading 40 21 25 ------ ------ ------ $1,540 $1,235 $ 1,250 ====== ====== ====== (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 Loy Yang A electric generating plant in Australia. CMS Energy currently plans to invest $445 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 $1.6 billion 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 $332 million from 1997 to 1999 are planned to continue development of non-utility natural gas storage, gathering and pipeline operations both domestically and internationally. CMS Energy plans to invest $370 million from 1997 to 1999 in its international energy distribution operations related to international expansion. CMS MST plans to invest $86 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 Growth: Consumers expects average annual growth of two and one-half percent per year in electric system volume over the next five years, based on the current industry and regulatory 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 direct access to alternative sources of energy supply is another means by which retail service customers can satisfy their power requirements. Restructuring: 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 could 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 by regulatory decisions and 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 by the MPSC as part of its phased introduction to competition. FERC issued Orders 888 and 889, as amended on rehearing, requiring utilities to provide open access to the interstate transmission grid for wholesale transactions. Consumers has complied with several FERC requirements contained in these orders; however, Consumers and Detroit Edison disagree on the effect of the orders on the Michigan Electric Power Coordination Center Pool. Consumers proposes to maintain the benefits of the pool, while Detroit Edison seeks early termination. FERC is expected to decide the question in 1998. As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, in June 1997 the MPSC issued an order which proposed that Consumers would have to accept competing power suppliers using its distribution and transmission facilities to serve retail customers beginning January 1, 1998. By January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers. The order would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers through the end of the transition period in 2007. Further proceedings, as ordered by the MPSC, later took place to address other features of the open access programs being considered, including proposals to "true up" Transition Cost charges for changes in sales and market prices of power purchase capacity to the extent that they are different from estimates used for calculating Transition Costs. The June order is subject to claims of appeal filed with the Court of Appeals and a rehearing petition filed by Consumers which questions whether the MPSC has the statutory authority to mandate restructuring on an involuntary basis. The June 1997 order further stated that Securitization may be a beneficial mechanism for recovery of Transition Costs, but recognizes that state legislation is required for Securitization to occur. Michigan legislative consideration of the entire subject of electric industry restructuring including Securitization is expected in early 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Rate reductions for customers could also be accomplished if the legislation allowed a Securitization charge to be paid by all customers over a period of 15 years (the expected term of the "rate reduction bonds" to be issued as part of the Securitization process). The legislature is expected to review all of the policy choices made by the MPSC during the Restructuring proceedings to assure that they are in accord with those which the legislature believes should be paramount. Prior to legislative input, Consumers had estimated that it would recover $1.9 billion (as revised in a June 1997 filing with the MPSC) of Transition Costs through charges to direct-access customers. A separate charge to direct-access customers would also recover costs of implementing a direct-access program totaling an additional $200 million. On October 29, 1997, the MPSC issued a series of orders relating to its electric industry restructuring proceedings. The orders primarily addressed issues involving the design of retail open access tariffs, the true-up mechanism in connection with the recovery of stranded costs, suspension of the power supply cost recovery clauses and freezing of power supply costs, and performance-based rate-making. The orders were not completely definitive. A number of matters need to be clarified or supplemented by further MPSC hearings, orders or in subsequent legislation before any open access program allowing customers choice of power suppliers with the scope contained in those orders could be accepted voluntarily by Consumers. Accordingly, Consumers has filed a petition for rehearing, reconsideration and clarification raising all of the issues which must be satisfactorily addressed before it could agree. For further information on Application of SFAS 71, see below. Application of SFAS 71: Consumers applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities related to the generation, transmission and distribution operations of its business 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 the generation segment of Consumers' business. 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. In accordance with recently published Emerging Issues Task Force Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101, Consumers can continue to carry its generation- related regulatory assets or liabilities as long as there is deregulatory legislation or an MPSC rate order which allows the collection of regulated cash flows to recover these specific costs or settle obligations. As a result, the generation portion of net regulatory assets are to be maintained by the regulated portion of the business until they are collected, they are impaired, or until the regulated portion of the business becomes deregulated. Based on a current evaluation of the various factors and conditions that are expected to affect future cost recovery, Consumers believes that even if it was to discontinue application of SFAS 71 for the generation segment of its business, its regulatory assets, including those related to generation, are probable of future recovery from the regulated portion of the business. Consumers Gas Group Outlook Growth: 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 further increase load. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. Consumers also plans additional capital expenditures to construct new gas mains 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. Gas Orders: 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 distribution facilities. 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 through March 1999; expected customer interest is unknown at this time. Application of SFAS 71: 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. Foreign Currency Translation: Foreign currency translation adjustments relating to the operation of CMS Energy's long-term investments in foreign countries are included in common stockholders' equity. As of September 30, 1997 the foreign currency translation adjustment was $45 million relating primarily to the U.S. and Australian Dollar exchange rate fluctuations from the acquisition of Loy Yang. CMS Energy has presently concluded that the Australian economy is stable and that currency exchange rate fluctuations over the long term are not expected to have a material effect on CMS Energy's financial position, liquidity or results of operations. 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. In 1997, the FASB also issued SFAS 130, Reporting Comprehensive Income, and SFAS 131, Disclosures about Segments of an Enterprise and Related Information, each of which will require expanded disclosures effective for 1998. Also in 1997, the Emerging Issues Task Force published Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101. The consensus reached in this issue allows for regulatory assets and liabilities to be maintained for a portion of a business which is being deregulated as long as there is deregulatory legislation or a commission rate order which allows the collection of regulated cash flows to recover costs or settle obligations. These regulatory assets and liabilities are maintained by the regulated portion of a business until they are collected or settled, they are impaired, or until the regulated portion of the business becomes deregulated. CMS Energy does not expect the application of these statements to have a material effect on its financial position, liquidity or results of operations. Computer Modifications for Year 2000: CMS Energy and its subsidiaries utilize software and related technologies throughout the business which will be affected by the year 2000 date change. Modifications began in 1995 to computer software systems to process year 2000 date transactions. Anticipated spending for these modifications will be expensed as incurred, while the costs for new software will be capitalized and amortized over the software's useful life. CMS Energy does not expect that the cost of these modifications will have a material effect on its financial position, liquidity or results of operations. 21 CMS Energy Corporation Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 In Millions, Except Per Share Amounts Operating Revenue Electric utility $ 670 $ 655 $1,888 $1,827 $2,507 $2,381 Gas utility 110 123 828 880 1,230 1,274 Oil and gas exploration and production 42 32 110 94 146 120 Independent power production 45 44 116 108 148 133 Natural gas transmission, storage and processing 22 12 75 40 97 48 Marketing, services and trading 153 59 366 191 433 246 Other 3 4 11 10 16 17 ------ ------ ------ ------ ------ ------ 1,045 929 3,394 3,150 4,577 4,219 ------ ------ ------ ------ ------ ------ Operating Expenses Operation Fuel for electric generation 80 76 220 219 297 294 Purchased power - related parties 151 150 447 436 600 558 Purchased and interchange power 65 56 180 147 235 189 Cost of gas sold 178 106 829 682 1,144 970 Other 189 186 525 528 734 728 ------ ------ ------ ------ ------ ------ 663 574 2,201 2,012 3,010 2,739 Maintenance 39 42 122 120 180 167 Depreciation, depletion and amortization 110 99 348 322 467 436 General taxes 48 45 158 149 211 202 ------ ------ ------ ------ ------ ------ 860 760 2,829 2,603 3,868 3,544 ------ ------ ------ ------ ------ ------ Pretax Operating Income (Loss) Electric utility 132 128 342 330 423 399 Gas utility (1) - 100 116 142 158 Oil and gas exploration and production 17 10 37 28 48 31 Independent power production 32 29 67 62 73 68 Natural gas transmission, storage and processing 9 5 26 19 33 23 Marketing, services and trading - - 1 2 1 3 Other (4) (3) (8) (10) (11) (7) ------ ------ ------ ------ ------ ------ 185 169 565 547 709 675 ------ ------ ------ ------ ------ ------ Other Income (Deductions) Accretion income 2 2 6 7 8 10 Accretion expense (4) (7) (13) (21) (14) (28) Other, net 3 1 5 5 2 6 ------ ------ ------ ------ ------ ------ 1 (4) (2) (9) (4) (12) ------ ------ ------ ------ ------ ------ Fixed Charges Interest on long-term debt 72 58 198 174 254 230 Other interest 12 10 34 30 47 43 Capitalized interest (4) (1) (11) (5) (14) (9) Preferred stock dividends 6 7 20 21 27 28 Trust Preferred Securities distributions 6 2 11 6 13 6 ------ ------ ------ ------ ------ ------ 92 76 252 226 327 298 ------ ------ ------ ------ ------ ------ Income Before Income Taxes 94 89 311 312 378 365 Income Taxes 28 31 107 116 130 131 ------ ------ ------ ------ ------ ------ Consolidated Net Income $ 66 $ 58 $ 204 $ 196 $ 248 $ 234 ====== ====== ====== ====== ====== ====== Net Income (Loss) Attributable to Common Stocks CMS Energy $ 68 $ 61 $ 195 $ 186 $ 235 $ 220 Class G $ (2) $ (3) $ 9 $ 10 $ 13 $ 14 Average Common Shares Outstanding CMS Energy 96 92 95 92 95 92 Class G 8 8 8 8 8 8 Earnings (Loss) Per Average Common Share CMS Energy $ .70 $ .65 $ 2.04 $ 2.02 $ 2.47 $ 2.39 Class G $ (.21) $ (.28) $ 1.13 $ 1.38 $ 1.57 $ 1.92 Dividends Declared Per Common Share CMS Energy $ .30 $ .27 $ .84 $ .75 $ 1.11 $ .99 Class G $ .31 $ .295 $ .90 $ .855 $1.195 $1.135 ====== ====== ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements. /TABLE 22 CMS Energy Corporation Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 In Millions Cash Flows from Operating Activities Consolidated net income $ 204 $ 196 $ 248 $ 234 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $37, $37, $49 and $49, respectively) 348 322 467 436 Capital lease and debt discount amortization 36 33 44 44 Deferred income taxes and investment tax credit 20 25 41 35 Accretion expense 13 21 14 28 Accretion income - abandoned Midland project (6) (7) (8) (10) Power purchases (47) (43) (67) (78) Undistributed earnings of related parties (44) (54) (53) (60) Other (11) 11 (3) 6 Changes in other assets and liabilities (150) 16 (179) 178 ------- ------ ------- ------ Net cash provided by operating activities 363 520 504 813 ------- ------ ------- ------ Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (538) (430) (767) (585) Investments in partnerships and unconsolidated subsidiaries (588) (147) (604) (215) Investments in nuclear decommissioning trust funds (37) (37) (49) (49) Other (27) (2) (23) (11) Cost to retire property, net (26) (20) (37) (34) Proceeds from sale of property 46 34 91 55 Acquisition of companies, net of cash acquired - (20) - (19) ------- ------ ------- ------ Net cash used in investing activities (1,170) (622) (1,389) (858) ------- ------ ------- ------ Cash Flows from Financing Activities Proceeds from bank loans, notes and bonds 827 385 875 507 Proceeds from Trust Preferred Securities 286 97 286 97 Increase (decrease) in notes payable, net 61 - 53 (133) Issuance of Common Stock 60 29 126 41 Retirement of preferred stock (120) - (120) - Payment of Common Stock dividends (87) (75) (115) (99) Retirement of bonds and other long-term debt (73) (37) (73) (37) Payment of capital lease obligations (35) (33) (42) (44) Repayment of bank loans (32) (264) (24) (268) Retirement of Common Stock (2) (1) (2) (1) ------- ------ ------- ------ Net cash provided by financing activities 885 101 964 63 ------- ------ ------- ------ Net Increase (Decrease) in Cash and Temporary Cash Investments 78 (1) 79 18 Cash and Temporary Cash Investments, Beginning of Period 56 56 55 37 ------- ------ ------- ------ Cash and Temporary Cash Investments, End of Period $ 134 $ 55 $ 134 $ 55 ======= ====== ======= ====== The accompanying condensed notes are an integral part of these statements.
23 CMS Energy Corporation Consolidated Balance Sheets
ASSETS September 30 September 30 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Plant and Property (At Cost) Electric $ 6,447 $ 6,333 $ 6,286 Gas 2,502 2,337 2,362 Oil and gas properties (full-cost method) 1,224 1,140 1,126 Other 99 94 88 ------- ------- ------- 10,272 9,904 9,862 Less accumulated depreciation, depletion and amortization 5,189 4,867 4,936 ------- ------- ------- 5,083 5,037 4,926 Construction work-in-progress 332 243 251 ------- ------- ------- 5,415 5,280 5,177 ------- ------- ------- Investments Independent power production 819 317 305 Natural gas transmission, storage and processing 249 233 241 First Midland Limited Partnership (Note 2) 239 232 230 Midland Cogeneration Venture Limited Partnership (Note 2) 163 134 127 Other 112 86 89 ------- ------- ------- 1,582 1,002 992 ------- ------- ------- Current Assets Cash and temporary cash investments at cost, which approximates market 134 56 55 Accounts receivable and accrued revenue, less allowances of $7, $10 and $3, respectively (Note 4) 384 374 219 Inventories at average cost Gas in underground storage 253 186 250 Materials and supplies 92 86 82 Generating plant fuel stock 26 30 28 Deferred income taxes 18 48 19 Prepayments and other 113 235 132 ------- ------- ------- 1,020 1,015 785 ------- ------- ------- Non-current Assets Postretirement benefits 411 435 442 Nuclear decommissioning trust funds 478 386 360 Abandoned Midland Project 98 113 117 Other 496 384 418 ------- ------- ------- 1,483 1,318 1,337 ------- ------- ------- Total Assets $ 9,500 $ 8,615 $ 8,291 ======= ======= =======
24
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Capitalization Common stockholders' equity $ 1,834 $ 1,702 $ 1,619 Preferred stock of subsidiary 238 356 356 Company-obligated mandatorily redeemable Trust Preferred Securities of: Consumers Power Company Financing I (a) 100 100 100 Consumers Energy Company Financing II (a) 120 - - Company-obligated convertible Trust Preferred Securities of CMS Energy Trust I (b) 173 - - Long-term debt 3,060 2,842 2,996 Non-current portion of capital leases 82 103 92 ------- ------- ------- 5,607 5,103 5,163 ------- ------- ------- Current Liabilities Current portion of long-term debt and capital leases 911 409 198 Notes payable 394 333 341 Accounts payable 326 348 260 Accrued taxes 146 262 147 Accrued interest 61 47 51 Power purchases (Note 2) 47 47 90 Accounts payable - related parties 70 63 59 Accrued refunds 7 8 23 Other 191 206 196 ------- ------- ------- 2,153 1,723 1,365 ------- ------- ------- Non-current Liabilities Deferred income taxes 675 698 651 Postretirement benefits 520 521 528 Deferred investment tax credit 154 161 163 Power purchases (Note 2) 144 178 197 Regulatory liabilities for income taxes, net 86 66 61 Other 161 165 163 ------- ------- ------- 1,740 1,789 1,763 ------- ------- ------- Commitments and Contingencies (Notes 2, 3, 6, 7 and 8) Total Stockholders' Investment and Liabilities $ 9,500 $ 8,615 $ 8,291 ======= ======= ======= (a) 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 primary asset of Consumers Energy Company Financing II is $124 million principal amount of 8.20% subordinated interest notes due 2027 from Consumers. For further discussion, see Note 4 to the Consolidated Financial Statements. (b) As described in Note 4, the primary asset of CMS Energy Trust I is $178 million principal amount of 7.75% convertible subordinated debentures due 2027 from CMS Energy. The accompanying condensed notes are an integral part of these statements.
25 CMS Energy Corporation Consolidated Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 In Millions Common Stock At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 ------ ------ ------ ------ ------ ------ Other Paid-in Capital At beginning of period 2,075 1,967 2,045 1,951 1,979 1,935 Common Stock reacquired (2) (1) (2) (1) (2) (1) Common Stock issued: CMS Energy 28 12 56 26 120 41 Class G 2 1 4 3 6 4 ------ ------ ------ ------ ------ ------ At end of period 2,103 1,979 2,103 1,979 2,103 1,979 ------ ------ ------ ------ ------ ------ Revaluation Capital At beginning of period (6) (8) (6) (8) (7) (8) Change in unrealized investment- gain (loss) 2 1 2 1 3 1 ------ ------ ------ ------ ------ ------ At end of period (4) (7) (4) (7) (4) (7) ------ ------ ------ ------ ------ ------ Foreign Currency Translation At beginning of period - - - - - - Change in foreign currency translation (45) - (45) - (45) - ------ ------ ------ ------ ------ ------ At end of period (45) - (45) - (45) - ------ ------ ------ ------ ------ ------ Retained Earnings (Deficit) At beginning of period (256) (385) (338) (475) (354) (489) Consolidated net income 66 58 204 196 248 234 Common Stock dividends declared: CMS Energy (28) (25) (80) (69) (105) (91) Class G (3) (2) (7) (6) (10) (8) ------ ------ ------ ------ ------ ------ At end of period (221) (354) (221) (354) (221) (354) ------ ------ ------ ------ ------ ------ Total Common Stockholders' Equity $1,834 $1,619 $1,834 $1,619 $1,834 $1,619 ====== ====== ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
26 CMS Energy Corporation Condensed Notes to Consolidated Financial Statements These Consolidated 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 which 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; storage, transmission and processing of natural gas; energy marketing, services and trading; 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, nine and twelve month periods ended September 30, 1997, undistributed equity earnings were $21 million, $44 million and $53 million, respectively, and $13 million, $54 million and $60 million for the three, nine and twelve months periods ended September 30, 1996. Foreign currency translation adjustments relating to the operation of CMS Energy's long-term investments in foreign countries are included in common stockholders' equity. As of September 30, 1997 the foreign currency translation adjustment was $45 million relating primarily to the U.S. and Australian Dollar exchange rate fluctuations from the acquisition of the Loy Yang. 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 Nine Twelve Months Ended Months Ended Months Ended September 30 1997 1996 1997 1996 1997 1996 Pretax operating income $18 $19 $36 $31 $45 $38 Income taxes and other 6 6 11 9 13 11 --- --- --- --- --- --- Net income $12 $13 $25 $22 $32 $27 === === === === === === 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 incrementally 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 recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. At September 30, 1997 and December 31, 1996, the after-tax present value of the PPA liability totaled $124 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $31 million partially offset by after-tax accretion expense of $8 million. The undiscounted after-tax amount associated with the liability totaled $506 million at September 30, 1997. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries were based on the assumption that the MCV Facility would be available over its expected life to generate electricity 90 percent of the time. However, for the first nine months of 1997 the MCV Facility was available 98.9 percent of the time, resulting in the $31 million of after-tax cash underrecoveries. The underrecovery shown in the table below has been revised to reflect the anticipated availability of the MCV Facility for the year 1997. In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $40 $23 $22 $21 $20 The amount of estimated underrecoveries of power costs continues to be based, in part, on an estimate 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, losses will need to be recognized for the amount of future underrecoveries in excess of 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 MCV 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 decision. The MCV Partnership filed an application for leave to appeal with the Michigan Supreme Court. 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 increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. It also established an experimental 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 load, of which 410 MW have already been filled by existing contracts. An additional 140 MW of load may be filled by new special contracts which the MPSC has approved or by direct-access customers. 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. Direct- access for this 100 MW is expected to begin during the fourth quarter of 1997. In May 1997, the MPSC authorized Consumers to collect $17 million from electric customers through a one-time surcharge pertaining to the 1994 PSCR reconciliation. In September 1997, the MPSC further authorized Consumers to collect $13 million from electric customers through a one- time surcharge pertaining to the 1995 PSCR reconciliation. Electric Restructuring: As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, in June 1997 the MPSC issued an order which proposed that Consumers would have to accept competing power suppliers using its distribution and transmission facilities to serve retail customers beginning January 1, 1998. By January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers. The order would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers through the end of the transition period in 2007. Further proceedings, as ordered by the MPSC, later took place to address other features of the open access programs being considered, including proposals to "true up" Transition Cost charges for changes in sales and market prices of power purchase capacity to the extent that they are different from estimates used for calculating Transition Costs. The June order is subject to claims of appeal filed with the Court of Appeals and a rehearing petition filed by Consumers which questions whether the MPSC has the statutory authority to mandate restructuring on an involuntary basis. The June 1997 order further stated that Securitization may be a beneficial mechanism for recovery of Transition Costs, but recognizes that state legislation is required for Securitization to occur. Michigan legislative consideration of the entire subject of electric industry restructuring including Securitization is expected in early 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Rate reductions for customers could also be accomplished if the legislation allowed a Securitization charge to be paid by all customers over a period of 15 years (the expected term of the "rate reduction bonds" to be issued as part of the Securitization process). The legislature is expected to review all of the policy choices made by the MPSC during the Restructuring proceedings to assure that they are in accord with those which the legislature believes should be paramount. Prior to legislative input, Consumers had estimated that it would recover $1.9 billion (as revised in a June 1997 filing with the MPSC) of Transition Costs through charges to direct-access customers. A separate charge to direct-access customers would also recover costs of implementing a direct-access program totaling an additional $200 million. On October 29, 1997, the MPSC issued a series of orders relating to its electric industry restructuring proceedings. The orders primarily addressed issues involving the design of retail open access tariffs, the true-up mechanism in connection with the recovery of stranded costs, suspension of the power supply cost recovery clauses and freezing of power supply costs, and performance-based rate-making. The orders were not completely definitive. A number of matters need to be clarified or supplemented by further MPSC hearings, orders or in subsequent legislation before any open access program allowing customers choice of power suppliers with the scope contained in those orders could be accepted voluntarily by Consumers. Accordingly, Consumers has filed a petition for rehearing, reconsideration and clarification raising all of the issues which must be satisfactorily addressed before it could agree. For further information on Application of SFAS 71, see Electric Outlook in the MD&A. Gas Proceedings: In the GCR reconciliation proceeding for the period April 1995 through March 1996, the MPSC staff questioned 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. In August 1997, the MPSC ruled that the gas loaning program was not the same as the storage service and, therefore, that gas loaning revenue was not subject to refund. In 1996, the MPSC authorized Consumers to implement a pilot gas transportation program in Bay County, Michigan. The pilot program provides residential and small commercial customers the opportunity to purchase gas from suppliers other than Consumers for a two-year period which began April 1997. Out of the 40,000 eligible customers, only 500 volunteered to participate in the program. For those program participants, Consumers will retain its role as transporter and distributor of the customers' gas. In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain gas 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, and the Court of Appeals upheld the MPSC order. The producers have appealed to the Michigan Supreme Court. 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: In July 1997, CMS Energy refinanced a $450 million unsecured revolving credit facility and a $125 million term loan with the $1.125 billion Senior Credit Facilities consisting of a $400 million 364-day revolving credit facility, a $600 million three-year revolving credit facility and a five-year $125 million term loan facility. Also, CMS Energy has available unsecured lines of credit and letters of credit in an aggregate amount of $155 million. At September 30, 1997 the total amount utilized under the Senior Credit Facilities and unsecured lines of credit and letters of credit was $395 million and $15 million, 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 repay debt and in part to fund CMS Energy's equity investment in Loy Yang. In May 1997, CMS Energy and affiliated business trusts filed a shelf registration statement with the SEC for the issuance and the sale of up to $300 million of CMS Energy Common Stock, subordinated debentures, stock purchase contracts, stock purchase units and preferred securities. In June 1997, 3.45 million units of 7.75 percent Trust Preferred Securities were issued and sold through CMS Energy Trust I, a wholly owned business trust which CMS Energy consolidates. Net proceeds from the sale totaled $170 million. CMS Energy Trust I was formed for the sole purpose of issuing Trust Preferred Securities. Its primary asset is approximately $178 million principal amount of 7.75 percent subordinated debentures issued by CMS Energy which mature in 2027. These Trust Preferred Securities are convertible into CMS Energy Common Stock at a rate equivalent to a conversion price of $40.80 per share of CMS Energy Common Stock. Proceeds of the subordinated debentures were used by CMS Energy for general corporate purposes including repayment of debt, capital expenditures, investment in subsidiaries and working capital. CMS Energy's obligations under the subordinated debentures, the indenture under which the subordinated debentures were issued, the declaration of trust and the CMS Energy guarantee provide, in the aggregate, a full irrevocable and unconditional guarantee of payments of distributions and other amounts due on the Trust Preferred Securities. For additional information, see footnote (b) to the Consolidated Balance Sheets. At September 30, 1997, CMS Energy had $179 million of Series A GTNs, $125 million of Series B GTNs, $150 million of Series C GTNs, and $6 million of Series D GTNs issued and outstanding with weighted-average interest rates of 7.8 percent, 7.9 percent, 7.7 percent, and 7.3 percent, respectively. In September 1997, CMS Energy issued $180 million of senior unsecured notes due November 15, 2004, at an interest rate of 7.625 percent. Proceeds from the sale together with other funds were used on October 1, 1997 to discharge, at maturity, $172 million of CMS Energy's Series A senior deferred coupon notes, and to redeem $175 of CMS Energy's Series B senior deferred coupon notes at a premium of $3 million. In November 1997, CMS Energy issued $300 million of senior unsecured notes due November 15, 2000, at an interest rate of 7.375 percent. Proceeds from the sale were used to repay a significant portion of the outstanding balance under the Senior Credit Facilities. Consumers: Consumers has FERC authorization to: 1) issue or guarantee up to $900 million of short-term securities through 1998; and 2) to issue $380 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes, through November 1998. Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million that are available to finance seasonal working capital requirements and pay for capital expenditures between long-term financings. At September 30, 1997, a total of $389 million was outstanding at a weighted average interest rate of 6.2 percent, compared with $340 million outstanding at September 30, 1996, at a weighted average interest rate of 6.0 percent. Consumers also has in place a $500 million trade receivables sale program. At September 30, 1997 and 1996, receivables sold under the program totaled $250 million and $210 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In 1996, 4 million shares of 8.36 percent Trust Preferred Securities were issued and sold through Consumers Power Company Financing I, a wholly owned business trust which Consumers consolidates. Net proceeds from the sale totaled $97 million. In September 1997, 4.8 million shares of 8.20 percent Trust Preferred Securities were issued and sold through Consumers Energy Company Financing II, a wholly owned business trust which Consumers consolidates. Net proceeds from the sale totaled $116 million. Both trusts were formed for the sole purpose of issuing the Trust Preferred Securities. Consumers' obligations with respect to the Trust Preferred Securities under the notes, under the indenture under which the notes have been issued, under Consumers' guarantee of the Trust Preferred Securities, and under the declaration by the trust, taken together, constitute a full and unconditional guarantee by Consumers of the trusts' obligations under the Trust Preferred Securities. For additional information, see footnote (a) to the Consolidated Balance Sheets. In September 1997, Consumers redeemed all outstanding shares of its $7.45, $7.68, $7.72 and $7.76 preferred stock for $120 million. 5: Earnings Per Share and Dividends Earnings (loss) per share attributable to Common Stock for the three, nine and twelve month periods ended September 30, 1997 and September 30, 1996 reflect the performance of Consumers Gas Group. The Class G Common Stock has participated in earnings and dividends from its original issue date in July 1995. 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 is the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis for the nine months ended September 30, 1997 and 1996 are based on 24.65 percent of the income of Consumers Gas Group and 23.67 percent of the income of the Consumers Gas Group, respectively. In February and May 1997, CMS Energy paid dividends of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock. In August 1997, CMS Energy paid a dividend of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock. In October 1997, the Board of Directors declared a quarterly dividend of $.30 per share on CMS Energy Common Stock and $.31 per share on Class G Common Stock to be paid in November 1997. 6: Risk Management Activities and Derivative Transactions CMS Energy and its subsidiaries use a variety of derivative instruments (derivatives), including futures contracts, swaps, options and forward contracts, to manage exposure to fluctuations in commodity prices, interest rates and foreign exchange rates. In order for derivatives to initially qualify for hedge accounting the following criteria must be met: 1) the item to be hedged exposes the enterprise to price, interest or exchange rate risk; and 2) the derivative reduces that exposure and is designated as a hedge. Derivative instruments contain credit risk if the counterparties, including financial institutions and energy marketers, fail to perform under the agreements. However, CMS Energy minimizes such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. The risk of nonperformance by the counterparties is considered remote. Commodity Price Hedges: CMS Energy accounts for its commodity price derivatives as hedges, and as such, defers any changes in market value and gains and losses resulting from settlements until the hedged transaction is complete. 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 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 1997 commodity price contracts on 13.8 bcf of gas 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. During the first nine months of 1997, CMS NOMECO has made net payments of $4.9 million for settlement of 1997 contracts on 12.0 bcf of gas and 1.8 million barrels of oil. During September 1997, CMS NOMECO entered into additional 1997 gas price hedging arrangements on .9 bcf of gas at prices of $3.30 and $3.31 per MMBtu. 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 through 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed price, escalating at 8 percent per year thereafter, 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 million 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 September 30, 1997, the other party posted a $3.3 million letter of credit in favor of CMS NOMECO. CMS MST uses natural gas futures contracts, options and swaps (which require a net cash payment for the difference between a fixed and variable price). Interest Rates Hedges: CMS Energy and some of its subsidiaries enter into interest rate swap agreements to exchange variable rate interest payment obligations to fixed rate obligations without exchanging the underlying notional amounts. These agreements convert variable rate debt to fixed rate debt in order to reduce the impact of interest rate fluctuations. The notional amounts parallel the underlying debt levels and are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The notional amount of CMS Energy's and its subsidiaries' interest rate swaps was $1.0 billion at September 30, 1997. The difference between the amounts paid and received under the swaps is accrued and recorded as an adjustment to interest expense over the life of the hedged agreement. Foreign Exchange Hedges: Forward exchange contracts are used to hedge certain receivables, payables, and long-term debt relating to foreign investments. The purpose of CMS Energy's foreign currency hedging activities is to protect the company from the risk that U.S. dollar net cash flows resulting from sales to foreign customers and purchases from foreign suppliers and the repayment of non-U.S. dollar borrowings may be adversely affected by changes in exchange rates. These contracts do not subject CMS Energy to risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on assets and liabilities being hedged. The notional amount of the outstanding foreign exchange contracts was $20 million at September 30, 1997. 7: Commitments and Contingencies Electric Environmental Matters: The Clean Air Act limits emissions of sulfur dioxide and nitrogen oxides and requires 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. In its effort to comply with the Act, Consumers has already made 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-fueled units to be an additional $45 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected as a result of these expenditures. The Clean Air Act also contains national air quality standards under which industry must operate. Consumers and certain other subsidiaries of CMS Energy currently operate within these standards and meet current ozone and small particle related emission limits. The Act requires the EPA to periodically review the effectiveness of these standards in preventing adverse health affects. The EPA recently revised these standards to further limit small particle and ozone related emissions. CMS Energy and Consumers support the bipartisan effort in Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established. In addition, the EPA has considered recommendations from the Ozone Transport Assessment Group and petitions from several Northeastern states to reduce ozone transport across state lines. On October 10, 1997, the EPA proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fuel emitters, such as Consumers' generating units, so as to reduce statewide nitrogen oxide emissions by 32 percent, as early as 2002. The State of Michigan will have one year to review and challenge the proposed recommendations, and one year thereafter to implement final requirements. The preliminary estimate of the cost of the changes Consumers may have to make to its fossil-fueled generating units to reduce ozone related emissions is approximately $175 million. A potentially equivalent amount may be needed to comply with the new small particle standards. Consumers is a so-called potentially responsible party at several contaminated sites being administered under Superfund. Superfund liability is joint and several and, along with Consumers, there are many other creditworthy 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 Superfund sites will be between $2 million and $9 million. At September 30, 1997, Consumers has accrued $2 million for its estimated Superfund liability. 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. Gas Environmental Matters: 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 September 30, 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. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $1,540 million for 1997, $1,235 million for 1998 and $1,250 million for 1999. For further information regarding capital expenditures, see Forward-Looking Information in the MD&A. Other: As of September 30, 1997, CMS Energy and Enterprises have guaranteed up to $315 million in contingent obligations of unconsolidated affiliates and unrelated parties. In October 1997, two independent power producers filed a lawsuit against Consumers and CMS Energy in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers as well as claims relating to independent power production projects. The plaintiffs claim damages of $100 million (which can be trebled in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by and subject to the jurisdiction of the MPSC. CMS Energy believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter. In addition to the matters disclosed in these Notes, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business and involving personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this Note have been accrued. Resolution of these contingencies is not expected to have a material adverse impact on CMS Energy's financial position or results of operations. 8: Nuclear Matters Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. Consumers plans to load five additional casks at Palisades in 1999 pending approval by the NRC. In June 1997, the NRC approved the process for unloading spent fuel from a cask with minor weld flaws. Consumers intends to transfer the spent fuel to a new transportable cask when one is available. The supplier for the design and fabrication of the transportable cask has been selected and design work is proceeding. 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 can 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. Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. The plant was originally scheduled to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and is expected to take five to ten years to return the site to its original condition. The current decommissioning fund, together with future collections from customers and future earnings of the fund, is expected to be adequate to cover the plant decommissioning expenses. 9: Supplemental Cash Flow Information For purposes of the Consolidated 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 September 30 were: In Millions Nine Twelve Months Ended Months Ended 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $ 201 $ 187 $ 267 $ 236 Income taxes paid (net of refunds) 57 61 78 70 Non-cash transactions Nuclear fuel placed under capital lease $ 4 $ 8 $ 24 $ 10 Other assets placed under capital leases 5 2 6 4 Common Stock issued to acquire companies - - - 4 Capital leases refinanced - - - 21 36 ARTHUR ANDERSEN LLP Report of Independent Public Accountants To CMS Energy Corporation: We have reviewed the accompanying consolidated balance sheets of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of September 30, 1997 and 1996, the related consolidated statements of income and common stockholders' equity for the three-month, nine-month and twelve-month periods then ended, and the related consolidated statements of cash flows for the nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of preferred stock of CMS Energy Corporation and subsidiaries as of December 31, 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, November 10, 1997. 37 Consumers Energy Company Management's Discussion and Analysis The MD&A of this Form 10-Q should be read along with the MD&A and other parts of Consumers' 1996 Form 10-K. This MD&A also refers to, and in some sections specifically incorporates by reference from Consumers Condensed Notes to Consolidated Financial Statements and should be read in conjunction with such Statements and Notes. 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 report. 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 September 30 1997 1996 Change Three months ended $ 71 $ 60 $ 11 Nine months ended 212 203 9 Twelve months ended 269 249 20 The increase in earnings for the three months ended September 30, 1997 compared to the same 1996 period reflects reduced operation expenses, and a one-time recognition of interest income from a related-party property sale. The increase in earnings for the nine months ended September 30, 1997 compared to the same 1996 period reflects the favorable impact of an electric rate increase received in February 1996 which benefited all nine months of 1997, recognized interest income as a result of the related- party property sale, increased electric sales and improved operating results from the MCV Facility in which Consumers has a 49 percent interest. Partially offsetting these increases were decreased gas deliveries due to warmer temperatures during the early part of 1997 and reduced gas wholesale services revenues in 1997. The increase in earnings for the twelve months ended September 30, 1997 compared to the same 1996 period reflects the favorable impact in all of the 1997 period of the electric rate increase received in February 1996, increased electric sales, the recognition of interest income from the related-party property sale, increased revenues from the transmission of electricity for others, and improved operating results from the MCV Facility. Partially offsetting the increases for the twelve months ended period 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 of this MD&A 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 $458 million for nine months ended September 30, 1997 and 1996. 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 $277 million and $359 million for nine months ended September 30, 1997 and 1996, respectively. The cash was used primarily for capital expenditures. In addition, Consumers received $50 million related to a repurchase of two shares by CMS Enterprises of its preferred stock. Financing Activities: Cash used in financing activities totaled $176 million and $101 million for nine months ended September 30, 1997 and 1996, respectively. The increase of $75 million in cash used reflects the redemption of $120 million of preferred stock partially offset by a $57 million increase in notes payable and an additional $19 million of proceeds from the issuance of Trust Preferred Securities. Other Investing and Financing Matters: Consumers has FERC authorization to: 1) issue or guarantee up to $900 million of short-term securities through 1998; and 2) to issue $380 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes, through November 1998. Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million that are available to finance seasonal working capital requirements and pay for capital expenditures between long-term financings. At September 30, 1997, the total amount remaining available under these facilities was $156 million. Consumers also has in place a $500 million trade receivables sale program. At September 30, 1997, $250 million in receivables remained available for sale under the program. For further information, see Note 4. In October 1997, Consumers returned $50 million of paid in capital to CMS Energy. Electric Utility Results of Operations Electric Pretax Operating Income: In Millions September 30 1997 1996 Change Three months ended $132 $128 $ 4 Nine months ended 342 330 12 Twelve months ended 423 399 24 Electric pretax operating income for the three months ended September 30, 1997 compared to the same period for 1996 benefited from reduced operation expenses, partially offset by higher depreciation and general taxes resulting from increased investments in facilities and technology to serve new customers. Electric pretax operating income for the nine and twelve month periods ended September 30, 1997 benefited from the favorable impact of increased electric sales, the entire period impact of an electric rate increase received in February 1996 and reduced operation and maintenance costs. The increases in the nine and twelve month periods were partly offset by decreased revenues due to special contract discounts negotiated with large industrial customers and higher depreciation and general taxes expense. The following table quantifies these impacts on Pretax Operating Income: In Millions Three Months Nine Months Twelve Months Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 Change Compared to Prior Year 1997 vs 1996 1997 vs 1996 1997 vs 1996 Sales (including special contract discounts) $ - $ 4 $ 8 Rate increases and other regulatory issues 2 12 26 Operations and maintenance 9 8 3 General taxes, depreciation and other (7) (12) (13) ---- ---- ---- Total change $ 4 $ 12 $ 24 ==== ==== ==== Electric Sales: Total electric sales remained constant for the three month periods ended September 30, 1997 and 1996 but increased for the nine months ended (0.6 percent) and twelve months ended (2.0 percent) September 30, 1997 over the comparable 1996 periods. The table below reflects electric kWh sales by class of customer for each period:
In Billions of kWh Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 Change 1997 1996 Change 1997 1996 Change Residential 2.8 2.8 - 8.1 8.2 (0.1) 10.8 10.8 - Commercial 2.7 2.7 - 7.6 7.5 0.1 10.1 9.8 0.3 Industrial 3.4 3.4 - 9.8 9.5 0.3 13.2 12.7 0.5 Other 0.9 0.9 - 2.3 2.5 (0.2) 3.1 3.2 (0.1) ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Sales 9.8 9.8 - 27.8 27.7 0.1 37.2 36.5 0.7 ==== ==== ==== ==== ==== ==== ==== ==== ====
Power Costs: In Millions September 30 1997 1996 Change Three months ended $ 296 $ 282 $ 14 Nine months ended 847 802 45 Twelve months ended 1,132 1,041 91 The cost increases for all periods ended September 30, 1997 reflect increased power purchases from outside sources to meet the sales demand and the accelerated amortization of nuclear fuel costs related to the early closing of Big Rock. Electric Utility Issues Power Purchases from the MCV Partnership: In 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries were based on the assumption that the MCV Facility would be available over its expected life to generate electricity 90 percent of the time. However, for the first nine months of 1997, the MCV Facility was available 98.9 percent of the time, resulting in after-tax cash underrecoveries of $31 million. The underrecovery shown in the table below has been revised to reflect the anticipated availability of the MCV Facility for the year 1997. For further information, see Power Purchases from the MCV Partnership in Note 2. In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $40 $23 $22 $21 $20 The amount of estimated underrecoveries of power costs continues to be based, in part, on an estimate 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, losses will need to be recognized for the amount of future underrecoveries in excess of 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 MCV Facility operations. Electric Rate Proceedings: In 1996, the MPSC issued a final order which authorized Consumers to recover costs associated with the purchase of an additional 325 MW of MCV Facility capacity and to accelerate recovery of its nuclear plant investment by increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. The order also established an experimental 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 information on these issues, see Notes 2 and 3 which are incorporated by reference herein. 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. In 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades can be operated to the end of its license life in the year 2007. 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. Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. The plant was originally scheduled to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and is expected to take five to ten years to return the site to its original condition. The current decommissioning fund, together with future collections from customers and future earnings of the fund, is expected to be adequate to cover the plant decommissioning expenses. For further information on nuclear matters, see Note 6 which is incorporated by reference herein. Electric Environmental Matters: The Clean Air Act contains significant environmental provisions specific to utilities. Consumers anticipates that it will have incurred capital expenditures totaling $85 million by the year 2000 in order to comply with the current nitrogen oxide emission limits established by the EPA. The Clean Air Act also contains national air quality standards. Consumers currently operates within these standards and meets current ozone and small particle related emission limits. The EPA recently revised these standards to further limit small particle and ozone related emissions and proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fuel emitters, such as Consumers' generating units. The preliminary estimate of costs to reduce ozone related emissions for Consumers' fossil-fueled generating units is approximately $175 million. A potentially equivalent amount may be needed to comply with the new small particle standards. Consumers supports the bipartisan effort in Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established. Consumers is a so-called potentially responsible party at several contaminated sites being administered under Superfund. There are many other creditworthy potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that Consumers' liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding these and other environmental matters, see Electric Environmental Matters in Note 5 which is incorporated by reference herein. Other: In October 1997, two independent power producers filed a lawsuit against Consumers and CMS Energy in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers as well as claims relating to independent power production projects. The plaintiffs claim damages of $100 million (which can be trebled in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by and subject to the jurisdiction of the MPSC. Consumers believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter. Gas Utility Results of Operations Gas Pretax Operating Income: In Millions September 30 1997 1996 Change Three months ended $ (1) $ - $ (1) Nine months ended 100 116 (16) Twelve months ended 142 158 (16) Gas pretax operating income, while relatively flat for the three month period, decreased in both the nine month and twelve month periods ended September 30, 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 nine months ended September 30, 1997 reflects higher depreciation and general taxes resulting from increased investments in facilities and technology to serve new customers, partially offset by lower operations and maintenance expenses. The twelve months ended September 30, 1997 also reflects higher depreciation and general taxes from the increased investments to serve new customers, partially offset by lower operation expenses and benefits from gas services activities. The following table quantifies these impacts on Pretax Operating Income: In Millions Three Months Nine Months Twelve Months Change Compared to Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 Prior Year 1997 vs 1996 1997 vs 1996 1997 vs 1996 Sales $ - $(15) $(19) Gas wholesale and retail services activities (2) (9) (5) Operations and maintenance 1 11 12 General taxes, depreciation and other - (3) (4) ---- ---- ---- Total change $(1) $(16) $(16) ==== ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, decreased 1.1 percent, 3.8 percent and 3.3 percent, for the three months, nine months and twelve months ended September 30, 1997, respectively. The table below indicates total deliveries and the impact of weather.
In bcf Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 Change 1997 1996 Change 1997 1996 Change Weather-adjusted deliveries 30 30 - 228 231 (3) 333 333 - Impact of weather and leap year - - - 4 10 (6) 9 22 (13) --- --- --- --- --- --- --- --- --- System deliveries excluding transport to MCV Facility 30 30 - 232 241 (9) 342 355 (13) Transport to MCV Facility 17 16 1 49 49 - 65 62 3 Other Transportation 2 6 (4) 12 25 (13) 17 29 (12) --- --- --- --- --- --- --- --- --- Total deliveries 49 52 (3) 293 315 (22) 424 446 (22) === === === === === === === === ===
Cost of Gas Sold: In Millions September 30 1997 1996 Change Three months ended $ 39 $ 51 $ (12) Nine months ended 472 504 (32) Twelve months ended 718 742 (24) The decrease in gas costs for the three months ended September 30, 1997 reflects lower gas prices during 1997. The decreases for the nine month and twelve month periods ended September 30, 1997 were the result of decreased 1997 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 in response to the customer's proposal to bypass Consumers' system in favor of a competitive alternative. 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 claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. In October 1997, the Court of Appeals issued an opinion affirming the MPSC's order. Consumers has sought rehearing of the Court of Appeals opinion. GCR Matters: In 1995, the MPSC issued an order favorable to Consumers' position in a $44 million pricing dispute (excluding interest) between Consumers and certain gas producers gas supply contracts. The court of appeals has upheld the MPSC order and the producers have now appealed to the Michigan Supreme Court. 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. 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. Consumers estimates its costs related to investigation and remedial action at $48 million to $98 million. This estimate is based on undiscounted 1997 costs. Any significant change in assumptions, such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of investigation and 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 FERC and the MPSC) with respect to rates, proposed electric industry restructuring, change in industry and rate structure, operation of a nuclear power facility, 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 other important factors. 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 $359 $370 $358 Nuclear fuel lease 14 28 31 Capital leases other than nuclear fuel 14 14 18 Michigan Gas Storage 3 3 3 $390 $415 $410 Electric utility operations (a) $270 $295 $295 Gas utility operations (a) 120 120 115 $390 $415 $410 (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 Growth: Consumers expects average annual growth of two and one-half percent per year in electric system volume over the next five years, based on the current industry and regulatory 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 direct access to alternative sources of energy supply is another means by which retail service customers can satisfy their power requirements. Restructuring: 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 could 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 by regulatory decisions and 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 by the MPSC as part of its phased introduction to competition. FERC issued Orders 888 and 889, as amended on rehearing, requiring utilities to provide open access to the interstate transmission grid for wholesale transactions. Consumers has complied with several FERC requirements contained in these orders; however, Consumers and Detroit Edison disagree on the effect of the orders on the Michigan Electric Power Coordination Center Pool. Consumers proposes to maintain the benefits of the pool, while Detroit Edison seeks early termination. FERC is expected to decide the question in 1998. As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, in June 1997 the MPSC issued an order which proposed that Consumers would have to accept competing power suppliers using its distribution and transmission facilities to serve retail customers beginning January 1, 1998. By January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers. The order would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers through the end of the transition period in 2007. Further proceedings, as ordered by the MPSC, later took place to address other features of the open access programs being considered, including proposals to "true up" Transition Cost charges for changes in sales and market prices of power purchase capacity to the extent that they are different from estimates used for calculating Transition Costs. The June order is subject to claims of appeal filed with the Court of Appeals and a rehearing petition filed by Consumers which questions whether the MPSC has the statutory authority to mandate restructuring on an involuntary basis. The June 1997 order further stated that Securitization may be a beneficial mechanism for recovery of Transition Costs, but recognizes that state legislation is required for Securitization to occur. Michigan legislative consideration of the entire subject of electric industry restructuring including Securitization is expected in early 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Rate reductions for customers could also be accomplished if the legislation allowed a Securitization charge to be paid by all customers over a period of 15 years (the expected term of the "rate reduction bonds" to be issued as part of the Securitization process). The legislature is expected to review all of the policy choices made by the MPSC during the Restructuring proceedings to assure that they are in accord with those which the legislature believes should be paramount. Prior to legislative input, Consumers had estimated that it would recover $1.9 billion (as revised in a June 1997 filing with the MPSC) of Transition Costs through charges to direct-access customers. A separate charge to direct-access customers would also recover costs of implementing a direct-access program totaling an additional $200 million. On October 29, 1997, the MPSC issued a series of orders relating to its electric industry restructuring proceedings. The orders primarily addressed issues involving the design of retail open access tariffs, the true-up mechanism in connection with the recovery of stranded costs, suspension of the power supply cost recovery clauses and freezing of power supply costs, and performance-based rate-making. The orders were not completely definitive. A number of matters need to be clarified or supplemented by further MPSC hearings, orders or in subsequent legislation before any open access program allowing customers choice of power suppliers with the scope contained in those orders could be accepted voluntarily by Consumers. Accordingly, Consumers has filed a petition for rehearing, reconsideration and clarification raising all of the issues which must be satisfactorily addressed before it could agree. For further information on Application of SFAS 71, see below. Application of SFAS 71: Consumers applies the utility accounting standard, SFAS 71, that recognizes the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities related to the generation, transmission and distribution operations of its business 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 the generation segment of Consumers' business. 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. In accordance with recently published Emerging Issues Task Force Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101, Consumers can continue to carry its generation- related regulatory assets or liabilities as long as there is deregulatory legislation or an MPSC rate order which allows the collection of regulated cash flows to recover these specific costs or settle obligations. As a result, the generation portion of net regulatory assets are to be maintained by the regulated portion of the business until they are collected, they are impaired, or until the regulated portion of the business becomes deregulated. Based on a current evaluation of the various factors and conditions that are expected to affect future cost recovery, Consumers believes that even if it was to discontinue application of SFAS 71 for the generation segment of its business, its regulatory assets, including those related to generation, are probable of future recovery from the regulated portion of the business. Gas Outlook Growth: 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 further increase load. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. Consumers also plans additional capital expenditures to construct new gas mains 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. Gas Orders: 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 distribution facilities. 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 through March 1999; expected customer interest is unknown at this time. Application of SFAS 71: 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. In 1997, the FASB also issued SFAS 130, Reporting Comprehensive Income, and SFAS 131, Disclosures about Segments of an Enterprise and Related Information, each of which will require expanded disclosures effective for 1998. Also in 1997, the Emerging Issues Task Force published Issue 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101. The consensus reached in this issue allows for regulatory assets and liabilities to be maintained for a portion of a business which is being deregulated as long as there is deregulatory legislation or a commission rate order which allows the collection of regulated cash flows to recover costs or settle obligations. These regulatory assets and liabilities are maintained by the regulated portion of a business until they are collected or settled, they are impaired, or until the regulated portion of the business becomes deregulated. Consumers does not expect the application of these statements to have a material effect on its financial position, liquidity or results of operations. Computer Modifications for Year 2000: Consumers utilizes software and related technologies throughout its business which will be affected by the year 2000 date change. In 1995, Consumers began to modify its computer software systems to process year 2000 date transactions. Anticipated spending for these modifications will be expensed as incurred, while the costs for new software will be capitalized and amortized over the software's useful life. Consumers does not expect that the cost of these modifications will have a material effect on its financial position, liquidity or results of operations. (This page intentionally left blank) 49 Consumers Energy Company Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 In Millions Operating Revenue Electric $ 670 $ 655 $1,888 $1,827 $2,507 $2,381 Gas 110 123 828 880 1,230 1,274 Other 19 20 39 33 49 41 ------ ------ ------ ------ ------ ------ 799 798 2,755 2,740 3,786 3,696 ------ ------ ------ ------ ------ ------ Operating Expenses Operation Fuel for electric generation 80 76 220 219 297 294 Purchased power - related parties 151 150 447 436 600 558 Purchased and interchange power 65 56 180 147 235 189 Cost of gas sold 39 51 472 504 718 742 Other 144 151 404 424 566 591 ------ ------ ------ ------ ------ ------ 479 484 1,723 1,730 2,416 2,374 Maintenance 38 41 119 117 176 164 Depreciation, depletion and amortization 88 83 286 273 384 369 General taxes 45 43 148 141 198 192 ------ ------ ------ ------ ------ ------ 650 651 2,276 2,261 3,174 3,099 ------ ------ ------ ------ ------ ------ Pretax Operating Income (Loss) Electric 132 128 342 330 423 399 Gas (1) - 100 116 142 158 Other 18 19 37 33 47 40 ------ ------ ------ ------ ------ ------ 149 147 479 479 612 597 ------ ------ ------ ------ ------ ------ Other Income (Deductions) Interest and dividends from affiliates 11 4 20 13 24 17 Accretion income 2 2 6 7 8 10 Accretion expense (4) (7) (13) (21) (14) (28) Other, net 1 - 1 1 (3) 1 ------ ------ ------ ------ ------ ------ 10 (1) 14 - 15 - ------ ------ ------ ------ ------ ------ Interest Charges Interest on long-term debt 34 34 103 104 138 139 Other interest 9 8 25 22 33 33 Capitalized interest - -- - (2) - (3) ------ ------ ------ ------ ------ ------ 43 42 128 124 171 169 ------ ------ ------ ------ ------ ------ Net Income Before Income Taxes 116 104 365 355 456 428 Income Taxes 36 35 126 125 151 145 Net Income 80 69 239 230 305 283 Preferred Stock Dividends 6 7 20 21 27 28 Trust Preferred Securities Distributions 3 2 7 6 9 6 ------ ------ ------ ------ ------ ------ Net Income Available to Common Stockholder $ 71 $ 60 $ 212 $ 203 $ 269 $ 249 ====== ====== ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
50 Consumers Energy Company Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 In Millions Cash Flows from Operating Activities Net income $ 239 $ 230 $ 305 $ 283 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $37, $37, $49 and $49, respectively) 286 273 384 369 Capital lease and other amortization 35 32 42 44 Deferred income taxes and investment tax credit 11 27 32 32 Accretion expense 13 21 14 28 Accretion income - abandoned Midland project (6) (7) (8) (10) Undistributed earnings of related parties (35) (30) (45) (39) Power purchases (47) (43) (67) (78) Other 4 4 4 5 Changes in other assets and liabilities (42) (49) 9 148 ----- ----- ----- ----- Net cash provided by operating activities 458 458 670 782 ----- ----- ----- ----- Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (260) (298) (371) (434) Investments in nuclear decommissioning trust funds (37) (37) (49) (49) Cost to retire property, net (26) (20) (37) (34) Associated company preferred stock redemption 50 - 50 - Other (4) (4) (4) (6) ----- ----- ----- ----- Net cash used in investing activities (277) (359) (411) (523) ----- ----- ----- ----- Cash Flows from Financing Activities Retirement of preferred stock (120) - (120) - Payment of common stock dividends (113) (114) (199) (114) Retirement of bonds and other long-term debt (51) (37) (51) (37) Payment of capital lease obligations (34) (32) (42) (43) Payment of preferred stock dividends (23) (21) (29) (28) Trust Preferred Securities distributions (7) (6) (9) (6) Proceeds from Trust Preferred Securities 116 97 116 97 Increase (decrease) in notes payable, net 56 (1) 49 (134) Contribution from stockholder - 13 - 13 Proceeds from bank loans - - 23 - ----- ----- ----- ----- Net cash used in financing activities (176) (101) (262) (252) ----- ----- ----- ----- Net Increase (Decrease) in Cash and Temporary Cash Investments 5 (2) (3) 7 Cash and Temporary Cash Investments, Beginning of Period 4 14 12 5 ----- ----- ----- ----- Cash and Temporary Cash Investments, End of Period $ 9 $ 12 $ 9 $ 12 ===== ===== ===== ===== The accompanying condensed notes are an integral part of these statements.
51 Consumers Energy Company Consolidated Balance Sheets
ASSETS September 30 September 30 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Plant (At original cost) Electric $6,447 $6,333 $6,286 Gas 2,292 2,203 2,268 Other 25 26 25 ------ ------ ------ 8,764 8,562 8,579 Less accumulated depreciation, depletion and amortization 4,540 4,269 4,354 ------ ------ ------ 4,224 4,293 4,225 Construction work-in-progress 146 158 194 ------ ------ ------ 4,370 4,451 4,419 ------ ------ ------ Investments Stock of affiliates 258 298 338 First Midland Limited Partnership (Note 2) 239 232 230 Midland Cogeneration Venture Limited Partnership (Note 2) 163 134 127 Other 7 8 8 ------ ------ ------ 667 672 703 ------ ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 9 4 12 Accounts receivable and accrued revenue, less allowances of $6, $10 and $2, respectively (Note 4) 47 148 64 Accounts receivable - related parties 87 63 27 Inventories at average cost Gas in underground storage 253 186 250 Materials and supplies 69 68 71 Generating plant fuel stock 26 30 28 Postretirement benefits 25 25 25 Deferred income taxes 9 27 21 Prepayments and other 51 183 81 ------ ------ ------ 576 734 579 ------ ------ ------ Non-current Assets Nuclear decommissioning trust funds 478 386 360 Postretirement benefits 411 435 442 Abandoned Midland Project 98 113 117 Other 238 234 278 ------ ------ ------ 1,225 1,168 1,197 ------ ------ ------ Total Assets $6,838 $7,025 $6,898 ====== ====== ======
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Capitalization Common stockholder's equity Common stock $ 841 $ 841 $ 841 Paid-in-capital 502 504 504 Revaluation capital 45 37 30 Retained earnings since December 31, 1992 396 297 326 ------ ------ ------ 1,784 1,679 1,701 Preferred stock 238 356 356 Company-obligated mandatorily redeemable Trust Preferred Securities of: Consumers Power Company Financing I (a) 100 100 100 Consumers Energy Company Financing II (a) 120 - - Long-term debt 1,462 1,900 1,876 Non-current portion of capital leases 82 100 89 ------ ------ ------ 3,786 4,135 4,122 ------ ------ ------ Current Liabilities Current portion of long-term debt and capital leases 483 98 97 Notes payable 389 333 340 Accounts payable 140 212 161 Accounts payable - related parties 75 68 65 Accrued taxes 97 211 96 Power purchases (Note 2) 47 47 90 Accrued interest 25 33 28 Accrued refunds 7 8 23 Other 139 176 173 ------ ------ ------ 1,402 1,186 1,073 ------ ------ ------ Non-current Liabilities Deferred income taxes 630 646 618 Postretirement benefits 495 500 509 Deferred investment tax credit 152 159 162 Power purchases (Note 2) 144 178 197 Regulatory liabilities for income taxes, net 86 66 61 Other 143 155 156 ------ ------ ------ 1,650 1,704 1,703 ------ ------ ------ Commitments and Contingencies (Notes 2, 3, 5 and 6) Total Stockholders' Investment and Liabilities $6,838 $7,025 $6,898 ====== ====== ====== (a) 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 primary asset of Consumers Energy Company Financing II is $124 million principal amount of 8.20% subordinated interest notes due 2027 from Consumers. For further discussion, see Note 4. The accompanying condensed notes are an integral part of these statements.
53 Consumers Energy Company Consolidated Statements of Common Stockholder's Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 In Millions Common Stock At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841 ------- ------- ------- ------- ------- ------- Other Paid-in Capital At beginning of period 504 504 504 491 504 491 Preferred stock reacquired (2) - (2) - (2) - Stockholder's contribution - - - 13 - 13 ------- ------- ------- ------- ------- ------- At end of period 502 504 502 504 502 504 ------- ------- ------- ------- ------- ------- Revaluation Capital At beginning of period 41 31 37 29 30 22 Change in unrealized investment - gain (loss) 4 (1) 8 1 15 8 ------- ------- ------- ------- ------- ------- At end of period 45 30 45 30 45 30 ------- ------- ------- ------- ------- ------- Retained Earnings At beginning of period 368 305 297 237 326 191 Net income 80 69 239 230 305 283 Common stock dividends declared (43) (39) (113) (114) (199) (114) Preferred stock dividends declared (6) (7) (20) (21) (27) (28) Trust Preferred Securities distributions (3) (2) (7) (6) (9) (6) ------- ------- ------- ------- ------- ------- At end of period 396 326 396 326 396 326 ------- ------- ------- ------- ------- ------- Total Common Stockholder's Equity $1,784 $1,701 $1,784 $1,701 $1,784 $1,701 ======= ======= ======= ======= ======= ======= The accompanying condensed notes are an integral part of these statements.
54 Consumers Energy Company Condensed Notes to Consolidated Financial Statements These Consolidated 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 which 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 Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 Pretax operating income $18 $19 $36 $31 $45 $38 Income taxes and other 6 6 11 9 13 11 --- --- --- --- --- --- Net income $12 $13 $25 $22 $32 $27 === === === === === ===
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 incrementally 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 recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA. At September 30, 1997 and December 31, 1996, the after-tax present value of the PPA liability totaled $124 million and $147 million, respectively. The reduction in the liability since December 31, 1996 reflects after-tax cash underrecoveries of $31 million partially offset by after-tax accretion expense of $8 million. The undiscounted after-tax amount associated with the liability totaled $506 million at September 30, 1997. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries were based on the assumption that the MCV Facility would be available over its expected life to generate electricity 90 percent of the time. However, for the first nine months of 1997 the MCV Facility was available 98.9 percent of the time, resulting in the $31 million of after-tax cash underrecoveries. The underrecovery shown in the table below has been revised to reflect the anticipated availability of the MCV Facility for the year 1997. In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $40 $23 $22 $21 $20 The amount of estimated underrecoveries of power costs continues to be based, in part, on an estimate 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, losses will need to be recognized for the amount of future underrecoveries in excess of 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 MCV 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 decision. The MCV Partnership filed an application for leave to appeal with the Michigan Supreme Court. 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 increasing prospective annual nuclear plant depreciation expense by $18 million, with a corresponding decrease in fossil-fueled generating plant depreciation expense. It also established an experimental 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 load, of which 410 MW have already been filled by existing contracts. An additional 140 MW of load may be filled by new special contracts which the MPSC has approved or by direct-access customers. 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. Direct- access for this 100 MW is expected to begin during the fourth quarter of 1997. In May 1997, the MPSC authorized Consumers to collect $17 million from electric customers through a one-time surcharge pertaining to the 1994 PSCR reconciliation. In September 1997, the MPSC further authorized Consumers to collect $13 million from electric customers through a one- time surcharge pertaining to the 1995 PSCR reconciliation. Electric Restructuring: As part of ongoing proceedings relating to the restructuring of the electric utility industry in Michigan, in June 1997 the MPSC issued an order which proposed that Consumers would have to accept competing power suppliers using its distribution and transmission facilities to serve retail customers beginning January 1, 1998. By January 1, 2002, all customers would be free to choose (that is, have direct access to) their own power suppliers. The order would allow utilities to recover prudently incurred Transition Costs through a charge to all direct-access customers through the end of the transition period in 2007. Further proceedings, as ordered by the MPSC, later took place to address other features of the open access programs being considered, including proposals to "true up" Transition Cost charges for changes in sales and market prices of power purchase capacity to the extent that they are different from estimates used for calculating Transition Costs. The June order is subject to claims of appeal filed with the Court of Appeals and a rehearing petition filed by Consumers which questions whether the MPSC has the statutory authority to mandate restructuring on an involuntary basis. The June 1997 order further stated that Securitization may be a beneficial mechanism for recovery of Transition Costs, but recognizes that state legislation is required for Securitization to occur. Michigan legislative consideration of the entire subject of electric industry restructuring including Securitization is expected in early 1998. To be acceptable to Consumers, the legislation would have to provide for full recovery of Transition Costs. Rate reductions for customers could also be accomplished if the legislation allowed a Securitization charge to be paid by all customers over a period of 15 years (the expected term of the "rate reduction bonds" to be issued as part of the Securitization process). The legislature is expected to review all of the policy choices made by the MPSC during the Restructuring proceedings to assure that they are in accord with those which the legislature believes should be paramount. Prior to legislative input, Consumers had estimated that it would recover $1.9 billion (as revised in a June 1997 filing with the MPSC) of Transition Costs through charges to direct-access customers. A separate charge to direct-access customers would also recover costs of implementing a direct-access program totaling an additional $200 million. On October 29, 1997, the MPSC issued a series of orders relating to its electric industry restructuring proceedings. The orders primarily addressed issues involving the design of retail open access tariffs, the true-up mechanism in connection with the recovery of stranded costs, suspension of the power supply cost recovery clauses and freezing of power supply costs, and performance-based rate-making. The orders were not completely definitive. A number of matters need to be clarified or supplemented by further MPSC hearings, orders or in subsequent legislation before any open access program allowing customers choice of power suppliers with the scope contained in those orders could be accepted voluntarily by Consumers. Accordingly, Consumers has filed a petition for rehearing, reconsideration and clarification raising all of the issues which must be satisfactorily addressed before it could agree. For further information on Application of SFAS 71, see Electric Outlook in the MD&A. Gas Proceedings: In the GCR reconciliation proceeding for the period April 1995 through March 1996, the MPSC staff questioned 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. In August 1997, the MPSC ruled that the gas loaning program was not the same as the storage service and, therefore, that gas loaning revenue was not subject to refund. In 1996, the MPSC authorized Consumers to implement a pilot gas transportation program in Bay County, Michigan. The pilot program provides residential and small commercial customers the opportunity to purchase gas from suppliers other than Consumers for a two-year period which began April 1997. Out of the 40,000 eligible customers, only 500 volunteered to participate in the program. For those program participants, Consumers will retain its role as transporter and distributor of the customers' gas. In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain gas 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, and the Court of Appeals upheld the MPSC order. The producers have appealed to the Michigan Supreme Court. 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: 1) issue or guarantee up to $900 million of short-term securities through 1998; and 2) to issue $380 million of long-term securities with maturities up to 30 years, for refinancing or refunding purposes, through November 1998. Consumers has an unsecured $425 million credit facility and unsecured lines of credit aggregating $120 million that are available to finance seasonal working capital requirements and pay for capital expenditures between long-term financings. At September 30, 1997, a total of $389 million was outstanding at a weighted average interest rate of 6.2 percent, compared with $340 million outstanding at September 30, 1996, at a weighted average interest rate of 6.0 percent. Consumers also has in place a $500 million trade receivables sale program. At September 30, 1997 and 1996, receivables sold under the program totaled $250 million and $210 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. Consumers has entered into interest rate swap agreements (derivatives) to exchange variable rate interest payment obligations for fixed rate obligations in order to reduce the impact of interest rate fluctuations. In order for derivatives to initially qualify for hedge accounting the following criteria must be met: 1) the item to be hedged exposes the enterprise to interest rate risk; and 2) the derivative reduces that exposure and is designated as a hedge. The hedged amounts are used to measure interest to be paid or received and do not represent the amount of exposure to principal loss. The hedged amount of Consumers' interest rate swaps was $416 million at September 30, 1997. The difference between the amounts paid and received under the swaps is accrued and recorded as an adjustment to interest expense over the life of the hedged agreement. Derivative instruments contain credit risk if the counterparties, including financial institutions, fail to perform under the agreements. However, Consumers minimizes such risk by performing financial credit reviews using, among other things, publicly available credit ratings of such counterparties. The risk of nonperformance by the counterparties is considered remote. In 1996, 4 million shares of 8.36 percent Trust Preferred Securities were issued and sold through Consumers Power Company Financing I, a wholley owned business trust consolidated with Consumers. Net proceeds from the sale totaled $97 million. In September 1997, 4.8 million shares of 8.20 percent Trust Preferred Securities were issued and sold through Consumers Energy Company Financing II, a wholley owned business trust consolidated with Consumers. Net proceeds from the sale totaled $116 million. Both trusts were formed for the sole purpose of issuing the Trust Preferred Securities. Consumers' obligations with respect to the Trust Preferred Securities under the notes, under the indenture under which the notes have been issued, under Consumers' guarantee of the Trust Preferred Securities, and under the declaration by the trust, taken together, constitute a full and unconditional guarantee by Consumers of the trusts' obligations under the Trust Preferred Securities. For additional information, see footnote (a) to the Consolidated Balance Sheets. In September 1997, Consumers redeemed all outstanding shares of its $7.45, $7.68, $7.72 and $7.76 preferred stock for $120 million. Under the provisions of its Articles of Incorporation at September 30, 1997, Consumers had $365 million of unrestricted retained earnings available to pay common dividends. In October 1997, Consumers declared a $57 million common dividend to be paid in November 1997. In October 1997, Consumers returned $50 million of paid in capital to CMS Energy. 5: Commitments and Contingencies Electric Environmental Matters: The Clean Air Act limits emissions of sulfur dioxide and nitrogen oxides and requires 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. In its effort to comply with the Act, Consumers has already made 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-fueled units to be an additional $45 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected as a result of these expenditures. The Clean Air Act also contains national air quality standards under which industry must operate. Consumers currently operates within these standards and meets current ozone and small particle related emission limits. The Act requires the EPA to periodically review the effectiveness of these standards in preventing adverse health affects. The EPA recently revised these standards to further limit small particle and ozone related emissions. Consumers supports the bipartisan effort in Congress to delay implementation of the revised standards until the relationship between the new standards and health improvements is established. In addition, the EPA has considered recommendations from the Ozone Transport Assessment Group and petitions from several Northeastern states to reduce ozone transport across state lines. On October 10, 1997, the EPA proposed that the State of Michigan impose additional nitrogen oxide limits on fossil-fuel emitters, such as Consumers' generating units, so as to reduce statewide nitrogen oxide emissions by 32 percent, as early as 2002. The State of Michigan will have one year to review and challenge the proposed recommendations, and one year thereafter to implement final requirements. The preliminary estimate of the cost of the changes Consumers may have to make to its fossil-fueled generating units to reduce ozone related emissions is approximately $175 million. A potentially equivalent amount may be needed to comply with the new small particle standards. Consumers is a so-called potentially responsible party at several contaminated sites being administered under Superfund. Superfund liability is joint and several and, along with Consumers, there are many other creditworthy 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 Superfund sites will be between $2 million and $9 million. At September 30, 1997, Consumers has accrued $2 million for its estimated Superfund liability. 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. Gas Environmental Matters: 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 September 30, 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. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $390 million for 1997, $415 million for 1998 and $410 million for 1999. For further information, see Capital Expenditures in Forward-Looking Information in the MD&A. Other: In October 1997, two independent power producers filed a lawsuit against Consumers and CMS Energy in a federal court. The suit alleges antitrust violations relating to contracts which Consumers entered into with some of its customers as well as claims relating to independent power production projects. The plaintiffs claim damages of $100 million (which can be trebled in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by and subject to the jurisdiction of the MPSC. Consumers believes the lawsuit is without merit and will vigorously defend against it, but cannot predict the outcome of this matter. 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 adverse 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. Consumers plans to load five additional casks at Palisades in 1999 pending approval by the NRC. In June 1997, the NRC approved the process for unloading spent fuel from a cask with minor weld flaws. Consumers intends to transfer the spent fuel to a new transportable cask when one is available. The supplier for the design and fabrication of the transportable cask has been selected and design work is proceeding. 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 can 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. Big Rock closed permanently on August 29, 1997 because management determined that the plant would be uneconomical to operate in an increasingly competitive environment. The plant was originally scheduled to close May 31, 2000, at the end of the plant's operating license. Plant decommissioning began in September 1997 and is expected to take five to ten years to return the site to its original condition. The current decommissioning fund, together with future collections from customers and future earnings of the fund, is expected to be adequate to cover the plant decommissioning expenses. 7: Supplemental Cash Flow Information For purposes of the Consolidated Statements 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 Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $129 $122 $164 $159 Income taxes paid (net of refunds) 122 105 135 76 Non-cash transactions Nuclear fuel placed under capital lease $ 4 $ 8 $ 24 $ 10 Other assets placed under capital leases 5 2 6 4 Capital leases refinanced - - - 21 61 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 September 30, 1997 and 1996, the related consolidated statements of income and common stockholder's equity for the three-month, nine-month and twelve-month periods then ended, and the related consolidated statements of cash flows for the nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statements of long-term debt and preferred stock of Consumers 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, November 10, 1997. 62 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion below is limited to an update of developments that have occurred in various judicial and administrative proceedings, many of which are more fully described in CMS Energy's and Consumers' Form 10-K for the year ended December 31, 1996, and in their Forms 10-Q for the quarters ended March 31, 1997 and June 30, 1997. Reference is made to the Notes to the Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating and environmental matters. CONSUMERS STRAY VOLTAGE LITIGATION 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 September 30, 1997, Consumers had 16 separate stray voltage cases awaiting action at the trial court level and the number pending has subsequently decreased to 9. Accordingly, CMS Energy and Consumers believe that the resolution of remaining lawsuits will not have a material impact on either company. Absent presently unanticipated further developments, stray voltage litigation will not be disclosed in future SEC filings. CMS ENERGY AND CONSUMERS ANTITRUST LITIGATION In October 1997, Indeck Energy Services, Inc. and Indeck Saginaw Limited Partnership, independent power producers, filed a lawsuit against CMS Energy and Consumers in the United States District Court for the Eastern District of Michigan. The suit alleges antitrust violations relating to contracts that Consumers entered into with some of its customers as well as claims relating to independent power production projects. The plaintiffs claim damages of $100 million (which can be trebled in antitrust cases as provided by law). The transactions of which plaintiffs complain have been regulated by and subject to the jurisdiction of the MPSC. CMS Energy and Consumers presently believe the lawsuit is entirely without merit and will vigorously defend against it, but cannot predict the outcome of this matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (4)(a) - Consumers: Second Supplemental Indenture dated as of September 4, 1997 between Consumers and The Bank of New York, as Trustee (4)(b) - CMS Energy: Fifth Supplemental Indenture dated as of November 4, 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) - Consumers: Financial Data Schedule (99) - CMS Energy: Consumers Gas Group Financials (b) Reports on Form 8-K Current Reports on Form 8-K dated August 21, 1997 were filed by each of CMS Energy and Consumers covering matters pursuant to "Item 5. Other Events." 64 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. CMS ENERGY CORPORATION ----------------------- (Registrant) Dated: November 14, 1997 By A. M. Wright ----------------------- Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer CONSUMERS ENERGY COMPANY ----------------------- (Registrant) Dated: November 14, 1997 By A. M. Wright ----------------------- Alan M. Wright Senior Vice President and Chief Financial Officer EX-4 2 CONSUMERS SECOND SUPPLEMENTAL INDENTURE EXHIBIT (4)(a) ==================================== SECOND SUPPLEMENTAL INDENTURE between CONSUMERS ENERGY COMPANY and THE BANK OF NEW YORK Dated as of September 4, 1997 ==================================== TABLE OF CONTENTS PAGE ARTICLE I. DEFINITIONS SECTION 1.1.Definition of Terms . . . . . . . . . . 2 ARTICLE II. GENERAL TERMS AND CONDITIONS OF THE NOTES SECTION 2.1.Designation and Principal Amount. . . . 3 SECTION 2.2.Maturity. . . . . . . . . . . . . . . . 3 SECTION 2.3.Form and Payment. . . . . . . . . . . . 3 SECTION 2.4.Global Note . . . . . . . . . . . . . . 3 SECTION 2.5.Interest. . . . . . . . . . . . . . . . 4 ARTICLE III. REDEMPTION OF THE NOTES SECTION 3.1.Special Event Redemption. . . . . . . . 5 SECTION 3.2.Optional Redemption by Issuer . . . . . 5 SECTION 3.3.No Sinking Fund . . . . . . . . . . . . 6 ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1.Extension of Interest Payment Period. . 6 SECTION 4.2.Notice of Extension . . . . . . . . . . 6 ARTICLE V. EXPENSES SECTION 5.1.Payment of Expenses . . . . . . . . . . 7 SECTION 5.2.Payment Upon Resignation or Removal . . 7 ARTICLE VI. SUBORDINATION SECTION 6.1.Agreement to Subordinate. . . . . . . . 7 ARTICLE VII. COVENANT TO LIST ON EXCHANGE SECTION 7.1.Listing on an Exchange. . . . . . . . . 8 ARTICLE VIII. FORM OF NOTES SECTION 8.1.Form of Note. . . . . . . . . . . . . . 8 ARTICLE IX. ORIGINAL ISSUE OF NOTES SECTION 9.1.Original Issue of Notes . . . . . . . . 12 ARTICLE X. MISCELLANEOUS SECTION 10.1Provisions of Indenture for the Sole Benefit of Parties and Holders of Trust Securities . . . . . . . . . . . . 13 SECTION 10.2Ratification of Indenture . . . . . . . 13 SECTION 10.3.Trustee Not Responsible for Recitals . 13 SECTION 10.4.Governing Law. . . . . . . . . . . . . 13 SECTION 10.5.Separability . . . . . . . . . . . . . 13 SECTION 10.6.Counterparts . . . . . . . . . . . . . 13 1 SECOND SUPPLEMENTAL INDENTURE, dated as of September 4, 1997, (the "Second Supplemental Indenture"), between Consumers Energy Company, a Michigan Corporation (the "Issuer"), and The Bank of New York, as trustee (the "Trustee") under the Indenture dated as of January 1, 1996 between the Issuer and the Trustee (the "Indenture"). WHEREAS, the Issuer executed and delivered the Indenture to the Trustee to provide for the future issuance of the Issuer's Securities to be issued from time to time in one or more series as might be determined by the Issuer under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Indenture; and WHEREAS, Section 2.3 of the Indenture permits the terms of any series of Securities to be established in an indenture supplemental to the Indenture; and WHEREAS, Section 8.1(d) of the Indenture provided that a supplemental indenture may be entered into without the consent of any Holders of Securities to supplement certain provisions of the Indenture; and WHEREAS, Section 8.1(e) of the 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, pursuant to the terms of the Indenture, the Issuer desires to provide for the establishment of a new series of its Securities to be known as its 8.20% Subordinated Deferrable Interest Notes due 2027 (the "Notes"), the form and substance of such Notes and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this Second Supplemental Indenture; and WHEREAS, Consumers Energy Company Financing II, a Delaware statutory business trust (the "Trust"), has offered to the public $120 million aggregate liquidation amount of its 8.20% Trust Originated Preferred Securities (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Issuer of $3,711,350 aggregate liquidation amount of its 8.20% Trust Originated Common Securities (together the "Trust Securities), in $123,711,350 aggregate principal amount of the Notes; and WHEREAS, the Issuer wishes to supplement Section 13.2 of the Indenture with respect to the Notes and the Preferred Securities; and WHEREAS, the Issuer has requested that the Trustee execute and deliver this Second Supplemental Indenture and all requirements necessary to make this Second Supplemental Indenture a valid instrument in accordance with its terms, and to make the Notes, when executed by the Issuer and authenticated and delivered by the Trustee, the valid obligations of the Issuer, have been performed, and the execution and delivery of this Second Supplemental Indenture has been duly authorized in all respects. NOW THEREFORE, in consideration of the purchase and acceptance of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Notes and the terms, provisions and conditions thereof, the Issuer covenants and agrees with the Trustee as follows: ARTICLE I. DEFINITIONS SECTION 1.1.DEFINITION OF TERMS. Unless the context otherwise requires: (a)a term defined in the Indenture has the same meaning when used in this Second Supplemental Indenture; (b)a term defined anywhere in this Second Supplemental Indenture has the same meaning throughout; (c)the singular includes the plural and vice versa; (d)a reference to a Section or Article is to a Section or Article of this Second Supplemental Indenture; (e)headings are for convenience of reference only and do not affect interpretation; (f)the following terms have the meanings given to them in the Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Redemption Tax Opinion; (iv) No Recognition Opinion; (v) Preferred Security Certificate; (vi) Property Trustee; (vii) Regular Trustees; (viii) Special Event; (ix) Tax Event; (x) Underwriting Agreement; (xi) Investment Company Event; and (xii) Distribution; (g)the following terms have the meanings given to them in this Section 1.1(g): "Additional Interest" shall have the meaning set forth in Section 2.5. "Compounded Interest" shall have the meaning set forth in Section 4.1. "Coupon Rate" shall have the meaning set forth in Section 2.5. "Declaration" means the Amended and Restated Declaration of Trust of Consumers Energy Company Financing II, a Delaware statutory business trust, dated as of September 4, 1997. "Deferred Interest" shall have the meaning set forth in Section 4.1. "Dissolution Event" means that, as a result of the occurrence and continuation of a Special Event, the Trust is to be dissolved in accordance with the Declaration, and the Notes held by the Property Trustee are to be distributed to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Declaration. "Extended Interest Payment Period" shall have the meaning set forth in Section 4.1. "Global Note" shall have the meaning set forth in Section 2.4. "Non Book-Entry Preferred Securities" shall have the meaning set forth in Section 2.4. "Optional Redemption Price" shall have the meaning set forth in Section 3.2. ARTICLE II. GENERAL TERMS AND CONDITIONS OF THE NOTES SECTION 2.1.DESIGNATION AND PRINCIPAL AMOUNT. There is hereby authorized and established a series of unsecured Securities designated the "8.20% Subordinated Deferrable Interest Notes due 2027", limited in aggregate principal amount to $123,711,350, (except as contemplated in Section 2(f)(2) of the Indenture). SECTION 2.2.MATURITY. The Maturity Date of the Notes is September 1, 2027. SECTION 2.3.FORM AND PAYMENT. The Notes shall be issued in fully registered form without interest coupons. Principal and interest on the Notes issued in certificated form will be payable, the transfer of such Notes will be registrable and such Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Trustee in the Borough of Manhattan, the City of New York; provided, however, that payment of interest may be made at the option of the Issuer by check mailed to the Holder at such address as shall appear in the Security Register or by wire transfer to an account maintained by the Holder. Notwithstanding the foregoing, so long as the Holder of any Notes is the Property Trustee, the payment of the principal of and interest (including Compounded Interest and Additional Interest, if any) on such Notes held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. SECTION 2.4.GLOBAL NOTE. (a) In connection with a Dissolution Event, (i) the Notes may be presented to the Trustee by the Property Trustee in exchange for a global Note in an aggregate principal amount equal to the aggregate principal amount of all outstanding Notes (a "Global Note"), to be registered in the name of the Clearing Agency, or its nominee, and delivered by the Trustee to the Clearing Agency for crediting to the accounts of its participants pursuant to the instructions of the Regular Trustees and the Clearing Agency will act as Depository for the Notes. The Issuer upon any such presentation, shall execute a Global Note in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Indenture and this Second Supplemental Indenture. Payments on the Notes issued as a Global Note will be made to the Depositary; and (ii)if any Preferred Securities are held in non book-entry certificated form, the Notes may be presented to the Trustee by the Property Trustee and any Preferred Security Certificate which represents Preferred Securities other than Preferred Securities held by the Clearing Agency or its nominee ("Non Book-Entry Preferred Securities") will be deemed to represent beneficial interests in Notes presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Preferred Securities until such Preferred Security Certificates are presented to the Security Registrar for transfer or reissuance at which time such Preferred Security Certificates will be cancelled and a Note, registered in the name of the holder of the Preferred Security Certificate or the transferee of the holder of such Preferred Security Certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Security Certificate cancelled, will be executed by the Issuer and delivered to the Trustee for authentication and delivery in accordance with the Indenture and this Second Supplemental Indenture. (b) Except as provided in (c) below, a Global Note may be transferred, in whole but not in part, only to another nominee of the Depositary, or to a successor Depositary selected or approved by the Issuer or to a nominee of such successor Depositary. (c) If at any time the Depositary notifies the Issuer that it is unwilling or unable to continue as Depositary or if at any time the Depositary for such series shall no longer be registered or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation, and a successor Depositary for such series is not appointed by the Issuer within 90 days after the Issuer receives such notice or becomes aware of such condition, as the case may be, the Issuer will execute, and, subject to Section 2.8 of the Indenture, the Trustee, upon written notice from the Issuer, will authenticate and deliver the Notes in definitive registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Note in exchange for such Global Note. In addition, the Issuer may at any time determine that the Notes shall no longer be represented by a Global Note. In such event the Issuer will execute, and subject to Section 2.8 of the Indenture, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Issuer, will authenticate and deliver the Notes in definitive registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Note in exchange for such Global Note. Upon the exchange of the Global Note for such Notes in definitive registered form, in authorized denominations, the Global Note shall be cancelled by the Trustee. Such Notes in definitive registered form issued in exchange for the Global Note shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Notes to the Depositary for delivery to the Persons in whose names such Notes are so registered. SECTION 2.5.INTEREST. (a) Each Note will bear interest at the rate of 8.20% per annum (the "Coupon Rate") from the original date of issuance until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest, at the Coupon Rate, compounded quarterly, payable (subject to the provisions of Article IV) quarterly in arrears on March 31, June 30, September 30 and December 31 of each year (each, an "Interest Payment Date," commencing on September 30, 1997), to the Person in whose name such Note or any predecessor Note is registered, at the close of business on the regular record date for such interest installment, which, in respect of any Notes of which the Property Trustee is the Holder or a Global Note, shall be the close of business on the Business Day next preceding that Interest Payment Date. Notwithstanding the foregoing sentence, if the Preferred Securities are no longer in book-entry only form or, except if the Notes are held by the Property Trustee, the Notes are not represented by a Global Note, the regular record date for such interest installment shall be the fifteenth day of the month in which the applicable Interest Payment Date occurs. (b) The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the following sentence, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed, will be computed on the basis of the actual number of days elapsed in such a 90-day period. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. (c) If, at any time while the Property Trustee is the Holder of any Notes, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any case, the Issuer will pay as additional interest ("Additional Interest") on the Notes held by the Property Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. ARTICLE III. REDEMPTION OF THE NOTES SECTION 3.1.SPECIAL EVENT REDEMPTION. If (a) a Tax Event has occurred and is continuing and (i) the Issuer has received a Redemption Tax Opinion, or (ii) The Regular Trustees shall have been informed by tax counsel that a No Recognition Opinion cannot be delivered to the Trust, or (b) an Investment Company Event has occurred and is continuing, then, notwithstanding Section 3.2(a) but subject to Section 3.2(b) and Article Eleven of the Indenture, the Issuer shall have the right upon not less than 30 days' nor more than 60 days' notice to the Holders of the Notes to redeem the Notes, in whole or in part, for cash within 90 days' following the occurrence of such Special Event (the "90 Day Period") at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Redemption Price"), provided that if at the time there is available to the Issuer or the Trust the opportunity to eliminate, within the 90 Day Period, the Special Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure which has no adverse effect on the Issuer, the Trust or the Holders of the Trust Securities issued by the Trust, the Issuer shall pursue such Ministerial Action in lieu of redemption, and, provided, further, that the Issuer shall have no right to redeem the Notes while the Trust is pursuing any Ministerial Action pursuant to its obligations under the Declaration. The Redemption Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or such earlier time as the Issuer determines, and the Issuer shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 10:00 a.m., New York time, on the date such Redemption Price is to be paid. SECTION 3.2.OPTIONAL REDEMPTION BY ISSUER. (a) Subject to the provisions of Section 3.2(b) and to the provisions of Article Eleven of the Indenture, the Issuer shall have the right to redeem the Notes, in whole or in part, from time to time, on or after September 30, 2002, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Optional Redemption Price"). Any redemption pursuant to this paragraph will be made upon not less than 30 days' nor more than 60 days' notice to the Holder of the Notes, at the Optional Redemption Price. If the Notes are only partially redeemed pursuant to this Section 3.2, the Notes will be redeemed on a pro rata basis provided that if at the time of redemption the Notes are registered as a Global Note, the Depository shall determine, in accordance with its procedures, the principal amount of such Notes held by each Holder of Notes to be redeemed. The Optional Redemption Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or at such earlier time as the Issuer determines and the Issuer shall deposit with the Trustee an amount sufficient to pay the Optional Redemption Price by 10:00 a.m., New York time, on the date such Optional Redemption Price is to be paid. (b) If a partial redemption of the Notes would result in the delisting of the Preferred Securities from any national securities exchange or other organization on which the Preferred Securities are then listed, the Issuer shall not be permitted to effect such partial redemption and may only redeem the Notes in whole. SECTION 3.3.NO SINKING FUND. The Notes are not entitled to the benefit of any sinking fund. ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1.EXTENSION OF INTEREST PAYMENT PERIOD. The Issuer shall have the right, at any time and from time to time during the term of the Notes, to defer payments of interest by extending the interest payment period of such Notes for a period not exceeding 20 consecutive quarters (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable; provided that no Extended Interest Payment Period may extend beyond the Maturity Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 4.1, will bear interest thereon at the Coupon Rate compounded quarterly for each quarter of the Extended Interest Payment Period ("Compounded Interest"). At the end of the Extended Interest Payment Period, the Issuer shall pay all interest accrued and unpaid on the Notes, including any Additional Interest and Compounded Interest (together, "Deferred Interest") that shall be payable to the Holders of the Notes in whose names the Notes are registered in the Security Register on the First record date after the end of the Extended Interest Payment Period. Prior to the termination of any Extended Interest Payment Period, the Issuer may further extend such period, provided that such period together with all such further extensions thereof shall not exceed 20 consecutive quarters. Upon the termination of any Extended Interest Payment Period and upon the payment of all Deferred Interest then due, the Issuer may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Issuer may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. The limitations set forth in Section 3.5 of the Indenture shall apply during any Extended Interest Payment Period. SECTION 4.2.NOTICE OF EXTENSION. (a) If the Property Trustee is the only registered Holder of the Notes at the time the Issuer elects an Extended Interest Payment Period, the Issuer shall give written notice to the Regular Trustees, the Property Trustee and the Trustee of its election of such Extended Interest Payment Period one Business Day before the earlier of (i) the next succeeding date on which Distributions on the Trust Securities issued by the Trust are payable, or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Preferred Securities, but in any event at least one Business Day before such record date. (b) If the Property Trustee is not the only Holder of the Notes at the time the Issuer elects an Extended Interest Payment Period, the Issuer shall give the Holders of the Notes and the Trustee written notice of its election of such Extended Interest Payment Period ten Business Days before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Issuer is required to give notice of the record or payment date of such interest payment to the New York Stock Exchange or other applicable self-regulatory organization or to Holders of the Notes, but in any event at least 2 Business Days before such record date. (c) The quarter in which any notice is given pursuant to paragraphs (a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters permitted in the maximum Extended Interest Payment Period permitted under Section 4.1. ARTICLE V. EXPENSES SECTION 5.1.PAYMENT OF EXPENSES. In connection with the offering, sale and issuance of the Notes to the Property Trustee and in connection with the sale of the Trust Securities by the Trust, the Issuer, in its capacity as borrower with respect to the Notes, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Notes, including commissions to the underwriters payable pursuant to the Underwriting Agreement and the Pricing Agreements, and compensation of the Trustee under the Indenture in accordance with the provisions of Section 6.6 of the Indenture; (b) pay all costs and expenses of the Trust (including, but not limited to, costs and expenses relating to the organization of the Trust, the offering, sale and issuance of the Trust Securities (including commissions to the underwriters in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets); (c) be primarily liable for any indemnification obligations arising with respect to the Declaration; and (d) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. SECTION 5.2.PAYMENT UPON RESIGNATION OR REMOVAL. Upon termination of this Second Supplemental Indenture or the Indenture or the removal or resignation of the Trustee pursuant to Section 6.10 of the Indenture, the Issuer shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.6 of the Declaration, the Issuer shall pay to the Delaware Trustee or the Property Trustee, as the case may be, all amounts accrued to the date of such termination, removal or resignation. ARTICLE VI. SUBORDINATION SECTION 6.1.AGREEMENT TO SUBORDINATE. The Issuer covenants and agrees, and each Holder of Notes issued hereunder, by such Holder's acceptance thereof likewise covenants and agrees, that pursuant to Section 2.3(f)(9) of the Indenture all Notes shall be issued as Subordinated Securities subject to the provisions of Article Twelve of the Indenture and this Article VI; and each Holder of a Note by its acceptance thereof accepts and agrees to be bound by such provisions. ARTICLE VII. COVENANT TO LIST ON EXCHANGE SECTION 7.1.LISTING ON AN EXCHANGE. In connection with the distribution of the Notes to the holders of the Preferred Securities upon a Dissolution Event, the Issuer will use its best efforts to list such Notes on the New York Stock Exchange or on such other exchange as the Preferred Securities are then listed. ARTICLE VIII. FORM OF NOTES SECTION 8.1.FORM OF NOTE. The Notes and the Trustee's Certificate of Authentication to be endorsed thereon are to be substantially in the following forms and the Notes shall have such additional terms as may be set forth in such form: (FORM OF FACE OF NOTE) [IF THE NOTE IS TO BE A GLOBAL NOTES, INSERT - This Note is a Global Note within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This Note is exchangeable for Notes registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Note (other than a transfer of this Note as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances. Unless this Note is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any Note issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.] No. $ CUSIP NO. CONSUMERS ENERGY COMPANY ____% SUBORDINATED DEFERRABLE INTEREST NOTES DUE 2027 Consumers Energy Company, a Michigan corporation (the "Issuer", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______________, or registered assigns, the principal sum of _____________ Dollars ($___________) on _________, ____, and to pay interest on said principal sum from ____________, 19 , or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year commencing ___________ at the rate of ____% per annum until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Note (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the close of business on the Business Day next preceding such Interest Payment Date. [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE NOTES ARE NO LONGER REPRESENTED BY A GLOBAL NOTE -- which shall be the close of business on the 15th day of the month in which such Interest Payment Date occurs.] If and to the extent the Issuer shall default in the payment of the interest due on such Interest Payment Date, interest shall be paid to the person in whose name this Note is registered at the close of business on a subsequent record date (which shall not be less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the Holder of this Note not less than 15 days preceding such subsequent Record Date. The principal of (and premium, if any) and the interest on this Note shall be payable at the office or agency of the Trustee in the Borough of Manhattan, the City of New York maintained for that purpose in any coin or currency of the United States of America that at the time is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Issuer by check mailed to the registered Holder at such address as shall appear in the Security Register or by wire transfer to an account maintained by the Holder. Notwithstanding the foregoing, so long as the Holder of this Note is the Property Trustee, the payment of the principal of (and premium, if any) and interest on this Note will be made at such place and to such account as may be designated by the Property Trustee. The indebtedness evidenced by this Note is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Note is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Note shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Note are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Issuer has caused this instrument to be executed. Dated Consumers Energy Company [Seal] By: Name: Title Attest: By: Name: Title: (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series of Securities described in the within-mentioned Indenture. [ ] ________________________________ as Trustee By Authorized Signatory (FORM OF REVERSE OF NOTE) This Note is one of a duly authorized series of Securities of the Issuer (herein sometimes referred to as the "Notes"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to an Indenture dated as of January 1, 1996, duly executed and delivered between the Issuer and The Bank of New York, a New York banking corporation, as Trustee (the "Trustee"), as supplemented by certain supplemental indentures, including the Second Supplemental Indenture dated as of _______, 1997, between the Issuer and the Trustee (the Indenture as so supplemented, the "Indenture"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the Holders of the Notes. By the terms of the Indenture, the Notes are issuable in series that may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. This series of Notes is limited in aggregate principal amount as specified in said Second Supplemental Indenture. The Issuer shall have the right to redeem this Note at the option of the Issuer, without premium or penalty, in whole or in part at any time on or after __________, 2002, or at any time in certain circumstances upon the occurrence of a Special Event, at a redemption price equal to 100% of the principal amount plus any accrued but unpaid interest, to the date of such redemption. Any redemption pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days' notice. If the Notes are only partially redeemed by the Issuer pursuant to an Optional Redemption, the Notes will be redeemed pro rata. In the event of redemption of this Note in part only, a new Note or Notes of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Notes may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes and other Indenture securities of each series affected at the time Outstanding and affected (voting as one class), as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Notes; provided, however, that the Company and the Trustee may not, without the consent of the Holder of each Note then Outstanding and affected thereby: (a) change the time of payment of the principal (or any installment) of any Note, or reduce the principal amount thereof, or reduce the rate or change the time of payment of interest thereon, or impair the right to institute suit for the enforcement of any payment on any Note when due or (b) reduce the percentage in principal amount of the Notes, the consent of whose Holders is required for any such modification or for any waiver provided for in the Indenture. The Indenture also contains provisions providing that prior to the acceleration of the maturity of any Note or other securities outstanding under the Indenture, the Holders of a majority in aggregate principal amount of Notes of and other Securities Outstanding under the Indenture with respect to which a default or/an Event of Default shall have occurred and be continuing (voting as one class) may on behalf of the Holders of all such affected Securities (including the Notes) waive any past default and its consequences, except a default or an Event of Default in respect of a covenant or provision of the Indenture or of any Note or other Security which cannot be modified or amended without the consent of the Holder of each Note or other Security affected. Any such consent or waiver by the registered Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and of any Note issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this 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 premium, if any, and interest on this Note at the time and place and at the rate and in the money herein prescribed. The Issuer shall have the right at any time during the term of the Notes and from time to time to extend the interest payment period of such Notes for up to 20 consecutive quarters (an "Extended Interest Payment Period"), at the end of which period the Issuer shall pay all interest then accrued and unpaid (together with interest thereon at the rate specified for the Notes to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extended Interest Payment Period, the Issuer may further extend such Extended Interest Payment Period, provided that such Extended Interest Payment Period together with all such further extensions thereof shall not exceed 20 consecutive quarters. At the termination of any such Extended Interest Payment Period and upon the payment of all accrued and unpaid interest and any additional amounts then due, the Issuer may commence a new Extended Interest Payment Period. As provided in the Indenture and subject to certain limitations therein set forth, this Note is transferable by the registered Holder hereof on the Security Register of the Issuer, upon surrender of this Note for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer or the Trustee duly executed by the registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Note, the Issuer, the Trustee, any paying agent and the Security Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Note shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Issuer nor the Trustee nor any paying agent nor any Security Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Issuer or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. Notes of this series so issued are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations herein and therein set forth, Notes of this series so issued are exchangeable for a like aggregate principal amount of Notes of this series in authorized denominations, as requested by the Holder surrendering the same. All terms used in this Note that are defined in the Indenture shall have the meanings assigned to them in the Indenture. [END OF FORM OF NOTE] ARTICLE IX. ORIGINAL ISSUE OF NOTES SECTION 9.1. Original Issue of Notes. Notes in the aggregate principal amount of $123,711,350 may, upon execution of this Second Supplemental Indenture, be executed by the Issuer and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Issuer, in accordance with Section 2.4 of the Indenture. ARTICLE X. MISCELLANEOUS SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and Holders of Trust Securities. Notwithstanding Section 13.2 of the Indenture, for so long as any Trust Securities remain outstanding, the Issuer's obligations under the Indenture and this Second Supplemental Indenture will also be for the benefit of the holders of the Trust Securities, and the Issuer acknowledges and agrees that such holders will be entitled to enforce certain payment obligations under the Notes directly against the Issuer to the extent provided in the Declaration. SECTION 10.2 Ratification of Indenture. The Indenture, as supplemented by this Second Supplemental Indenture, is in all respects ratified and confirmed, and this Second Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION 10.3.Trustee Not Responsible for Recitals. The recitals herein contained are made by the Issuer and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Second Supplemental Indenture. SECTION 10.4.Governing Law. This Second Supplemental Indenture and each Note shall be deemed to be a contract made under the internal laws of the State of Michigan, and for all purposes shall be construed in accordance with the laws of said State, provided, however, that the rights, duties and obligations of the Trustee are governed and construed in accordance with the laws of the State of New York. SECTION 10.5.Separability. In case any one or more of the provisions contained in this Second Supplemental Indenture or in the Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Second Supplemental Indenture or of the Notes, but this Second Supplemental Indenture and the Notes shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 10.6.Counterparts. This Second Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed on the date or dates indicated in the acknowledgements and as of the day and year first above written. Consumers Energy Company By: /s/ A.M. Wright ______________________ Name:Alan M. Wright Title: Senior Vice President and Chief Financial Officer [Seal] Attest: By: /s/ Joyce H. Norkey _______________________ Joyce H. Norkey Assistant Secretary The Bank of New York, as Trustee By: /s/ Denise Leonard _____________________ Name: Denise Leonard Title: Assistant Treasurer STATE OF MICHIGAN ) )ss. COUNTY OF WAYNE ) On the 4th day of September, 1997, before me personally came Alan M. Wright, to me known, who, being by me duly sworn, did depose and say that he resides at Ann Arbor, Michigan; that he is Senior Vice President and Chief Financial Officer of Consumers Energy Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. [Notarial Seal] /s/ Sherry Ann White ________________________________ Notary Public, Wayne County, Michigan My Commission Expires: March 7, 2002 EX-4 3 CMS ENERGY FIFTH SUPPLEMENTAL INDENTURE EXHIBIT (4)(b) FIFTH SUPPLEMENTAL INDENTURE dated as of November 4, 1997 ____________________ This Fifth Supplemental Indenture, dated as of the 4th day of November, 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 Fifth 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 "7 3/8% Senior Unsecured Notes Due 2000, Series A" (the "Series A Notes"), providing for the issuance of the Series A Notes and amending and adding certain provisions thereof for the benefit of the Holders of the Series A Notes; and WHEREAS, the Issuer and certain purchasers of the Series A Notes are entering into a Registration Rights Agreement dated as of November 7, 1997 which requires the Issuer to use its best efforts to make an Exchange Offer which would enable Holders of Series A Notes to exchange such Series A Notes for Securities not subject to certain restrictions under the Securities Act or to cause a Shelf Registration Statement to become effective with respect to the Series A Notes (in each case as defined in such Registration Rights Agreement); and WHEREAS, the Issuer wishes to establish the forms and terms of a series of Securities to be issued in exchange for Series A Notes as so contemplated, such Securities to be known as the Issuer's "7 3/8% Senior Unsecured Notes Due 2000, Series B" (the "Series B Notes"), provide for the issuance of such Notes and amend and add certain provisions to the Original Indenture for the benefit of the Holders of the Series B Notes; and WHEREAS, the Issuer and the Trustee desire to enter into this Fifth 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 Fifth Supplemental Indenture; and WHEREAS, all things necessary to make this Fifth 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 FIFTH SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Series A Notes and the Series B Notes (such Series A Notes and Series B Notes being sometimes referred to herein as the "2000 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 such 2000 Notes, as follows: ARTICLE I STANDARD PROVISIONS; DEFINITIONS SECTION 1.01. STANDARD PROVISIONS. The Original Indenture together with this Fifth 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 2000 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. "Applicable Premium" means, with respect to a 2000 Note (or portion thereof) being redeemed at any time, the excess of (A) the present value at such time of the principal amount of such 2000 Note (or portion thereof) being redeemed plus all interest payments due on such 2000 Note (or portion thereof), which present value shall be computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such 2000 Note (or portion thereof) being redeemed at such time. For purposes of this definition, the present values of interest and principal payments will be determined in accordance with generally accepted principles of financial analysis. "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; provided that Hybrid Preferred Securities shall not be considered Capital Stock for purposes of this definition. "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 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; provided that Consolidated Indebtedness shall not include any subordinated debt owned by any Hybrid Preferred Securities Subsidiary. "Consolidated Interest Expense" means, for any period, the total interest expense in respect of Consolidated 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 Fifth 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 each series of 2000 Notes has the meaning specified in Article VI of this Fifth 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). "Hybrid Preferred Securities" means any preferred securities issued by a Hybrid Preferred Securities Subsidiary, where such preferred securities have the following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends substantially all of the proceeds from the issuance of such preferred securities to the Company or Consumers in exchange for subordinated debt issued by the Company or Consumers respectively; (ii) such preferred securities contain terms providing for the deferral of distributions corresponding to provisions providing for the deferral of interest payments on such subordinated debt; and (iii) the Company or Consumers (as the case may be) makes periodic interest payments on such subordinated debt, which interest payments are in turn used by the Hybrid Preferred Securities Subsidiary to make corresponding payments to the holders of the Hybrid Preferred Securities. "Hybrid Preferred Securities Subsidiary" means any business trust (or similar entity) (i) all of the common equity interest of which is owned (either directly or indirectly through one or more wholly-owned Subsidiaries of the Company or Consumers) at all times by the Company or Consumers, (ii) that has been formed for the purpose of issuing Hybrid Preferred Securities and (iii) substantially all of the assets of which consist at all times solely of subordinated debt issued by the Company or Consumers (as the case may be) and payments made from time to time on such subordinated debt. "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 May 15, 1998 and each November 15 and May 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 Enterprises. "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 2000 Notes on behalf of the Issuer. Initially, the Paying Agent for each series of 2000 Notes shall be the Trustee. "Predecessor Note" with respect to any particular 2000 Note means every previous 2000 Note evidencing all or a portion of the same debt as that evidenced by such particular 2000 Note; and, for the purposes of this definition, any 2000 Note authenticated and delivered under Section 2.9 of the Indenture in exchange for or in lieu of a mutilated, destroyed, lost or stolen 2000 Note of the same series shall be deemed to evidence the same debt as such mutilated, destroyed, lost or stolen 2000 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; provided that Hybrid Preferred Securities shall not be considered Preferred Stock for purposes of this definition. "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 2000 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 2000 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 one dollar of additional Indebtedness under Section 5.04, 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 Outstanding 2000 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 Fifth Supplemental Indenture or thereafter incurred) which is contractually subordinated or junior in right of payment to the 2000 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. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two Business Days prior to the redemption date or, in the case of defeasance, prior to the date of deposit (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life to stated maturity of the 2000 Notes; provided, however, that if the average life to stated maturity of the 2000 Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given. "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 Fifth Supplemental Indenture, are defined in those Articles. ARTICLE II DESIGNATION AND TERMS OF THE SERIES A NOTES; FORMS SECTION 2.01. ESTABLISHMENT OF SERIES. (a) There is hereby created a series of Securities to be known and designated as the "7 3/8% Senior Unsecured Notes Due 2000, Series A" and limited in aggregate principal amount (except as contemplated in Section 2.3(f)(2) of the Indenture) to $300,000,000. The Stated Maturity of the Series A Notes is November 15, 2000. (b) The Series A 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 7 3/8% 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 Series A 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 Series A 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 Series A Notes shall not be secured by a security interest in any property. (e) The Series A Notes shall be redeemable at the option of the Issuer, in whole or in part, at any time and from time to time, at a redemption price equal to 100% of the principal amount of such Series A Notes being redeemed plus the Applicable Premium, if any, thereon at the time of redemption, together with accrued interest, if any, thereon to the redemption date. In no event will the redemption price ever be less than 100% of the principal amount of the Series A Notes plus accrued interest to the redemption date. The Series A Notes shall be purchased by the Issuer at the option of the Holders thereof as provided in Sections 4.01 and 5.06 hereof. (f) The Series A Notes shall not be convertible. (g) The Series A Notes will not be subordinated to the payment of Senior Debt. (h) The Issuer will not pay any additional amounts on the Series A 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 Series A Notes shall include the events specified in Article Six of this Fifth Supplemental Indenture. In addition to the covenants set forth in Article Three of the Original Indenture, the Holders of the Series A Notes shall have the benefit of the covenants of the Issuer set forth in Article Five hereto. SECTION 2.02. FORMS GENERALLY. The Series A 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 Series A Notes, as evidenced by their execution thereof. The definitive Series A 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 Series A Notes, as evidenced by their execution thereof. SECTION 2.03. FORM OF FACE OF SERIES A NOTE. THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE SECOND SENTENCE HEREOF. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER) OR (G) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "U.S. PERSONS" AND "UNITED STATES" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING. CMS ENERGY CORPORATION 7 3/8% SENIOR UNSECURED NOTE DUE 2000, SERIES A 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 November 15, 2000 ("Maturity") and to pay interest thereon from November 7, 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 May 15, 1998 and at Maturity at the rate of 7 3/8% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. 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 Series A Note (or one or more Predecessor 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 Series A Note (or one or more Predecessor Series A 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 Series A 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 Series A 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; and provided, further, that if this Series A Note is a Global Note within the meaning of the Indenture, then each payment hereunder shall be made by wire transfer to an account or accounts designated by the Person entitled thereto not later than ten days prior to the date of such payment. Reference is hereby made to the further provisions of this Series A 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 Series A 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: SECTION 2.04. FORM OF REVERSE OF SERIES A NOTE. This 7 3/8% Senior Unsecured Note Due 2000, Series A is one of a duly authorized issue of securities of the Issuer (herein called the "Series A Notes"), issued and to be issued under an Indenture, dated as of September 15, 1992, as supplemented by certain supplemental indentures, including the Fifth Supplemental Indenture, dated as of November 4, 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, and the Holders of the Series A Notes and of the terms upon which the Series A Notes are, and are to be, authenticated and delivered. This Series A Note is one of the series designated on the face hereof, limited in aggregate principal amount to $300,000,000. The Series A Notes are subject to redemption at the option of the Issuer, in whole or in part, upon not more than 60 nor less than 30 days' notice as provided in the Indenture at any time and from time to time, at a redemption price equal to 100% of the principal amount of such Series A Notes being redeemed plus the Applicable Premium, if any, thereon at the time of redemption, together with accrued interest, if any, thereon to the redemption date, but interest installments whose Stated Maturity is on or prior to such redemption date will be payable to the Holder of record at the close of business on the relevant Record Date referred to on the face hereof, all as provided in the Indenture. In no event will the redemption price ever be less than 100% of the principal amount of the Series A Notes plus accrued interest to the redemption date. The following definitions are used to determine the Applicable Premium: "Applicable Premium" means, with respect to a Series A Note (or portion thereof) being redeemed at any time, the excess of (A) the present value at such time of the principal amount of such Series A Note (or portion thereof) being redeemed plus all interest payments due on such Series A Note (or portion thereof), which present value shall be computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such Series A Note (or portion thereof) being redeemed at such time. For purposes of this definition, the present values of the interest and principal payments will be determined in accordance with generally accepted principles of financial analysis. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the redemption date or, in the case of defeasance, prior to the date of deposit (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life to stated maturity of the Series A Notes; provided, however, that if the average life to stated maturity of the Series A Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given. In the event of redemption of this Series A Note in part only, a new Series A Note for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If a Change in Control occurs, the Issuer shall notify the Holder of this Series A 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 Series A Note at a Change in Control Purchase Price equal to 101% of the principal amount of this Series A 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 Series A Note, a new Series A 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 Series A Note shall occur and be continuing, the principal of this Series A 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 Series A Note shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of the Indenture or this Series A 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 Series A Note or (ii) certain restrictive covenants and Events of Default with respect to this Series A 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 Series A 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 Series A 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 Series A Note on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Series A 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 Series A 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 and herein set forth, the transfer of this Series A Note is registerable in the Security Register, upon surrender of this Series A 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 Series A 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 Series A 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 Series A 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, Series A Notes are exchangeable for a like aggregate principal amount of Series A 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. The Issuer shall not be required to (a) issue, exchange or register the transfer of this Series A Note for a period of 15 days next preceding the mailing of the notice of redemption of Series A Notes or (b) exchange or register the transfer of any Series A Note or any portion thereof selected, called or being called for redemption, except in the case of any Series A Note to be redeemed in part, the portion thereof not so to be redeemed. Prior to due presentment of this Series A 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 Series A Note is registered as the owner hereof for all purposes, whether or not this Series A 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 Series A Note without definition which are defined in the Indenture shall have the meanings assigned to them in the Indenture. CERTIFICATE OF TRANSFER 7 3/8% Senior Unsecured Note due 2000, Series A FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELL(S), ASSIGN(S) AND TRANSFER(S) UNTO __________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------- _____________________ (Please print or typewrite name and address including postal zip code, of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints to transfer said Note on the books of the Issuer, with full power of substitution in the premises. The undersigned certifies that said Note is being resold, pledged or otherwise transferred as follows: (check one) ___ to the Issuer; ___ to a Person whom the undersigned reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") purchasing for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or other transfer is being made in reliance on Rule 144A; ___ in an offshore transaction in accordance with Rule 903 or 904 of Regulation S under the Securities Act; ___ to an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is acquiring this Note for investment purposes and not for distribution; (attach a copy of an Investment Letter For Institutional Accredited Investors in the form annexed signed by an authorized officer of the transferee) ___ as otherwise permitted by the non-registration legend appearing on this Note; or ___ as otherwise agreed by the Issuer, confirmed in writing to the Trustee, as follows: (describe) Dated: FORM OF INVESTMENT LETTER FOR INSTITUTIONAL ACCREDITED INVESTORS [Transferor, Trustee and Issuer Names and Addresses] Ladies and Gentlemen: In connection with our proposed purchase of 7 3/8% Senior Unsecured Notes due 2000, Series A (the "Notes") issued by CMS Energy Corporation ("Issuer"), we confirm that: 1. We have received a copy of the Offering Memorandum (the "Offering Memorandum") relating to the Notes and such other information as we deem necessary in order to make our investment decision. We acknowledge that we have read and agree to the matters stated under the caption NOTICE TO INVESTORS in such Offering Memorandum, and the restrictions on duplication or circulation of, or disclosure relating to, such Offering Memorandum. 2. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture relating to Notes (the "Indenture") and that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth under NOTICE TO INVESTORS in the Offering Memorandum and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with such restrictions and conditions and the Securities Act of 1933, as amended ("Securities Act"). 3. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we sell any Senior Notes, we will do so only (A) to the Issuer, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes to the Trustee (as defined in the Indenture) a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Notes (substantially in the form of this letter) and, if such transfer is in respect of an aggregate principal amount of Notes at the time of transfer of less than $250,000, an opinion of counsel acceptable to the Issuer that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 903 or 904 of Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 4. We understand that, on any proposed resale of any Notes, we will be required to furnish to the Trustee and Issuer such certifications, legal opinions and other information as the Trustee and Issuer may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 6. We are acquiring the Notes purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You, the Issuer and the Trustee are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By: ____________________ Name: Title: [END OF FORM] 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 SECTION 2.06. The Series A Notes will be initially issued as Global Notes registered in the name of Cede & Co. (as nominee for the Depository Trust Company ("DTC"), New York, New York). The Series A Notes shall contain restrictions on transfer, substantially as described in the form set forth in Section 2.03. Each Series A Note, whether in the form of a Global Note or in certificated form, shall bear a non-registration legend and a Certificate of Transfer, in each case in substantially the form set forth in such form. It is contemplated that beneficial interests in Series A Notes owned by qualified institutional buyers (as defined in Rule 144A under the Securities Act)("QIBs") or sold to QIBs in reliance upon Rule 144A under the Securities Act will be represented by one or more global certificates registered in the name of Cede & Co., as registered owner and as nominee for DTC; beneficial interests in Series A Notes acquired by foreign purchasers pursuant to Regulation S under the Securities Act will be evidenced by one or more separate global certificates (each the "Regulation S Global Certificate"), also registered in the name of Cede & Co., as registered owner and as nominee for DTC for the accounts of Euroclear and Cedel Bank; prior to the 40th day after the date of initial issuance of the Series A Notes, beneficial interests in the Regulation S Global Certificate may be held only through Euroclear or Cedel Bank; Series A Notes acquired by Institutional Accredited Investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) ("IAIs") and other eligible transferees, who are not QIBs and who are not foreign purchasers pursuant to Regulation S under the Securities Act, will be in certificated form. The Trustee and the Issuer will have no responsibility under the Indenture for transfers of beneficial interests in the Series A Notes. The Trustee shall authenticate and issue new Series A Notes upon a registration of transfer only upon receipt of a Transfer Certificate in the form set forth in Section 2.04. The Trustee shall refuse to register any transfer of a Series A Note in violation of the legend set forth on such Series A Note and without appropriate completion of the Transfer Certificate on such Series A Note. ARTICLE III DESIGNATION AND TERMS OF THE SERIES B NOTES; FORMS SECTION 3.01. ESTABLISHMENT OF SERIES. (a) There is hereby created a series of Securities to be known and designated as the "7 3/8% Senior Unsecured Notes Due 2000, Series B" and limited in aggregate principal amount (except as contemplated in Section 2.3(f)(2) of the Indenture) to $300,000,000 (the "Series B Notes"). The Stated Maturity of the Series B Notes is November 15, 2000. (b) The Series B 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 7 3/8% 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 Series B Note in Section 3.03 hereof. (c) The Record Date referred to in Section 2.3(f)(4) of the Indenture for the payment of the interest on any Series B 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 Series B Notes shall not be secured by a security interest in any property. (e) The Series B Notes shall be redeemable at the option of the Issuer, in whole or in part, at any time and from time to time, at a redemption price equal to 100% of the principal amount of such Series B Notes being redeemed plus the Applicable Premium, if any, thereon at the time of redemption, together with accrued interest, if any, thereon to the redemption date. In no event will the redemption price ever be less than 100% of the principal amount of the Series B Notes plus accrued interest to the redemption date. The Series B Notes shall be purchased by the Issuer at the option of the Holders thereof as provided in Sections 4.01 and 5.06 hereof. (f) The Series B Notes shall not be convertible. (g) The Series B Notes will not be subordinated to the payment of Senior Debt. (h) The Issuer will not pay any additional amounts on the Series B 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 Series B Notes shall include the events specified in Article Six of this Fifth Supplemental Indenture. In addition to the covenants set forth in Article Three of the Original Indenture, the Holders of the Series B Notes shall have the benefit of the covenants of the Issuer set forth in Article Five hereto. SECTION 3.02. FORMS GENERALLY. The Series B 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 Series B Notes, as evidenced by their execution thereof. The definitive Series B 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 Series B Notes, as evidenced by their execution thereof. SECTION 3.03. FORM OF FACE OF SERIES B NOTE. CMS ENERGY CORPORATION 7-3/8% SENIOR UNSECURED NOTE DUE 2000, SERIES B 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 November 15, 2000 ("Maturity") and to pay interest thereon from November 7, 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 May 15, 1998 and at Maturity at the rate of 7-3/8% per annum, until the principal hereof is paid or made available for payment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. 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 Series B Note (or one or more Predecessor Series B 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 Series B Note (or one or more Predecessor Series B 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 Series B 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 Series B 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; and provided, further, that if this Series B Note is a Global Note within the meaning of the Indenture, then each payment hereunder shall be made by wire transfer to an account or accounts designated by the Person entitled thereto not later than ten days prior to the date of such payment. Reference is hereby made to the further provisions of this Series B 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 Series B 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: SECTION 3.04. FORM OF REVERSE OF SERIES B NOTE. This 7-3/8% Senior Unsecured Note Due 2000, Series B is one of a duly authorized issue of securities of the Issuer (herein called the "Series B Notes"), issued and to be issued under an Indenture, dated as of September 15, 1992, as supplemented by certain supplemental indentures, including the Fifth Supplemental Indenture, dated as of November 4, 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, and the Holders of the Series B Notes and of the terms upon which the Series B Notes are, and are to be, authenticated and delivered. This Series B Note is one of the series designated on the face hereof, limited in aggregate principal amount to $300,000,000. The Series B Notes are subject to redemption at the option of the Issuer, in whole or in part, upon not more than 60 nor less than 30 days' notice as provided in the Indenture at any time and from time to time, at a redemption price equal to 100% of the principal amount of such Series B Notes being redeemed plus the Applicable Premium, if any, thereon at the time of redemption, together with accrued interest, if any, thereon to the redemption date, but interest installments whose Stated Maturity is on or prior to such redemption date will be payable to the Holder of record at the close of business on the relevant Record Date referred to on the face hereof, all as provided in the Indenture. In no event will the redemption price ever be less than 100% of the principal amount of the Series B Notes plus accrued interest to the redemption date. The following definitions are used to determine the Applicable Premium: "Applicable Premium" means, with respect to a Series B Note (or portion thereof) being redeemed at any time, the excess of (A) the present value at such time of the principal amount of such Series B Note (or portion thereof) being redeemed plus all interest payments due on such Series B Note (or portion thereof), which present value shall be computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such Series B Note (or portion thereof) being redeemed at such time. For purposes of this definition, the present values of the interest and principal payments will be determined in accordance with generally accepted principles of financial analysis. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the redemption date or, in the case of defeasance, prior to the date of deposit (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life to stated maturity of the Series B Notes; provided, however, that if the average life to stated maturity of the Series B Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given. In the event of redemption of this Series B Note in part only, a new Series B Note for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If a Change in Control occurs, the Issuer shall notify the Holder of this Series B 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 Series B Note at a Change in Control Purchase Price equal to 101% of the principal amount of this Series B 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 Series B Note, a new Series B 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 Series B Note shall occur and be continuing, the principal of this Series B 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 Series B Note shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of the Indenture or this Series B 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 Series B Note or (ii) certain restrictive covenants and Events of Default with respect to this Series B 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 Series B 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 Series B 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 Series B Note on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Series B 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 Series B 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 and herein set forth, the transfer of this Series B Note is registerable in the Security Register, upon surrender of this Series B 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 Series B 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 Series B 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 Series B 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, Series B Notes are exchangeable for a like aggregate principal amount of Series B 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. The Issuer shall not be required to (a) issue, exchange or register the transfer of this Series B Note for a period of 15 days next preceding the mailing of the notice of redemption of Series B Notes or (b) exchange or register the transfer of any Series B Note or any portion thereof selected, called or being called for redemption, except in the case of any Series B Note to be redeemed in part, the portion thereof not so to be redeemed. Prior to due presentment of this Series B 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 Series B Note is registered as the owner hereof for all purposes, whether or not this Series B 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 Series B Note without definition which are defined in the Indenture shall have the meanings assigned to them in the Indenture. FOR VALUE RECEIVED, THE UNDERSIGNED HEREBY SELL(S), ASSIGN(S) AND TRANSFER(S) UNTO __________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________ ________________ (Please print or typewrite name and address including postal zip code, of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints to transfer said Note on the books of the Issuer, with full power of substitution in the premises. Dated: [END OF FORM] SECTION 3.05. 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 IV CHANGE IN CONTROL SECTION 4.01. CHANGE IN 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 2000 Note shall have the right to require that the Issuer repurchase (a "Required Repurchase") all or any part of such Holder's 2000 Note at a repurchase price payable in cash equal to 101% of the principal amount of such 2000 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 2000 Notes at the Change in Control Purchase Price; (ii) the Change in 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 2000 Notes to be repurchased, which shall be consistent with this Section and the Indenture. (b) Holders electing to have a 2000 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 2000 Notes to be repurchased, which portion must be $1,000 or an integral multiple thereof; (ii) that such 2000 Notes are to be repurchased by the Issuer pursuant to the change in control provisions of the Indenture; and (iii) unless the 2000 Notes are represented by one or more Global Notes, the certificate numbers of the 2000 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 2000 Notes as to which the withdrawal notice relates and the principal amount of such 2000 Notes, if any, which remains subject to a Change in Control Purchase Notice. If a 2000 Note is represented by a Global Note (as described in Article VII below), the Depositary or its nominee will be the Holder of such 2000 Note and therefore will be the only entity that can elect a Required Repurchase of such 2000 Note. To obtain repayment pursuant to this Section 4.01 with respect to such 2000 Note, the beneficial owner of such 2000 Note must provide to the broker or other entity through which it holds the beneficial interest in such 2000 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 4.01. Such broker or other entity will provide to the Paying Agent (i) the Change in 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 4.01 to such beneficial owner. (c) Payment of the Change in Control Purchase Price for a 2000 Note for which a Change in Control Purchase Notice has been delivered and not withdrawn is conditioned (except in the case of a 2000 Note represented by one or more Global Notes) upon delivery of such 2000 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 in Control Purchase Price for such 2000 Note will be made promptly following the later of the Purchase Date or the time of delivery of such 2000 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 2000 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 in Control Purchase Price upon delivery of the 2000 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 2000 Notes at the option of Holders upon a Change in Control. (e) No 2000 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 2000 Notes). ARTICLE V ADDITIONAL COVENANTS OF THE ISSUER WITH RESPECT TO THE 2000 NOTES SECTION 5.01. EXISTENCE. So long as any of the 2000 Notes are Outstanding, subject to Article Nine of the Original Indenture, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 5.02. LIMITATION ON CERTAIN LIENS. (a) So long as any of the 2000 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 2000 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; (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 5.03. LIMITATION ON CONSOLIDATION, MERGER, SALE OR CONVEYANCE. So long as any of the 2000 Notes are Outstanding and until the 2000 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 5.03, and subject also to Article Nine of the Indenture, 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 5.04 hereof. SECTION 5.04. LIMITATION ON CONSOLIDATED INDEBTEDNESS. (a) So long as any of the 2000 Notes are Outstanding and until the 2000 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 5.04, 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 Fifth Supplemental Indenture, as set forth on Schedule 5.04(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 2000 Notes, the Indebtedness is subordinated to the 2000 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 2000 Notes, the Indebtedness so issued is subordinated to the 2000 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 5.05. LIMITATION ON RESTRICTED PAYMENTS. (a) So long as any of the 2000 Notes are Outstanding and until the 2000 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 5.05, 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 May 6, 1997 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 May 6, 1997 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 May 6, 1997. 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 5.05(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 5.06. LIMITATION ON ASSET SALES. So long as any of the 2000 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 2000 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 2000 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 2000 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 2000 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 2000 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 4.01 herein with respect to a Change in Control. ARTICLE VI ADDITIONAL EVENTS OF DEFAULT WITH RESPECT TO THE 2000 Notes SECTION 6.01. 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 each of the 2000 Notes. SECTION 6.02. AMENDMENTS TO SECTION 5.1 OF THE ORIGINAL INDENTURE. (a) Solely for the purpose of determining Events of Default with respect to the 2000 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. (b) The following event shall be an "Event of Default" with respect to the 2000 Notes: default in the payment of any Liquidated Damages pursuant to the Registration Rights Agreement with respect to any such 2000 Note, when due and continuance of such default for a period of 30 days. ARTICLE VII GLOBAL NOTES Each series of 2000 Notes will be issued initially in the form of Global Notes. "Global Note" means a registered 2000 Note evidencing one or more 2000 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 2000 Notes of a series, except as provided in Section 2.06. The Issuer shall execute and the Trustee shall, in accordance with this Article and the Issuer Order with respect to each series of 2000 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 2000 Notes of such series 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 2000 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 2000 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 2000 Notes in definitive form, a Global Note representing one or more 2000 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 2000 Notes or a nominee of such successor Depositary. If at any time the Depositary for the 2000 Notes is unwilling or unable to continue as Depositary for the 2000 Notes of such series, the Issuer shall appoint a successor Depositary with respect to the 2000 Notes of such series. If (A) a successor Depositary for such 2000 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, or (B) a Default or Event of Default has occurred with respect to any 2000 Notes, the Issuer will execute, and the Trustee, upon receipt of a Issuer Order for the authentication and delivery of definitive 2000 Notes of such series, will authenticate and deliver 2000 Notes of such series in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Notes representing such 2000 Notes in exchange for such Global Note or Notes. The Issuer may at any time and in its sole discretion determine that 2000 Notes of either series 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 2000 Notes of such series, will authenticate and deliver 2000 Notes of such series in definitive form in an aggregate principal amount equal to the principal amount of the Global Note or Notes representing such 2000 Notes in exchange for such Global Note or Notes. The Depositary for 2000 Notes of either series may surrender a Global Note or Notes for 2000 Notes of such series in exchange in whole or in part for 2000 Notes of such series 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 2000 Note or Notes of such series, 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 2000 Notes of such series 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 2000 Notes in definitive registered form in authorized denominations. Upon the exchange of a Global Note for 2000 Notes in definitive form, such Global Note shall be cancelled by the Trustee. 2000 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 2000 Notes to the persons in whose names such 2000 Notes are so registered. ARTICLE VIII DEFEASANCE All of the provisions of Article Ten of the Original Indenture shall be applicable to each series of 2000 Notes. Upon satisfaction by the Issuer of the requirements of Section 10.1(c) of the Original 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 IV and V of this Fifth Supplemental Indenture with respect to the 2000 Notes. ARTICLE IX SUPPLEMENTAL INDENTURES This Fifth Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Fifth Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Fifth Supplemental Indenture shall together constitute one and the same instrument. TESTIMONIUM This Fifth 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 Fifth Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. CMS ENERGY CORPORATION By: /s/ A.M. Wright ______________________________ Alan M. Wright Senior Vice President, Chief Financial Officer and Treasurer Attest: /s/ Michael D. Van Hemert (Corporate Seal NBD BANK as Trustee By: /s/ Ernest J. Peck ____________________________ Ernest J. Peck Vice President Attest: /s/ Richard J. McCullen _______________________ Richard J. McCullen Senior Vice President and Legal Counsel (Corporate Seal) SCHEDULE 5.04(B)(2) Indebtedness of CMS Energy Corporation outstanding on October 31, 1997 [CMS Energy to provide] EX-12 4 CMS ENERGY RATIO OF EARNINGS TO FIXED CHARGES Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges and Preferred Securities Dividends and Distributions (Millions of Dollars) Nine Months Ended Years Ended December 31 September 30, 1997 1996 1995 1994 1993 1992 (b) Earnings as defined (a) Consolidated net income (loss) $ 204 $ 240 $ 204 $ 179 $ 155 $(297) Income taxes 107 139 118 92 75 (146) Exclude equity basis subsidiaries (61) (85) (57) (18) (6) 10 Fixed charges as defined, adjusted to exclude capitalized interest of $11, $8, $8, $6, $5, and $3 million for the nine months ended September 30, 1997 and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively 258 310 295 249 253 236 ----- ----- ----- ----- ----- ----- Earnings as defined $ 508 $ 604 $ 560 $ 502 $ 477 $(197) ===== ===== ===== ===== ===== ===== Fixed charges as defined (a) Interest on long-term debt $ 198 $ 230 $ 224 $ 193 $ 204 $ 169 Estimated interest portion of lease rental 6 10 9 9 11 16 Other interest charges 34 43 42 30 32 43 Preferred securities dividends and distributions 47 54 42 36 17 16 ----- ----- ----- ----- ----- ----- Fixed charges as defined $ 285 $ 337 $ 317 $ 268 $ 264 $ 244 ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges and preferred securities dividends and distributions 1.78 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 and preferred securities dividends and distributions would have been 1.29 excluding these amounts.
EX-15 5 CMS ENERGY LETTER OF INDEPENDENT PUBLIC ACCOUNTANT ARTHUR ANDERSEN LLP Exhibit (15) To CMS Energy Corporation: We are aware that CMS Energy Corporation has incorporated by reference in its Registration Statements No. 33-29681, No. 33-47629, No. 33-60007, No. 33-61595, No. 33-62573, No. 333-27849, No. 333-32229, No. 333-34087 and No. 333-37241 its Form 10-Q for the quarter ended September 30, 1997, which includes our report dated November 10, 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, November 10, 1997. EX-27 6 CMS ENERGY FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 4,347 2,650 1,020 1,483 0 9,500 1 2,103 (221) 1,834 393 238 1,562 394 1,498 0 878 0 82 33 2,539 9,500 3,394 107 2,829 2,936 458 (2) 456 221 235 31 204 87 0 363 2.04 0 EPS for CMS Energy Common Stock $2.04 EPS for Class G Common Stock $1.13
EX-27 7 CONSUMERS FDS
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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 4,347 690 576 1,225 0 6,838 841 502 396 1,784 220 238 1,189 389 273 0 450 0 82 33 2,225 6,838 2,755 126 2,276 2,402 353 14 367 128 239 27 212 113 0 458 0 0
EX-99 8 CMS ENERGY GAS GROUP FINANCIALS 1 Consumers Gas Group Management's Discussion and Analysis This MD&A should be read along with the MD&A and other parts of 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's Form 10-Q for the quarter ended September 30, 1997. Earnings In Millions September 30 1997 1996 Change Three months ended $ (7) $ (9) $ 2 Nine months ended 37 44 (7) Twelve months ended 52 62 (10) The increase in earnings for the three months ended September 30, 1997 compared to the same 1996 period reflects reduced operation and maintenance expenses and the August 1997 recognition of interest income related to a property sale. Earnings decreased in both the nine month and twelve month periods ended September 30, 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. In addition, the earnings comparisons for the nine and twelve month periods ended September 30, 1997 reflect higher depreciation and general taxes, partially offset by lower operation and 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 nine months of 1997 and 1996 totaled $122 million and $79 million, respectively. The $43 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 for the first nine months of 1997 and 1996 totaled $87 million and $100 million, respectively. The $13 million decrease in cash used primarily reflects a decrease in capital expenditures. Financing Activities: Cash used in financing activities during the first nine months of 1997 totaled $31 million; and cash provided by financing activities during the first nine months of 1996 totaled $38 million. The $69 million increase in cash used primarily reflects an increase in the retirement of bonds, other long-term debt, preferred stock and the repayment of bank loans in 1997 compared to 1996. Other Investing and Financing Matters: Consumers has an agreement permitting the sale of certain accounts receivable for up to $500 million. At September 30, 1997, receivables sold totaled $250 million. Consumers Gas Group's attributed portion of these receivables sold totaled $36 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) $117 $117 $112 Michigan Gas Storage 3 3 3 ---- ---- ---- $120 $120 $115 ==== ==== ==== (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. (This page intentionally left blank) 4 Consumers Gas Group Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 In Millions, Except Per Share Amounts Operating Revenue $ 110 $ 123 $ 828 $ 880 $1,230 $1,274 ------ ------ ------ ------ ------ ------ Operating Expenses Operation Cost of gas sold 39 51 472 504 718 742 Other 47 47 128 135 186 194 86 98 600 639 904 936 Maintenance 9 9 24 27 37 39 Depreciation, depletion and amortization 9 9 64 60 91 86 General taxes 7 7 40 38 56 55 ------ ------ ------ ------ ------ ------ 111 123 728 764 1,088 1,116 ------ ------ ------ ------ ------ ------ Pretax Operating Income (Loss) (1) - 100 116 142 158 ------ ------ ------ ------ ------ ------ Other Income (Deductions) 1 - - (2) (4) (2) ------ ------ ------ ------ ------ ------ Fixed Charges Interest on long-term debt 7 7 21 22 29 29 Other interest 3 3 9 8 13 11 Capitalized interest - - - - (1) - Preferred stock dividends 1 2 4 5 5 6 ------ ------ ------ ------ ------ ------ 11 12 34 35 46 46 ------ ------ ------ ------ ------ ------ Income (Loss) Before Income Taxes (11) (12) 66 79 92 110 Income Taxes (4) (3) 29 35 40 48 ------ ------ ------ ------ ------ ------ Net Income (Loss) $ (7) $ (9) $ 37 $ 44 $ 52 $ 62 ====== ====== ====== ====== ====== ====== Net Income (Loss) Attributable to CMS Energy Shareholders through Retained Interest $ (5) $ (6) $ 28 $ 34 $ 39 $ 48 Net Income (Loss) Attributable to Class G Shareholders $ (2) $ (3) $ 9 $ 10 $ 13 $ 14 Average Class G Common Shares Outstanding 8 8 8 8 8 8 Earnings (Loss) Per Average Class G Common Share $ (.21) $ (.28) $ 1.13 $ 1.38 $ 1.57 $ 1.92 Dividend Declared Per Class G Common Share $ .31 $ .295 $ .90 $ .855 $1.195 $1.135 ====== ====== ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
5 Consumers Gas Group Statements of Cash Flows (Unaudited)
Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 In Millions Cash Flows from Operating Activities Net income $ 37 $ 44 $ 52 $ 62 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 64 60 91 86 Capital lease and other amortization 3 3 4 5 Deferred income taxes and investment tax credit 7 10 10 4 Other (1) 1 - 1 Changes in other assets and liabilities 12 (39) 27 36 ------ ------ ------ ------ Net cash provided by operating activities 122 79 184 194 ------ ------ ------ ------ Cash Flows from Investing Activities Capital expenditures (excludes assets placed under capital lease) (79) (94) (122) (141) Cost to retire property, net (6) (7) (8) (11) Other (2) 1 (2) 2 ------ ------ ------ ------ Net cash used in investing activities (87) (100) (132) (150) ------ ------ ------ ------ Cash Flows from Financing Activities Increase (decrease) in notes payable, net 40 48 1 (5) Proceeds from long-term note 25 22 25 22 Issuance of common stock 4 3 6 4 Retirement of bonds and other long-term debt (33) (8) (33) (14) Payment of common stock dividends (29) (27) (39) (36) Retirement of preferred stock (26) - (26) - Repayment of bank loans (7) - (7) - Payment of capital lease obligations (3) (3) (4) (6) Repayment of long-term note (2) - (2) - Proceeds from bank loans - - 23 - Contribution from CMS Energy stockholders - 3 - 12 ------ ------ ------ ------ Net cash provided by (used in) financing activities (31) 38 (56) (23) ------ ------ ------ ------ Net Increase (Decrease) in Cash and Temporary Cash Investments 4 17 (4) 21 Cash and Temporary Cash Investments, Beginning of Period 15 6 23 2 ------ ------ ------ ------ Cash and Temporary Cash Investments, End of Period $ 19 $ 23 $ 19 $ 23 ====== ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
6 Consumers Gas Group Balance Sheets
ASSETS September 30 September 30 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Plant and Property (At Cost) Plant and property $2,292 $2,203 $2,268 Less accumulated depreciation, depletion and amortization 1,209 1,133 1,232 ------ ------ ------ 1,083 1,070 1,036 Construction work-in-progress 28 46 53 ------ ------ ------ 1,111 1,116 1,089 ------ ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 19 15 23 Accounts receivable and accrued revenue, less allowances of $2, $4 and $1, respectively (Note 4) 33 97 39 Inventories at average cost Gas in underground storage 253 186 250 Materials and supplies 8 8 9 Deferred income taxes 4 4 7 Trunkline settlement - 25 30 Prepayments and other 20 49 22 ------ ------ ------ 337 384 380 ------ ------ ------ Non-current Assets Postretirement benefits 145 153 156 Deferred income taxes 12 11 14 Other 60 59 60 ------ ------ ------ 217 223 230 ------ ------ ------ Total Assets $1,665 $1,723 $1,699 ====== ====== ======
7
STOCKHOLDERS' INVESTMENT AND LIABILITIES September 30 September 30 1997 December 31 1996 (Unaudited) 1996 (Unaudited) In Millions Capitalization Common stockholders' equity $ 382 $ 370 $ 363 Preferred stock 52 78 78 Long-term debt 351 446 423 Non-current portion of capital leases 16 17 18 ------ ------ ------ 801 911 882 ------ ------ ------ Current Liabilities Current portion of long-term debt and capital leases 100 24 24 Notes payable 154 114 153 Accounts payable 94 85 69 Accrued taxes 30 61 27 Accrued refunds 5 7 22 Accrued interest 3 7 6 Trunkline settlement - 25 30 Other 41 52 44 ------ ------ ------ 427 375 375 ------ ------ ------ Non-current Liabilities Postretirement benefits 170 171 174 Regulatory liabilities for income taxes, net 178 169 171 Deferred investment tax credit 26 27 27 Other 63 70 70 ------ ------ ------ 437 437 442 ------ ------ ------ Commitments and Contingencies (Notes 3 and 5) Total Stockholders' Investment and Liabilities $1,665 $1,723 $1,699 ====== ====== ====== The accompanying condensed notes are an integral part of these statements.
8 Consumers Gas Group Statements of Common Stockholders' Equity (Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 1997 1996 In Millions Common Stock At beginning and end of period $184 $184 $184 $184 $184 $184 ---- ---- ---- ---- ---- ---- Other Paid-in Capital At beginning of period 136 131 134 126 132 116 Common stock issued 2 1 4 3 6 4 CMS Energy stockholders' contribution - - - 3 - 12 ---- ---- ---- ---- ---- ---- At end of period 138 132 138 132 138 132 ---- ---- ---- ---- ---- ---- Retained Earnings At beginning of period 77 65 52 30 47 21 Net income (loss) (7) (9) 37 44 52 62 Common stock dividends declared (10) (9) (29) (27) (39) (36) ---- ---- ---- ---- ---- ---- At end of period 60 47 60 47 60 47 ---- ---- ---- ---- ---- ---- Total Common Stockholders' Equity $382 $363 $382 $363 $382 $363 ==== ==== ==== ==== ==== ==== 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 CMS Energy Notes 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 CMS Energy's Note 5 included and incorporated by reference herein. 2: Earnings Per Share and Dividends Earnings (loss) per share for the three, nine and twelve month periods ended September 30, 1997 and September 30, 1996 reflect the performance of Consumers Gas Group. The Class G Common Stock has participated in earnings and dividends since its original issue date in July 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 nine months ended September 30, 1997 and 1996, are based on 24.65 percent and 23.67 percent of the income of Consumers Gas Group, respectively. In February and May 1997, CMS Energy paid dividends of $.295 per share on Class G Common Stock. In August 1997, CMS Energy paid a dividend of $.31 per share on Class G Common Stock. In October 1997, the Board of Directors declared a quarterly dividend of $.31 per share on Class G Common Stock to be paid in November 1997. 3: Rate Matters For information regarding rate matters directly affecting Consumers Gas Group, see the Gas Proceedings discussion in CMS Energy's Note 3 included and incorporated by reference herein. 4: Short-Term and Long-Term Financings Consumers' short-term and long-term financings are discussed in CMS Energy's Note 4 included and incorporated by reference herein. Consumers generally manages its short-term financings on a centralized consolidated basis. The portion of receivables sold attributable to Consumers Gas Group at September 30, 1997 and 1996, is estimated by management to be $36 million and $28 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 $120 million for 1997 and 1998 and $115 million for 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 CMS Energy's Note 7 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 Nine Months Ended Twelve Months Ended September 30 1997 1996 1997 1996 Cash transactions Interest paid (net of amounts capitalized) $32 $29 $42 $39 Income taxes paid (net of refunds) 33 29 37 27 Non-cash transactions Assets placed under capital lease $ 1 $ 1 $ 2 $ 2 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 September 30, 1997 and 1996, the related statements of income and common stockholders' equity for the three-month, nine-month and twelve-month periods then ended, and the related statements of cash flows for the nine-month and twelve-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Consumers Gas Group as of December 31, 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, November 10, 1997. -----END PRIVACY-ENHANCED MESSAGE-----