-----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, WGkokvGc0ruINZhWnPK4qrk0SkWAW4hZfRh19rQUto9NzJDgsF1FpBSJ3EsW/Wjr le29eTN8UAxDt7YF7VB4Kw== 0000201533-97-000016.txt : 19970317 0000201533-97-000016.hdr.sgml : 19970317 ACCESSION NUMBER: 0000201533-97-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05611 FILM NUMBER: 97556666 BUSINESS ADDRESS: STREET 1: 212 W MICHIGAN AVE CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 517-788-0550 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS POWER CO DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 382726431 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 97556667 BUSINESS ADDRESS: STREET 1: FAIRLANE PLZ SOUTH STE 1100 STREET 2: 330 TOWN CENTER DR CITY: DEARBORN STATE: MI ZIP: 48126 BUSINESS PHONE: 313-436-9200 MAIL ADDRESS: STREET 1: FAIRLANE PLAZA SOUTH, SUITE 1100 STREET 2: 330 TOWN CENTER DRIVE CITY: DEARBORN STATE: MI ZIP: 48126 10-K 1 BODY OF FORM 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-9513 CMS ENERGY CORPORATION 38-2726431 (A Michigan Corporation) Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 (313)436-9200 1-5611 CONSUMERS ENERGY COMPANY 38-0442310 (A Michigan Corporation) 212 West Michigan Avenue Jackson, Michigan 49201 (517)788-0550 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Registrant Title of Class Which Registered New York CMS Energy Corporation Common Stock, $.01 par value Stock Exchange New York Class G Common Stock, no par value Stock Exchange Consumers Energy Company Listed on inside cover Consumers Power Company 8.36% Trust Originated New York Financing I Preferred Securities Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 2 Consumers Energy Company securities registered pursuant to Section 12(b) of the Act: PREFERRED STOCK - Cumulative FIRST MORTGAGE BONDS: No par value: 6-7/8% Series due 1998 $2.08 Series 6-5/8% Series due 1998 7-1/2% Series due 2001 $100 par value: 7-1/2% Series due 2002 $4.16 Series $7.68 Series $4.50 Series $7.72 Series $7.45 Series $7.76 Series These securities are listed on the New York Stock Exchange. The aggregate market value of the voting stock of CMS Energy Corporation held by non-affiliates was $3,258,739,364 based on the closing sale price of $32-3/4 per share for the 94,968,080 common shares, $.01 par value CMS Energy Common Stock and $18-3/4 per share for the 7,921,853 common shares, no par value Class G Common Stock, each outstanding on February 28, 1997. CMS Energy held all 84,108,789 outstanding common shares, $10 par value, of Consumers Energy Company, and the aggregate market value of the voting preferred stock of Consumers held by non-affiliates was $141,288,486 based on the closing sale prices shown below. Aggregate market value of Consumers' voting stock held by non-affiliates. Number Shares Transaction Type of Stock Outstanding Price/Share Date Market Value (2/28/97) Preferred: $4.16 68,451 $57 2/27/97 $ 3,901,707 4.50 373,148 58 2/28/97 21,642,584 7.45 379,549 96 2/28/97 36,436,704 7.68 207,565 97 2/26/97 20,133,805 7.72 289,642 99 2/18/97 28,674,558 7.76 308,072 99 2/28/97 30,499,128 --------- ------------ Total 1,626,427 $141,288,486 ========= ============ Documents incorporated by reference: The Registrants' proxy statements relating to the 1997 annual meetings of shareholders to be held May 27, 1997, are incorporated by reference in Part III, except for the organization and compensation committee report and cumulative total return performance graph contained therein. 3 CMS ENERGY CORPORATION and CONSUMERS ENERGY COMPANY ANNUAL REPORTS ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1996 This combined Form 10-K 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 PART I Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 37 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 40 PART II Item 5. Market for CMS Energy's and Consumers' Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . 41 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . 41 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . 42 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . .140 PART III Item 10. Directors and Executive Officers of CMS Energy and Consumers. .140 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . .140 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . .140 Item 13. Certain Relationships and Related Transactions. . . . . . . . .140 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . .140 4 (This page intentionally left blank) 5 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 AMT . . . . . . . . . . . . . Alternative minimum tax Articles. . . . . . . . . . . Articles of Incorporation Attorney General. . . . . . . Michigan Attorney General 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 on November 15, 1990 Cherokee. . . . . . . . . . . Cherokee Gas Processing, a partnership of CMS Gas Transmission and Heritage Gas Services of Tulsa CMS Electric and Gas. . . . . CMS Electric and Gas Company, a subsidiary of Enterprises CMS Electric Marketing. . . . CMS Electric Marketing Company, a subsidiary of Enterprises CMS Energy. . . . . . . . . . CMS Energy Corporation CMS Energy Common Stock . . . One of two classes of common stock of CMS Energy, par value $.01 per share CMS Gas Marketing . . . . . . CMS Gas Marketing Company, a subsidiary of Enterprises CMS Gas Transmission. . . . . CMS Gas Transmission and Storage Company, a subsidiary of Enterprises CMS Generation. . . . . . . . CMS Generation Co., a subsidiary of Enterprises CMS Holdings. . . . . . . . . CMS Midland Holdings Company, a subsidiary of Consumers CMS Midland . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers CMS 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 (formerly Consumers Power Company), a subsidiary of CMS Energy Consumers Gas Group . . . . . The gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage Court of Appeals. . . . . . . Michigan Court of Appeals CTM . . . . . . . . . . . . . Centrales Termicas Mendoza, an indirect subsidiary of CMS Generation Detroit Edison. . . . . . . . The Detroit Edison Company DOE . . . . . . . . . . . . . U.S. Department of Energy Dow . . . . . . . . . . . . . The Dow Chemical Company DSM . . . . . . . . . . . . . Demand-side management EDEER S.A.. . . . . . . . . . Empresa Distribuidora de Electricidad de Entre Rios S. A., the electric distribution utility in Entre Rios Province, Argentina Energy Act. . . . . . . . . . Energy Policy Act of 1992 Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of CMS Energy FASB. . . . . . . . . . . . . Financial Accounting Standards Board FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission FMLP. . . . . . . . . . . . . First Midland Limited Partnership GCR . . . . . . . . . . . . . Gas cost recovery General Motors. . . . . . . . General Motors Corporation GTNs. . . . . . . . . . . . . CMS Energy General Term Notes(Registered Trademark), $250 million Series A, $125 million Series B and $150 million Series C GVK . . . . . . . . . . . . . GVK Industries, the developer of an independent power project in Jegurupadu, Andhra Pradesh, India Huron . . . . . . . . . . . . Huron Hydrocarbons, Inc., a subsidiary of Consumers Hydra-Co. . . . . . . . . . . Hydra-Co Enterprises, Inc., a subsidiary of CMS Generation ITC . . . . . . . . . . . . . Investment tax credit Karn Unit 4 . . . . . . . . . D. E. Karn, Essexville, Michigan kWh . . . . . . . . . . . . . Kilowatt-hour Ludington . . . . . . . . . . Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison mcf . . . . . . . . . . . . . Thousand cubic feet MCV Facility. . . . . . . . . A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership MCV Partnership . . . . . . . Midland Cogeneration Venture Limited Partnership MD&A. . . . . . . . . . . . . Management's Discussion and Analysis MichCon . . . . . . . . . . . Michigan Consolidated Gas Company Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary of Consumers MHP . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P. Mbbls . . . . . . . . . . . . Thousand barrels MMbbls. . . . . . . . . . . . Million barrels MMBtu . . . . . . . . . . . . Million British thermal unit MMcf. . . . . . . . . . . . . Million cubic feet MPSC. . . . . . . . . . . . . Michigan Public Service Commission MW. . . . . . . . . . . . . . Megawatts Natural Gas Act . . . . . . . Federal Natural Gas Act NEIL. . . . . . . . . . . . . Nuclear Electric Insurance Ltd. Nitrotec. . . . . . . . . . . Nitrotech Corporation, a propriety gas technology company NML . . . . . . . . . . . . . Nuclear Mutual Ltd. NOPR. . . . . . . . . . . . . Notice of Proposed Rulemaking North Michigan. . . . . . . . North Michigan Land & Oil Corporation 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 PCB . . . . . . . . . . . . . Polychlorinated biphenyls Pension Plan. . . . . . . . . The trusteed, non-contributory, defined benefit pension plan of Consumers and CMS Energy PPA . . . . . . . . . . . . . The Power Purchase Agreement between Consumers and the MCV Partnership with a 35- year term commencing in March 1990 ppm . . . . . . . . . . . . . Parts per million PSCR. . . . . . . . . . . . . Power supply cost recovery PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935 PURPA . . . . . . . . . . . . Public Utility Regulatory Policies Act of 1978 Qualifying Facility . . . . . A facility that produces electricity or steam and electricity and meets the ownership and technical requirements of PURPA. Rate Reduction Bonds. . . . . A potential financing for Consumers which has the dual advantages of funding potential transition costs while simultaneously reducing customer rates SEC . . . . . . . . . . . . . Securities and Exchange Commission SERP. . . . . . . . . . . . . Supplemental Executive Retirement Plan Settlement Agreement. . . . . MPSC Order issued November 14, 1996 in MPSC Case Nos. U-10685, U-10754 and U-10787 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 Union . . . . . . . . . . . . Utility Workers of America, AFL-CIO Unsecured Revolving Credit Facility. . . . . . . . . . $450 million unsecured revolving credit and letter of credit facility dated November 21, 1995 UST . . . . . . . . . . . . . Underground storage tanks Voluntary Employee Beneficiary Association . . A legal entity, established under guidelines of the Internal Revenue Code, through which the company can provide certain benefits for its employees or retirees Walter. . . . . . . . . . . . Walter International, Inc., an oil and gas exploration and production subsidiary of CMS NOMECO 8 PART I ITEM 1. BUSINESS. GENERAL CMS Energy CMS Energy, incorporated in Michigan in 1987, is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving in all 68 counties of Michigan's Lower Peninsula, is the largest subsidiary of CMS Energy. Enterprises is engaged in several domestic and international energy-related businesses including: oil and gas exploration and production; acquisition, development and operation of independent power production facilities; energy marketing to utility, commercial and industrial customers, storage, transmission and processing of natural gas; and international energy distribution. CMS Energy is exempt from registration under PUHCA, as described in Item 3. Legal Proceedings. CMS Energy had consolidated operating revenue in 1996 of $4.3 billion which was derived 57 percent from its electric utility operations, 30 percent from its gas utility operations, 7 percent from gas transmission, storage and marketing, 3 percent from oil and gas exploration and production activities and 3 percent from independent power production and other non-utility activities. Consumers' consolidated operations in the electric and gas utility businesses account for the majority of CMS Energy's total assets, revenue and income. The unconsolidated share of non-utility electric generation and distribution and gas transmission and storage revenue for 1996 was $557 million. Consumers Consumers was incorporated in Michigan in 1968 and is the successor to a corporation which was organized in Maine in 1910 and which did business in Michigan from 1915 to 1968. Consumers was named Consumers Power Company from 1910 to the first quarter of 1997, when the name was changed to Consumers Energy Company to reflect its increasing focus on providing customers with total energy solutions. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Consumers is a public utility serving gas or electricity to almost 6 million of Michigan's 9.5 million residents in all 68 counties in Michigan's Lower Peninsula. Consumers' service area includes automotive, metal, chemical, food and wood products industries and a diversified group of other industries. Consumers had consolidated operating revenue in 1996 of $3.8 billion which was derived 65 percent from its electric business, 34 percent from its gas business and 1 percent from its non-utility business. Consumers' rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC, as described in CMS Energy and Consumers Regulation later in this Item. BUSINESS SEGMENTS CMS Energy and Consumers Financial Information For information with respect to operating revenue, net operating income, assets and liabilities attributable to all of CMS Energy's business segments, see Item 8. Financial Statements and Supplementary Data - CMS Energy's Consolidated Financial Statements and Notes to Consolidated Financial Statements. For information with respect to the operating revenue, net operating income, assets and liabilities attributable only to Consumers' business segments, see Item 8. Financial Statements and Supplementary Data - Consumers' Consolidated Financial Statements and Notes to Consolidated Financial Statements. CMS Energy and Consumers Principal Operations CMS Energy conducts its principal operations through the following seven business segments: electric utility operations; gas utility operations; oil and gas exploration and production operations; independent power production; energy marketing, services and trading; natural gas storage, transmission and processing; and international energy distribution. Consumers conducts CMS Energy's domestic electric and gas utility operations. Consumers Electric Utility Operations Consumers generates, purchases, transmits and distributes electricity in 61 of the 68 counties in the Lower Peninsula of Michigan. Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon and Saginaw. Consumers had 1.6 million electric customers at December 31, 1996. Total electric sales in 1996 were a record 37.1 billion kWh, a 4.4 percent increase from the 1995 levels including a 1.7 percent increase in system sales to Consumers' ultimate customers. Electric operating revenue in 1996 was $2.4 billion, an increase of 7.4 percent from 1995. A peak demand of 7,167 MW was achieved in August 1996, exceeding the 1995 peak by 0.1 percent (or 9 MW). Peak demand has increased 10.2 percent from the peak achieved in 1994. Based on actual peaks, Consumers' reserve margin was 12.7 percent in 1996 and 3 percent in 1995. Based on weather-adjusted peaks, Consumers' reserve margin was 13.3 percent in 1996 and 3.5 percent in 1995. Including Ludington, in which Consumers has a 51 percent ownership and capacity entitlement, Consumers owns and operates 28 electric generating plants with an aggregate net demonstrated capability of 6,256 MW, available under summer conditions in 1996. In 1996, Consumers purchased up to 1,648 MW of net capacity, which amounted to 34.3 percent of Consumers' total system requirements, from independent power producers and cogenerators, the most significant being the MCV Partnership. See Item 2. Properties - Consumers Electric Utility Properties. Consumers' electric generating plants are interconnected by a transmission system which is itself interconnected at a number of locations with transmission facilities of unaffiliated systems, including those of other utilities in Michigan and Indiana. These interconnections permit a sharing of the reserve capacity of the systems. This allows mutual assistance during emergencies and substantially reduces investment in utility plant facilities. Consumers' electric utility customer base includes a mix of residential, commercial, and diversified industrial customers, the largest segment of which is the automotive industry; however, Consumers' electric operations are not dependent upon a single customer, or even a few customers, the loss of which would have a material adverse effect on its financial condition. Consumers' electric operations are seasonal to the extent the weather may have an effect on revenues. Peak demands for 1996 were 5,925 MW in the winter and 7,167 MW in the summer. For sales by customer class, see CMS Energy's and Consumers' Sales by Business Segment later in this Item. MCV Issues: The MCV Partnership was formed in January 1987 by subsidiaries of Consumers and Dow to convert a portion of Consumers' abandoned Midland nuclear plant into a natural gas-fueled, combined-cycle cogeneration facility. The MCV Facility has been certified as a Qualifying Facility under PURPA. Consumers' current interests in the MCV Partnership and the MCV Facility are discussed more fully in Item 8. Financial Statements and Supplementary Data - Note 3 of Consumers' Notes to Consolidated Financial Statements. Fuel: Consumers has five generating plants which use coal as a fuel source and which constitute 77 percent of its baseload capacity. These plants combined to produce a total of 16,928 million kWhs in 1996 requiring 7.5 million tons of coal. At December 31, 1996, Consumers had long-term contracts covering 60 to 70 percent of its coal requirements for 1997. Consumers' coal requirements not under long-term contract must be supplied through short-term agreements or spot purchases. Consumers' coal inventory as of December 31, 1996 amounted to approximately 38 days' supply. Consumers owns and operates two nuclear power plants, Palisades, near South Haven, Michigan, and Big Rock, near Charlevoix, Michigan. In 1996, the combined net generation of these plants was 5,653 million kWhs, which constitutes 25 percent of Consumers' baseload generation. Consumers currently has one contract for uranium concentrates sufficient to cover up to approximately 10 percent of its requirements. Consumers intends to purchase the balance of its 1997 concentrate and conversion requirements in the spot market. Consumers has contracts for nuclear fuel services, including enrichment of uranium hexafluoride and fabrication of nuclear fuel assemblies. The enrichment contract covers 70 percent of Consumers' requirements until the year 2000. The fabrication contract was renegotiated in 1995 for Palisades and remains in effect for the next six Palisades reloads with options to extend for an additional two reloads. The Big Rock fabrication contract remains in effect through the end of the operating license in the year 2000. These contracts are with major private industrial suppliers of nuclear fuel and related services and with the United States Government. 11 As shown below, Consumers generates electricity principally from coal and nuclear fuel. Power Generated Millions of kWhs - ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------- Coal 16,928 15,956 17,401 16,520 17,024 Nuclear 5,653 5,353 4,904 3,938 5,093 Oil (a) 364 318 322 238 206 Gas (a) 74 238 91 110 12 Hydro 473 420 481 489 490 Net pumped storage (b) (419) (373) (414) (394) (393) ------- ------- ------- ------- ------- Total net generation 23,073 21,912 22,785 20,901 22,432 ======================================================================= (a) Beginning in 1993, reflects the conversion of Karn Unit 4 to a dual fuel capability enabling the unit to burn natural gas or oil or a combination of both, having previously only burned oil. (b) Represents Consumers' share of net generation from Ludington. This facility pumps water into a storage pond using electricity generated during off-peak hours, in order to later generate electricity during peak demand hours. The cost of all fuels consumed, shown below, fluctuates with the mix of fuel burned. Fuel Consumed Cost per Million Btu - ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------- Coal $1.50 $1.51 $1.57 $1.60 $1.62 Oil 2.67 2.64 2.96 2.90 2.73 Gas (a) 3.60 2.18 2.81 3.13 4.73 Nuclear .50 .49 .46 .40 .38 All Fuels (b) 1.27 1.27 1.34 1.39 1.33 ======================================================================= (a) Beginning in 1993, includes combustion turbines and Karn Unit 4. (b) Weighted average fuel costs. Under the Nuclear Waste Policy Act of 1982, the federal government is responsible for the permanent disposal of spent nuclear fuel and high- level radioactive waste beginning not later than 1998. To date, the DOE has been unable to arrange for storage facilities to meet this obligation and has given notice that it anticipates that it will be unable to accept spent nuclear fuel for storage by 1998. For a discussion of pending litigation and legislative action relating to the DOE's obligations in this regard, see Item 3. Legal Proceedings and Item 8. Financial Statements and Supplementary Data - Note 2 of Consumers' Notes to Consolidated Financial Statements. Big Rock has the capacity to accommodate normal spent fuel discharge through the end of its operating license in 2000. Consumers' on-site storage pool at Palisades is at capacity and Consumers is currently storing spent nuclear fuel in an on- site dry cask storage facility. For a discussion relating to the NRC approval of dry storage casks and Consumers' use of the casks, see Item 8. Financial Statements and Supplementary Data - Note 13 of Consumers' Notes to Consolidated Financial Statements. Consumers Gas Utility Operations Consumers purchases, transports, stores and distributes gas and renders gas service to 1.5 million customers and is authorized to serve in 54 of the 68 counties in Michigan's Lower Peninsula. Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban Detroit area. It owns gas transmission and distribution mains and other gas lines, compressor stations and facilities, storage rights, wells and gathering facilities in several fields in Michigan. See Item 2. Properties. Consumers and Michigan Gas Storage store gas during the warmer months of the year for use in the colder months when demand is higher. Consumers' gas operations are not dependent upon a single customer, or even a few customers, and the loss of any one or even a few of such customers would not have a material adverse effect on its financial condition. Consumers' gas operations are seasonal to the extent that peak demand occurs in winter due to colder temperatures. Consumers' consolidated gas operating revenue was $1.3 billion in 1996, an increase of 7 percent from 1995. The all-time record 24 hour send-out of natural gas for Consumers on January 19, 1994 was 3.1 bcf. Consumers considers the peak-day transportation and distribution capacity of the system to be 3.6 bcf. Deliveries of gas sold by Consumers, and from other sellers over Consumers' pipeline and distribution network, to ultimate customers, including the MCV Partnership, totaled 448 bcf in 1996. See CMS Energy's and Consumers' Sales by Business Segment later in this Item. Consumers Gas Supply: In 1996, Consumers contracted to purchase 78 percent of its required gas supply. The contract supply included 38 percent from United States producers outside of Michigan, 22 percent from Canadian producers and 18 percent from Michigan producers. The remaining 22 percent of Consumers' 1996 gas supply requirements were met by purchases on the spot market. Consumers' firm transportation agreements are with Trunkline Gas Company, Panhandle Eastern Pipeline Company, ANR Pipeline Company and Great Lakes Gas Transmission, L.P. These agreements are utilized by Consumers to transport its required gas supplies to market and to replenish its storage fields. In total, Consumers' firm transportation arrangements will carry almost 90 percent of Consumers' total gas supply requirements. Consumers' portfolio of firm transportation from pipelines is as follows: 13 Volume (dekatherms/day) Expiration - -------------------------------------------------------------------------- Trunkline Gas Company 41,400 February 1997 336,375 October 2002 Panhandle Eastern Pipeline Company 40,000 March 2000 25,000 March 2000 ANR Pipeline Company 20,000 October 1999 40,000 October 1999 10,000 December 2001 6,000 December 2002 24,900 October 2003 58,765 October 2003 Great Lakes Gas Transmission, L.P. 84,000 March 2004 The balance of Consumers' required gas supply is transported on interruptible contracts. The amount of interruptible capacity and the utilization thereof is primarily a function of the price for such service and the availability and price of the spot supplies to be purchased and transported. Consumers' utilization of interruptible transportation is generally in off-peak summer months and after its firm capacity has been fully subscribed. CMS Energy Oil and Gas Exploration and Production CMS NOMECO is an oil and natural gas producer with activities in Michigan and 12 other states, the Gulf of Mexico, Colombia, Congo, Ecuador, Equatorial Guinea, Tunisia, Venezuela and Yemen. In 1996, it produced 4.8 MMbbls of oil, condensate and plant products and 29.4 bcf of gas, compared to 4.5 MMbbls and 26.3 bcf in 1995. During 1996, CMS NOMECO participated with a working interest in drilling wells as follows: Number of Number of Wells Successful Wells Success Ratio Type of Well Gross Net Gross Net Gross Net - ------------------------------------------------------------------------ Exploratory 9 2.11 - - 0% 0% Development 28 7.64 25 6.89 89% 90% ------------ ------------- Total 37 9.75 25 6.89 68% 71% ======================================================================== The previous table does not include CMS NOMECO's participation in Devonian Shale gas wells in Michigan and Indiana, where CMS NOMECO drilled 297 wells (46.88 net) during 1996 with a 99 percent success rate. CMS NOMECO has a 14 percent working interest in a consortium which is conducting oil development and production operations in Block 16 and the adjoining Tivacuno Block of the Oriente Basin of Ecuador. Production commenced from these Blocks in 1994. At the end of 1996, the six fields were producing at a pipeline-constrained rate of 32,900 barrels per day compared to total production capacity of 44,000 barrels per day. During the course of 1996, the consortium and the Ecuadorian Ministry of Energy and Mines negotiated a conversion of the Risk Service Contract (under which the parties were operating) into a Production Sharing Agreement. For additional information, see Item 2. Properties - CMS Energy Oil and Gas Exploration and Production Properties and Item 7. CMS Energy Management's Discussion and Analysis - Oil and Gas Exploration and Production. CMS Energy Independent Power Production CMS Generation was formed in 1986 and invests in, develops, converts, constructs and operates non-utility power generation projects both domestically and internationally. As of January 1997, CMS Generation had ownership interests in 2,878 MW (gross) capacity in 30 operating power projects throughout the United States and in Argentina, India, Jamaica, and the Philippines. These plants are powered by natural gas, wood, coal, oil, water, scrap tires, naptha and wind. For additional information, see Item 2. Properties - CMS Energy Other Properties and Item 7. CMS Energy Management's Discussion and Analysis - Independent Power Production. CMS Energy Natural Gas Transmission, Storage and Processing CMS Gas Transmission, which commenced operations in 1989, owns, develops and manages domestic and international natural gas transmission, processing and storage projects. For additional information, see Item 7. CMS Energy Management's Discussion and Analysis - Natural Gas Transmission, Storage and Marketing. CMS Energy International Energy Distribution CMS Electric and Gas was formed in 1996 to invest in, manage, and operate international natural gas and electric distribution systems. In 1996, a seven-company consortium in which CMS Electric and Gas holds a 40 percent interest acquired 90 percent of the outstanding shares of EDEER S.A. For additional information, see Item 7. CMS Energy Management's Discussion and Analysis - International Energy Distribution. CMS Energy Marketing, Services and Trading In 1996, CMS MST was formed to provide gas, oil, coal and electric marketing, risk management and energy management services to industrial, commercial, utility and municipal energy users throughout the United States and internationally. The creation of CMS MST is part of a restructuring of CMS Energy's energy marketing business which included the merging of CMS Gas Marketing into CMS MST and the transfer of CMS Electric Marketing's assets to CMS MST. 15 CMS ENERGY'S AND CONSUMERS' CONSOLIDATED REVENUE BY BUSINESS SEGMENT In Millions - -------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 - -------------------------------------------------------------------- Electric Operations Residential $ 878 $ 809 $ 756 Commercial 739 675 646 Industrial 704 687 672 Other system sales 80 78 80 Intersystem sales 45 28 35 ----------------------------- Total Electric Operations 2,446 2,277 2,189 ----------------------------- Gas Operations Residential 869 821 791 Commercial 254 239 230 Industrial 62 59 57 Other 39 26 19 Transportation 58 50 54 ----------------------------- Total Gas Operations 1,282 1,195 1,151 ----------------------------- Other Consumers Operations 42 39 16 ----------------------------- Total Consumers Revenue 3,770 3,511 3,356 ----------------------------- Oil and Gas Exploration and Production Operations 130 108 78 ----------------------------- Independent Power Production (a) 140 96 46 ----------------------------- Gas Transmission and Marketing Operations (b) Marketing 258 171 129 Transmission 62 25 16 ----------------------------- Total Gas Transmission and Marketing Operations 320 196 145 ----------------------------- Other CMS Energy Operations (c) 15 18 5 ----------------------------- Reclassification adjustment (d) (42) (39) (16) ----------------------------- Total CMS Energy Revenue $4,333 $3,890 $3,614 ==================================================================== (a) Does not include CMS Energy's share of unconsolidated independent power production revenue of $493 million in 1996, $497 million in 1995, and $385 million in 1994. (b) Does not include CMS Energy's share of unconsolidated natural gas transmission, storage and marketing revenue of $42 million in 1996, $26 million in 1995, and $7 million in 1994. 16 (c) Does not include CMS Energy's share of unconsolidated international energy distribution revenue of $22 million in 1996. (d) Represents the reclassification of Other Consumers Operations to CMS Energy segments including the consolidated interest in the MCV to Independent Power Production of $40 million for 1996, $36 million for 1995 and $15 million for 1994, and the remainder to Other CMS Energy Operations. CMS ENERGY'S AND CONSUMERS' SALES BY BUSINESS SEGMENT Consumers Electric and Gas Sales Years Ended December 31 1996 1995 1994 - -------------------------------------------------------------------- Electric Sales (millions of kWh) Residential 10,921 10,712 10,222 Commercial 9,978 9,649 9,174 Industrial 12,897 12,688 12,321 Other system sales 1,182 1,351 1,285 Intersystem sales 2,073 1,106 1,460 ---------------------------- Total Electric Sales 37,051 35,506 34,462 ==================================================================== Gas Sales and Deliveries (bcf) Residential 190 180 171 Commercial 61 58 55 Industrial 16 15 14 Transportation 181 151 169 --------------------------- Total Gas Sales and Deliveries 448 404 409 ==================================================================== CMS Energy Other Sales Years Ended December 31 1996 1995 1994 - -------------------------------------------------------------------- Oil and Gas Exploration and Production Sales (net equiv. MMbbls) 9.7 8.9 5.6 ==================================================================== Independent Power Production Sales (millions of kWh) 7,823 7,422 6,216 ==================================================================== Gas Marketed for End-users (bcf) 108 101 66 ==================================================================== 17 CMS ENERGY AND CONSUMERS REGULATION CMS Energy, Consumers and their subsidiaries are subject to regulation by various federal, state, local and foreign governmental agencies, including those specifically described below. Michigan Public Service Commission Consumers is subject to the jurisdiction of the MPSC, which regulates public utilities in Michigan with respect to retail utility rates, accounting, services, certain facilities and various other matters. The MPSC also has or will have rate jurisdiction over several limited part- nerships in which CMS Gas Transmission has ownership interests. These partnerships own or will own and operate intrastate gas transmission pipelines. The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC proceedings concerning Consumers. Unless otherwise noted herein, these parties have intervened in such proceedings. For many years, almost every significant MPSC order affecting Consumers has been appealed. Appeals from such MPSC orders are pending in the Michigan Court of Appeals and the Michigan Supreme Court. Consumers is vigorously pursuing these matters. Under Michigan civil procedure, parties may file a claim of appeal with the Michigan Court of Appeals which serves as a notice of appeal. The grounds on which the appeal is being made are not finally set forth until a later date when the parties file their briefs. MPSC Regulatory Changes: In January 1996, the Governor of the State of Michigan requested that the MPSC review the existing statutory and regulatory framework governing Michigan utilities in light of increasing competition in the utility industry. In response, the MPSC Staff issued the "Staff Report on Electric Industry Restructuring" in December 1996. The report recommends a phased-in program of direct access by customers to electricity suppliers, with a rate freeze for temporarily captive customers, choice of suppliers, transition cost recovery, and new bond legislation to securitize transition costs. Consumers and various parties filed comments on the Staff's report in January 1997. In March 1997, Consumers and Detroit Edison filed their responses to a February 1997 MPSC order asking the utilities to provide additional information concerning certain elements of the plan. At this time, no new legislation has been introduced. For additional information concerning the MPSC staff report and Consumers' filings, see Item 7. Consumers Management's Discussion and Analysis - Forward-Looking Information - Electric Outlook. In late 1996, the MPSC requested Consumers and other local gas distribution companies regulated by the MPSC to develop pilot programs that would allow customers to purchase gas from other suppliers and have the gas transported through local pipelines. Consumers subsequently received MPSC approval to initiate a two-year experimental gas transportation program, Choice Energy, in Bay County, Michigan. For additional information concerning the MPSC order, see Item 8. Financial Statements and Supplementary Data - Note 4 to Consumers' Notes to Consolidated Financial Statements. Retail Wheeling Proceedings: In April 1994, the MPSC issued an opinion and interim order which approved the framework for a five-year experimental retail open access program for "wheeling" of electric power purchased by customers from other suppliers over the transmission systems of Consumers and Detroit Edison, and remanded the case to the ALJ to determine appropriate rates and charges. The MPSC stated that the purpose of the experiment is to gather and evaluate information regarding whether retail wheeling is in the public interest and should occur on a permanent basis. The experimental program will commence with each utility's next solicitation of additional supply side resources. In June 1995, the MPSC issued an order that set rates and charges for retail delivery service under the experiment. In September 1995, the MPSC denied Consumers' and ABATE's petitions for rehearing of this order. Consumers, ABATE and Dow have filed claims of appeal of the MPSC's order with the Court of Appeals, joining Detroit Edison and the Attorney General who had previously appealed. The Court of Appeals subsequently consolidated the appellate cases of these parties. This matter is still pending. Rate Proceedings: In September 1995, Consumers and the MPSC staff reached a proposed settlement agreement that addressed several outstanding regulatory issues before the MPSC in three separate proceedings, (i) a request for approval of a competitive tariff for certain industrial customers, (ii) a general electric rate case increase request and a request for approval of cost recovery of the remaining 325 MW of contract capacity from the MCV Facility and (iii) approval of certain revised depreciation and accounting practices. In November 1996, the MPSC issued a final order in the Settlement Agreement which combined the separate requests. For additional information concerning Settlement Agreement, see Item 8. Financial Statements and Supplementary Data - Notes 3 and 4 of Consumers' Notes to Consolidated Financial Statements. Intrastate Gas Supplier Contract Pricing Dispute: In October 1995, the MPSC issued an opinion and order in a proceeding that had been initiated by Consumers regarding a gas contract pricing dispute under three gas supply contracts. The MPSC found that the pricing mechanism at issue, that operates within definite ceiling and floor prices, is a definite pricing provision within the meaning of the state statutes and was properly implemented by Consumers to reduce gas prices without the prior approval of the MPSC. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals, where the case awaits scheduling of oral arguments. Prior to the issuance of the MPSC's order, the intrastate gas producers involved in this MPSC proceeding filed a complaint against Consumers in Kent County Circuit Court alleging breach of contract. On Consumers' motion, the court dismissed the lawsuit. The gas suppliers subsequently filed a petition for rehearing with the court where the matter is still pending. MPSC Case No U-10029 - Intrastate Gas Supply: In February 1993, the MPSC issued an order granting Consumers' request to lower the price to be paid to one of its intrastate gas suppliers, North Michigan, who then filed an appeal with the Court of Appeals. In June 1995, the Court of Appeals affirmed the MPSC's decision and North Michigan's motion for reconsideration was denied in August 1995. North Michigan filed an application with the Michigan Supreme Court for leave to appeal the Court of Appeals' order, which the Michigan Supreme Court subsequently denied. North Michigan filed a petition for a writ of certiorari with the U.S. Supreme Court to review the Michigan Supreme Court's decision. In December 1996, the U.S. Supreme Court denied this petition. This proceeding is now closed. Collateral suits claiming relief based on a theory of breach of contract, among other things, were filed by the producers in the Grand Traverse County Circuit Court and in the Clinton County Circuit Court, which was subsequently transferred to Jackson County Circuit Court. The dismissals of the Grand Traverse County Circuit Court suit and the Jackson County Circuit Court suit were appealed by the producers to the Court of Appeals, which affirmed the dismissals in an opinion issued in January 1997. The producers have filed a motion, which is still pending, for rehearing in the Court of Appeals. Federal Energy Regulatory Commission FERC has limited jurisdiction over 26 independent power projects in which CMS Generation has an ownership interest which are Qualifying Facilities under PURPA. FERC also has more comprehensive jurisdiction over Michigan Gas Storage as a natural gas company within the meaning of the Natural Gas Act. The FERC jurisdiction relates, among other things, to the acquisition, operation and disposal of assets and facilities and to service provided and rates charged by Michigan Gas Storage. Under certain circumstances, the FERC also has the power to modify gas tariffs of interstate pipeline companies. Some of Consumers' gas business is also subject to regulation by the FERC including a blanket transportation tariff pursuant to which Consumers can transport gas in interstate commerce. Certain aspects of Consumers' electric operations are also subject to regulation by the FERC, including compliance with the FERC's accounting rules and other regulations applicable to "public utilities" and "licensees", the transmission of electric energy in interstate commerce and the rates and charges for the sale of electric energy at wholesale, the consummation of certain mergers, the sale of certain facilities, the construction, operation and maintenance of hydroelectric projects and the issuance of securities, as provided by the Federal Power Act. FERC Regulatory Changes: In April 1996, FERC issued Orders 888 and 889, which require utilities to file conforming open access tariffs and functionally unbundle transmission and wholesale sales activities. Consumers made compliance filings in July and December 1996, which are still pending FERC resolution. Consumers' open access tariff proceeding filed in 1992 still awaits FERC decision. Orders 888 and 889 are more fully discussed in Item 7. Consumers Management's Discussion and Analysis - - Forward-Looking Information - Electric Outlook. Nuclear Regulatory Commission Under the Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC with respect to the design, construction and operation of its nuclear power plants. Consumers is also subject to NRC jurisdiction with respect to certain other uses of nuclear material. These and other matters concerning Consumers' nuclear plants are more fully discussed in Item 8. Financial Statements and Supplementary Data - Notes 2 and 13 to Consumers' Consolidated Financial Statements. CMS ENERGY AND CONSUMERS INSURANCE Consumers maintains $500 million of primary property damage insurance from NML at each of its operating nuclear plants, Big Rock and Palisades, covering all risks of physical loss, subject to certain exclusions and deductibles. Consumers is also insured by NEIL and obtains excess property damage insurance in the amount of $2 billion for Palisades. These nuclear property insurance policies cover decontamination, debris removal and direct property loss. The NEIL excess property damage policies for Palisades would also cover much of the cost arising from an accidental premature decommissioning which was not already funded and part of the remaining book value of the plant. For any loss over $100 million, stabilization and decontamination expenses must be satisfied before other claims proceeds are received from the insurers. Under all these policies, Consumers retains the risk of loss to the extent the loss is within the policy deductibles ($1 million for Palisades and $250,000 for Big Rock) or policy exclusions or if the loss exceeds the combined property damage policy limits ($2.5 billion for Palisades and $500 million for Big Rock) at either location. Because NML and NEIL are mutual insurance companies, Consumers would be subject to assessments under the NML and NEIL excess property damage policies which could total $20.7 million in any one policy year in the event of covered losses at its own or any other member's nuclear facility. Consumers has also procured NEIL I coverage which would partially cover the cost of replacement power during certain prolonged accidental outages of the Big Rock or Palisades units. Such costs would not be covered by the insurance during the first 21 weeks of any outage, but the major portion of such costs would be covered during the next 12 months of the outage, followed by a reduced level of coverage for a period up to two additional years. Consumers would be subject to a maximum assessment under the replacement power insurance of $2.2 million in any one policy year in the event of covered losses at its own or any other member's nuclear facility or facilities. Consumers maintains nuclear liability insurance and other forms of financial protection (including an agreement of government indemnity under the Price-Anderson Act, applicable to the Big Rock) for injuries and off- site property damage due to the nuclear hazard at such facilities. Such insurance and financial protection covers Consumers up to the aggregate limits of liability established by the Price-Anderson Act, which are presently $544 million for Big Rock and approximately $8.9 billion for Palisades. Part of such financial protection consists of a mandatory industry-wide program under which owners of nuclear generating facilities could be assessed in the event of a nuclear incident at any of such facilities. Consumers would be subject to a maximum assessment of $79 million per occurrence in the event of a nuclear incident at certain nuclear facilities, limited to a maximum installment payment of $10 million per occurrence in any year. Consumers also maintains insurance under a master worker program that covers tort claims for bodily injury caused by a nuclear hazard to workers who began their nuclear related employment after January 1, 1988. The policies contain a $200 million nuclear industry aggregate limit and could subject Consumers to a maximum assessment of up to $6.3 million in the event of claims thereunder. Property insurance is also maintained on CMS Energy's and Consumers' non- nuclear facilities and operations. Conventional (non-nuclear) property insurance is maintained on buildings, equipment, boilers, machinery and gas stored underground. The applicable policies insure the full replacement value of all major operating locations. However, the insurance policies are subject to standard terms, conditions, exclusions and coverage limits similar to those of other companies with similar facilities and operations. Consumers maintains deductibles ranging from $500,000 to $1 million on plant and facility losses. Certain CMS Energy projects are specifically insured with lower deductibles. Consumers insures its overhead electric transmission and distribution system for a $25 million maximum loss limit subject to a $7.5 million deductible. CMS Energy's and Consumers' non-nuclear public liability insurance policies provide a $125 million policy limit, with a $500,000 deductible. Other policies include $125 million of excess workers' compensation insurance, subject to the $500,000 deductible; $125 million of fiduciary and employee benefit liability insurance, subject to the $500,000 deductible; $10 million of crime insurance coverage subject to a $100,000 deductible; $50 million (offshore) and $20 million (onshore) of oil and gas well blow-out insurance subject to a $250,000 deductible; and a maximum of $225 million of aircraft insurance. Certain CMS Energy non- utility operations and projects maintain special insurance with lower deductibles. CMS Energy and Consumers are not insured with regard to certain risks, most notably for damage to its underground gas and electrical equipment, because it believes that these properties are not subject to large loss risks. Consumers has also not obtained insurance for flood and earthquake property damage at its nuclear plants because it believes that the protective systems built into these plants and the low probability of an event of this type at the locations of these plants makes such insurance unnecessary. In addition, Consumers' current insurance coverages do not extend to certain environmental clean-up costs, such as claims for air pollution, some past PCB contamination and for some long-term storage or disposal of pollutants. See CMS Energy and Consumers Environmental Compliance below. Insurance policy terms, limits and conditions are subject to change during the year as policies are renewed; however, CMS Energy and Consumers believe that they and their subsidiaries are adequately insured for the various risk exposures incidental to their respective businesses. CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE CMS Energy and Consumers and their subsidiaries are subject to regulation with regard to environmental quality, including air and water quality, waste management, zoning and other matters, by various federal, state and local authorities. Management believes that the responsible administration of its energy resources includes reasonable programs for the protection and enhancement of the environment. For additional information concerning environmental matters, see Item 8. Financial Statements and Supplementary Data - Note 12 of Consumers' Notes to Consolidated Financial Statements. Consumers has installed modern stack emission controls and monitoring systems at its electric generating plants and converted electric gener- ating units to burn cleaner fuels. It has worked with others to use bottom ash as final cover for ash disposal areas in place of topsoil and flyash as a filler for asphalt in road shoulders. It has also worked with local, state and national organizations on waste minimization and pollution prevention initiatives and enhanced certain of Consumers' lands for the benefit of wildlife, as well as provided recreational access to its lands. Finally, it has worked with universities and other institutions on projects to protect and, in some instances, propagate threatened or endangered species, and made financial contributions to a variety of environmental enhancement projects. Capital expenditures by Consumers for environmental protection additions were $34 million in 1996 and are estimated to be $21 million in 1997. Air use permits are required under federal and state law for certain of Consumers' and CMS Generation's affiliates' sources of air emissions. These laws require that certain affected facilities control their sources' air emissions. Permits for Consumers' affected steam electric generating facilities and other affected sources of air emissions have been issued by the Michigan Air Pollution Control Commission, and more recently, the Department of Environmental Quality, pursuant to a delegation of authority from the Environmental Protection Agency under the Clean Air Act and Michigan Air Pollution Act, as amended. Consumers believes that it is in substantial compliance with all air use permits. Consumers has engaged in an aggressive testing and removal program for USTs. Since 1985, Consumers and its subsidiaries have reduced the number of regulated UST systems from 256 to 31. At 116 of the sites from which UST systems were removed, there had been hydrocarbon releases, either from tank system leaks or from spillage on the surface during transfer of contents to or from the tanks. Consumers' response activities have resulted in Department of Natural Resources/Department of Environmental Quality concurrence in closure of 100 of those releases. The remaining releases are at various stages of cleanup completion. The Michigan Underground Storage Tank Financial Assurance Act provided a fund to help pay for the cost of response activities associated with leaking USTs. Through December 1996, Consumers was reimbursed $4.7 million by this state fund. This fund was eliminated in 1996, and no future reimbursements will be available. Like most electric utilities, Consumers has PCB in some of its electrical equipment. Although it has been unlawful to manufacture or sell PCB or PCB contaminated equipment since the 1970's, its continued use in preexisting electrical equipment is lawful. Consumers has engaged in a number of programs to reduce the risk of exposure to the environment from possible PCB spills. These included such actions as a contingency program of removing PCB capacitors outside of substations and replacing them with non-PCB capacitors, draining large transformers and refilling them with non-PCB mineral oil, removing PCB equipment which was found to pose a risk to food supplies or animal feed, and other such programs. Consumers still has a limited number of PCB capacitors in substations. It has approximately 460,000 untested distribution transformers. By regulation, unless the PCB level is known, transformers are presumed to be PCB- contaminated. There may also be PCB in certain other types of equipment. Based upon results of sampling in 1981, it is thought that about 1 percent of the pole-top transformers had over 500 ppm of PCB, and about 12 percent had from 50 to 500 ppm. Those percentages should decline over time with the retirement of older equipment and its replacement with non-PCB equipment. From time to time there are accidental releases from such equipment. Consumers typically spends less than $1 million per year for all cleanup and disposal of debris and equipment from PCB releases. National Pollutant Discharge Elimination System and ground water discharge permits authorize the discharge of certain waste waters from Consumers' facilities and pipeline construction projects pursuant to state water quality standards and federal effluent limitation guidelines. Authorizations for discharges from all of Consumers' major operating steam electric generating facilities and for certain discharges from Consumers' other facilities, including hydroelectric projects and pipeline construction projects, have been issued by the State of Michigan pursuant to a delegation of authority from the Environmental Protection Agency under the Federal Water Pollution Control Act of 1972, as amended. Consumers believes that it is in substantial compliance with National Pollutant Discharge Elimination System and groundwater discharge/exemption permits. CMS ENERGY AND CONSUMERS COMPETITION Electric Competition The electric utility operations of Consumers are regulated at the wholesale and retail level. The wholesale utility operations of Consumers are regulated by the FERC while the retail utility operations are regulated by the MPSC. Competitors in the electric utility operations of Consumers must also be similarly regulated or specifically exempted from such regulation. CMS Energy's non-utility electric generation businesses are exempt from most state and many federal regulations regarding electric generation and compete in the non-utility power market with other non- utility energy companies that have similar exemptions. The electric utility industry has experienced retail load competition in recent years from cogeneration and self-generation, the possible formation of municipal utilities, and competition from other utilities offering flexible rate arrangements, as discussed below. The electric utility industry is now also experiencing increased competition in the wholesale power markets. The factors driving this trend include the enactment of PURPA, the enactment of the Energy Act and increased transmission access. These initiatives provide both opportunities for Consumers in competing for new customers and potential risks because of alternative energy supplies available to existing customers. CMS Energy is similarly faced with expanded opportunities and competition for customers in the non-utility electric generation market. PURPA created a special class of independent power producers that, providing the requirements of Qualifying Facility status are met, are entitled by statute to have their production purchased by a utility. Under PURPA, Qualifying Facilities are generally exempt from federal and state rate regulation. Consumers last signed a PURPA contract in 1993. Similar to PURPA, the Energy Act was designed, among other things, to foster competition in the wholesale electric market by facilitating the ownership and operation of generating facilities by "exempt wholesale generators" (which may include independent power producers as well as affiliates of electric utilities), by excluding them from regulation under PUHCA and by authorizing the FERC under certain conditions to order utilities that own transmission facilities to provide wholesale transmission services to or for other utilities and other entities generating electric energy for sale or resale. One effect of the reduced regulation has been to encourage investment in wholesale power production facilities that will compete with utilities to provide generation to meet future system demand and provide competition for CMS Energy in the domestic and foreign non-utility electric generation markets. Some of Consumers' larger industrial customers have explored the possibility of constructing and operating their own on-site generating facilities. Consumers has worked with these customers to develop rate and service alternatives that are competitive with self-generation options. In an effort to meet the challenge of competition, Consumers has signed sales contracts with some of its largest industrial customers, including its largest customer, General Motors. In addition, a number of municipalities distribute electricity within their corporate limits and some of these generate all or a portion of their requirements. These municipalities and various rural electric cooperative corporations serve a growing number of retail customers in the same or adjacent areas served by Consumers. In one case, a community currently served by Consumers is considering the formation of a new municipal utility which could displace retail service by Consumers. Consumers has on file with the FERC an open-access transmission tariff as discussed above in CMS Energy and Consumers Regulation. During 1996 Consumers filed wholesale power sales agreements with FERC to supply power to six municipal and two cooperative electric utilities which had pre- existing contracts with Consumers. The new contracts are for a five-year term beginning January 1997. The rates are unbundled to reflect the cost of power and transmission and to reflect open access. Other similar open-access transmission tariffs have been made effective by the FERC for several large utility companies or systems and more open-access transmission tariffs are anticipated. These developments produce increased marketing opportunities for utility systems such as Consumers' and expose Consumers' system to loss of wholesale load or reduced revenues due to possible displacement of Consumers' wholesale transactions by alternative suppliers with access to Consumers' primary areas of service. Because wholesale transactions by Consumers generated less than 2 percent of Consumers' 1996 revenue from electric operations, Consumers does not believe that this potential loss is significant. For additional information concerning electric competition, see Item 7. Consumers Management's discussion and Analysis - Forward-Looking Information - Electric Outlook. Gas Competition Competition has existed for several years for Consumers' gas operations and comes primarily from alternate energy sources such as electricity and alternate fuel sources. In the industrial market segment, customers have traditionally used alternate fuels such as coal, oil and propane. In the residential market segment, some customers use propane, fuel oil or electricity for space heating and water heating; in Consumers' gas territory, natural gas maintains 96.9 percent market share for residential space heating and 88 percent for residential water heating. The Natural Gas Policy Act of 1978 resulted in the deregulation of wellhead gas prices, substituting supply and demand effects of the marketplace for regulation. This effectively eliminated artificially-induced curtailments of gas supply experienced earlier in the decade. Gas competition among various wellhead suppliers subsequently increased. Order 636 effectively unbundled the transportation of natural gas from the sale of natural gas by interstate pipelines thereby requiring pipelines to become common carriers. Consequently, pipelines must compete for shippers in search of low priced capacity. Consumers offers unbundled services (transportation and storage) to its larger end-use customers who choose to acquire gas supplies from alternate sources. Since Consumers' earnings from its gas operations are not dependent on gas purchased and resold to its customer base, Consumers has not suffered any negative earnings impact as a result of such competition, nor does it believe that any such impact is likely in the future. CMS Energy's non-regulated gas subsidiaries face significant competition from other gas pipeline companies, gas producers, gas storage companies, and brokers/marketers. For additional information concerning gas competition, see Item 7. Consumers Management's discussion and Analysis - Forward-Looking Information - Gas Outlook. EMPLOYEES CMS Energy As of February 28, 1997, CMS Energy and its subsidiaries had 9,663 full- time equivalent employees of which 9,541 are full-time employees; the rest equate to 122 full-time equivalent employees associated with the part-time work force. Consumers As of February 28, 1997, Consumers and its subsidiaries had 8,873 full- time equivalent employees of which 8,758 are full-time employees; the rest equate to 115 full-time equivalent employees associated with the part-time work force. Included in the total are 3,953 full-time operating, maintenance and construction employees of Consumers who are represented by the Union. A collective bargaining agreement was negotiated between Consumers and the Union which became effective as of June 1, 1995 and, by its terms, will continue in full force and effect until June 1, 2000. 25 CMS ENERGY AND CONSUMERS EXECUTIVE OFFICERS As of February 28, 1997 Name Age Position Period - -------------------------------------------------------------------------- William T. McCormick, Jr. 52 Chairman of the Board and Chief Executive Officer of CMS Energy 1987-Present Chairman of the Board of Consumers 1992-Present Chairman of the Board of Enterprises 1995-Present Chairman of the Board and Chief Executive Officer of Enterprises 1988-1995 Chairman of the Board and Chief Executive Officer of Consumers 1985-1992 Victor J. Fryling 49 President and Chief Operating Officer of CMS Energy 1996-Present Vice Chairman of the Board of Consumers 1992-Present President and Chief Executive Officer of Enterprises 1995-Present President of CMS Energy 1992-1995 President of Enterprises 1993-1995 President and Chief Financial Officer of Enterprises 1992-1993 Executive Vice President and Chief Financial Officer of CMS Energy and Consumers 1988-1992 Michael G. Morris 50 Executive Vice President of CMS Energy 1996-Present President and Chief Executive Officer of Consumers 1994-Present Executive Vice President and Chief Operating Officer of Consumers 1992-1994 Executive Vice President of Consumers 1988-1992 Alan M. Wright 51 Senior Vice President, Chief Financial Officer and Treasurer of CMS Energy 1994-Present Senior Vice President and Chief Financial Officer of Consumers 1993-Present Senior Vice President, Chief Financial Officer and Treasurer of Enterprises 1994-Present Senior Vice President and Chief Financial Officer of CMS Energy 1992-1994 Senior Vice President and Chief Financial Officer of Enterprises 1993-1994 Senior Vice President, Chief Financial Officer and Treasurer of Consumers 1992-1993 Vice President and Treasurer of Consumers 1991-1992 Rodger A. Kershner 48 Senior Vice President and General Counsel of CMS Energy 1996-Present Senior Vice President and General Counsel of Enterprises 1996-Present Vice President and General Counsel of Enterprises 1989-1996 Deputy General Counsel and Assistant Secretary of CMS Energy 1994-1995 Assistant General Counsel and Assistant Secretary of CMS Energy 1989-1994 John W. Clark 52 Senior Vice President of CMS Energy 1987-Present Senior Vice President of Consumers 1985-Present James W. Cook 56 Senior Vice President of CMS Energy 1995-Present Senior Vice President of Enterprises 1994-Present Executive Vice President of Enterprises 1989-1994 President and Chief Executive Officer of CMS Generation 1989-1995 Preston D. Hopper 46 Senior Vice President, Controller and Chief Accounting Officer of CMS Energy 1996-Present Vice President, Controller and Chief Accounting Officer of CMS Energy 1992-1996 Senior Vice President and Chief Accounting Officer of Enterprises 1997-Present Senior Vice President and Controller of Enterprises 1996-1997 Vice President and Controller of Enterprises 1992-1996 Vice President and Controller of CMS Energy 1991-1992 Rodney E. Boulanger 56 Senior Vice President of Enterprises 1996-Present President and Chief Executive Officer of CMS Generation 1995-Present William J. Haener 55 President and Chief Executive Officer of CMS Gas Transmission 1994-Present Gordon L. Wright 54 President and Chief Executive Officer of CMS NOMECO 1995-Present Executive Vice President and Chief Operating Officer of CMS NOMECO 1993-1995 Vice President of Operations of CMS NOMECO 1981-1993 Paul A. Elbert 47 Executive Vice President and Chief Operating Officer - Gas of Consumers 1994-Present Senior Vice President of Consumers 1991-1994 David W. Joos 43 Executive Vice President and Chief Operating Officer - Electric of Consumers 1994-Present Senior Vice President of Consumers 1994-1994 Vice President of Consumers 1990-1994 David A. Mikelonis 48 Senior Vice President and General Counsel of Consumers 1988-Present Robert A. Fenech 49 Senior Vice President of Consumers 1997-Present Vice President of Consumers 1994-1997 Dennis DaPra* 54 Vice President and Controller of Consumers 1991-Present *Mr. DaPra is an executive officer of Consumers but not of CMS Energy. All other individuals are executive officers of both CMS Energy and Consumers. The present term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of each of CMS Energy and Consumers (scheduled to be held May 27, 1997). There are no family relationships among executive officers and directors of CMS Energy and Consumers. 28 ITEM 2. PROPERTIES. CHARACTER OF OWNERSHIP The principal properties of CMS Energy, Consumers and their subsidiaries are owned in fee, except that most electric lines and gas mains are located, pursuant to easements and other rights, in public roads or on land owned by others. The statements under this item as to ownership of properties are made without regard to tax and assessment liens, judgments, easements, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumbrances, and other outstanding rights. None of these outstanding rights impairs the usefulness of such properties. Substantially all of Consumers' properties are subject to the lien of its First Mortgage Bond Indenture. Substantially all properties of the subsidiaries of CMS Generation that own interests in operating plants are subject to liens of creditors of the respective subsidiaries. Properties of certain Consumers, CMS Gas Transmission and CMS NOMECO subsidiaries are also subject to liens of creditors of the respective subsidiaries. CONSUMERS ELECTRIC UTILITY PROPERTIES Consumers' electric generating system consists of five fossil-fueled plants, two nuclear plants, one pumped storage hydroelectric facility, seven gas combustion turbine plants and 13 hydroelectric plants.
1996 Summer Net 1996 Net Demonstrated Generation Size and Year Capability (Thousands Name and Location (Michigan) Entering Service (Kilowatts) of kWhs) Coal Generation J H Campbell - West Olive 3 Units, 1962-1980 1,346,100(a) 8,168,527 D E Karn - Essexville 2 Units, 1959-1961 515,000 3,324,179 B C Cobb - Muskegon 2 Units, 1956-1957 296,000 1,931,212 J R Whiting - Erie 3 Units, 1952-1953 310,000 1,796,964 J C Weadock - Essexville 2 Units, 1955-1958 310,000 1,706,846 --------- ---------- Total coal generation 2,777,100 16,927,728 --------- ---------- Oil/Gas Generation D E Karn - Essexville 2 Units, 1975-1977 1,276,000 428,567 --------- ---------- Ludington Pumped Storage 6 Units, 1973 954,700(b) (418,371)(c) --------- ---------- Nuclear Generation Palisades - South Haven 1 Unit, 1971 762,000 5,290,683 Big Rock Point - Charlevoix 1 Unit, 1962 67,000 362,303 --------- ---------- Total nuclear generation 829,000 5,652,986 --------- ---------- Gas/Oil Combustion Turbine Generation 7 Plants, 1966-1971 345,000 9,373 --------- ---------- Hydro Generation 13 Plants, 1907-1949 73,800 472,892 --------- ---------- Total owned generation 6,255,600 23,073,175 ========== Purchased and Interchange Power Capacity 1,820,600(d) --------- Total 8,076,200 ========= (a) Represents Consumers' share of the capacity of the Campbell Plant Unit 3, net of 6.69 percent (ownership interests of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.). (b) Represents Consumers' share of the capacity of Ludington. Consumers and Detroit Edison have 51 percent and 49 percent undivided ownership, respectively, in the plant, and the capacity of the plant is shared accordingly. (c) Represents Consumers' share of net pumped storage generation. This facility electrically pumps water during off- peak hours for storage to later generate electricity during peak-demand hours. (d) Includes 1,240 MW of purchased contract capacity from the MCV Facility. /TABLE 30 Consumers' electric transmission and distribution lines owned and in service are shown in the following table.
Structure Sub-Surface (Miles) (Miles) Transmission 345,000 volt 1,137 - 138,000 volt 3,276 4 120,000 volt 20 - 46,000 volt 4,102 9 23,000 volt 30 7 ------ ----- Total transmission 8,565 20 Distribution (2,400-24,900 volt) 52,071 5,722 ------ ----- Total transmission and distribution 60,636 5,742 ====== =====
Consumers owns substations having an aggregate transformer capacity of 38,016,960 kilovoltamperes. CONSUMERS GAS UTILITY PROPERTIES Consumers' gas distribution and transmission system consists of 22,309 miles of distribution mains and 1,041 miles of transmission lines throughout the Lower Peninsula of Michigan. Consumers owns and operates six compressor stations with a total of 133,060 installed horsepower. Consumers' gas storage fields, listed below, have an aggregate storage capacity of 242.2 bcf.
Field Name Location Storage Capacity (bcf) Overisel Allegan and Ottawa Counties 64.0 Salem Allegan and Ottawa Counties 35.0 Ira St Clair County 7.5 Lenox Macomb County 3.5 Ray Macomb County 66.0 Northville Oakland, Washtenaw and Wayne Counties 25.8 Puttygut St Clair County 16.6 Four Corners St Clair County 3.8 Swan Creek St Clair County .6 Hessen St Clair County 18.0 Lyon - 34 Oakland County 1.4
Michigan Gas Storage owns and operates two compressor stations with a total of 46,600 installed horsepower. Its transmission system consists of 530 miles of pipelines within the Lower Peninsula of Michigan. Michigan Gas Storage's gas storage fields, listed below, have an aggregate certified storage capacity of 109.5 bcf.
Total Certified Field Name Location Storage Capacity (bcf) Winterfield Osceola and Clare Counties 72.3 Cranberry Lake Clare and Missaukee Counties 28.2 Riverside Missaukee County 9.0
Consumers' gas properties also include the Marysville gas reforming plant, located in Marysville, Michigan. Huron and PanCanadian Petroleum Company are partners in a partnership to use the expanded capacity of the underground caverns at the Marysville plant for commercial storage of liquid hydrocarbons. In addition, Consumers and PanCanadian Petroleum Company are partners in a partnership to use certain hydrocarbon fractionation facilities at the plant. CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES Net oil and gas production by CMS NOMECO for the years 1994 through 1996 is shown in the following table.
1996 1995 1994 Oil and condensate (Mbbls) (a) 4,597 4,267 2,025 Natural gas (MMcf) (a) 29,371 26,348 20,546 Plant products (Mbbls) (a) 240 226 193 Average daily production (b) Oil (Mbbls) 16.7 16.1 7.1 Gas (MMcf) 97.9 84.9 69.3 Reserves to annual production ratio Oil (MMbbls) 14.6 14.9 26.1 Gas (bcf) 11.0 10.8 11.3 (a) Revenue interest to CMS NOMECO (b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties)
32 The following table shows CMS NOMECO's estimated proved reserves of oil and gas for the years 1994 through 1996.
Total Worldwide United States International Oil Gas Oil Gas Oil Gas (MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf) Proved Developed and Undeveloped Reserves December 31, 1993 34.7 201.8 3.4 194.6 31.3 7.2 Revisions and other changes (1.3) (9.7) (0.3) (9.4) (1.0) (0.3) Extensions and discoveries 0.4 50.2 0.4 50.2 - - Acquisitions of reserves 20.2 9.4 - 9.4 20.2 - Production (2.1) (20.5) (0.8) (20.3) (1.3) (0.2) ---- ----- ---- ----- ---- ---- December 31, 1994 51.9 231.2 2.7 224.5 49.2 6.7 Revisions and other changes (4.1) (23.8) (0.1) (22.9) (4.0) (0.9) Extensions and discoveries - 13.3 - 2.6 - 10.7 Acquisitions of reserves 20.0 96.2 - 96.2 20.0 - Sales of reserves (2.4) (6.7) - (1.0) (2.4) (5.7) Production (4.3) (26.3) (0.7) (26.2) (3.6) (0.1) ---- ----- ---- ----- ---- ---- December 31, 1995 61.1 283.9 1.9 273.2 59.2 10.7 Revisions and other changes 4.7 6.8 1.2 - 3.5 6.8 Extensions and discoveries 4.9 64.6 - 32.6 4.9 32.0 Acquisitions of reserves 0.2 1.0 - 1.0 0.2 - Sales of reserves (0.6) (3.7) (0.6) (3.7) - - Production (4.7) (29.4) (0.7) (29.4) (4.0) - ---- ----- ---- ----- ---- ---- December 31, 1996 65.6 323.2 1.8 273.7 63.8 49.5 ==== ===== ==== ===== ==== ==== Estimated Proved Developed Reserves December 31, 1993 31.2 200.0 3.3 193.4 27.9 6.6 December 31, 1994 37.4 211.7 2.5 205.9 34.9 5.8 December 31, 1995 32.7 254.2 1.8 254.2 30.9 - December 31, 1996 35.3 270.0 1.8 270.0 33.5 - ==== ===== ==== ===== ==== ==== Equity Interest in Estimated Proved Reserves of Comeco Petroleum, Inc. (Yemen) December 31, 1993 1.5 - - - 1.5 - December 31, 1994 2.9 - - - 2.9 - December 31, 1995 2.8 - - - 2.8 - December 31, 1996 3.2 - - - 3.2 - ==== ===== ==== ===== ==== ====
33 The following table shows CMS NOMECO's undeveloped net acres of oil and gas leasehold interests.
December 31 1996 1995 Michigan 131,502 143,243 North Dakota 13,840 15,586 Indiana 10,986 7,014 Louisiana (a) 8,088 17,408 Texas (a) 7,005 11,458 Ohio 6,104 4,494 Other states 4,930 4,335 --------- --------- Total domestic 182,455 203,538 --------- --------- Colombia 294,330 42,571 Venezuela 230,175 230,175 Equatorial Guinea 113,947 113,947 Tunisia 67,193 67,891 Ecuador 66,430 66,430 Yemen 27,610 401,897 Congo 17,981 17,981 --------- --------- Total international 817,666 940,892 --------- --------- Total net acres 1,000,121 1,144,430 ========= ========= (a) Includes offshore acreage.
CONSUMERS OTHER PROPERTIES CMS Midland owns a 49 percent interest in the MCV Partnership which was formed to construct and operate the MCV Facility. The MCV Facility has been sold to five owner trusts and leased back to the MCV Partnership. CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS Holdings' indirect beneficial interest in the MCV Facility is 35 percent. Consumers owns fee title to 1,140 acres of land in the City and Township of Midland, Midland County, Michigan, occupied by the MCV Facility. The land is leased to the owners of the MCV Facility by five separate leases, each leasing an undivided interest and in the aggregate totaling 100 percent, for an initial term ending December 31, 2035 with possible renewal terms to June 15, 2090. Consumers owns or leases three principal general office buildings in Jackson, Michigan and 53 field offices at various locations in Michigan's Lower Peninsula. Of these, two general office buildings and eleven field offices are leased. Also owned are miscellaneous parcels of real estate not now used in utility operations. 34 CMS ENERGY OTHER PROPERTIES The following table shows interests in independent power plants at December 31, 1996. Location Ownership Interest (%) Gross Capacity (MW) CMS Generation Wood Fueled Chateaugay, New York 50.0 20 Grayling Township, Michigan 50.0 39 Genesee Township, Michigan 50.0 35 Imperial Valley, California 40.5 15 Lyonsdale, New York 50.0 19 New Bern, North Carolina 50.0 45 Stratton, Maine 35.0 40 Susanville, California 50.0 36 Fossil Fueled Andhra Pradesh, India 25.3 235 Cebu Island, Philippines (Carmen) 47.5 46 Cebu Island, Philippines (Sangi) 47.5 89 Filer City, Michigan 50.0 60 Kingston, Jamaica (a) 43.9 56 Lakewood, New Jersey 45.0 236 Little Falls, New York 50.0 4 Mendoza Province, Argentina 80.6 242 Oklahoma City, Oklahoma 8.8 110 Scrap Tire Fueled Sterling, Connecticut 50.0 31 Hydro Generation Benton, Maine 50.0 4 Canton, New York 50.0 8 Copenhagen, New York 50.0 3 Corinth, New York 12.5 58 Limay River, Argentina (Arroyito) 17.2 120 Limay River, Argentina (El Chocon) 17.2 1,200 Little Falls, New York 1.0 13 Lyons Falls, New York 50.0 3 Petersburg, Virginia 55.5 3 Port Leyden, New York 12.5 6 Wind Generation Altamont Pass, California 22.7 30 Montezuma, California 8.5 72 CMS Midland Fossil Fueled Midland, Michigan 49.0(b) 1,370 ==== ===== (a) Commenced commercial operations in January, 1997. (b) See the previous section - Consumers Other Properties - for more information.
In 1996, CMS Generation sold its 37.5 percent interest in a 80 MW fossil- fueled plant in Solvay, New York. In February 1997, CMS Generation acquired a 29.5 percent interest in a 48 MW fossil-fueled plant in Cavite, Philippines. CMS Generation also negotiated the purchase of a further interest which could take its ultimate interest to 44 percent, and has plans to increase the plant's generating capacity to 63 MW in 1998. CMS Gas Transmission owns a 75 percent interest in a general partnership which owns and operates a 25-mile, 16-inch natural gas transmission pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent limited partnership interest in the Saginaw Bay Area Limited Partnership which owns 125 miles of 10-inch and 16-inch natural gas transmission pipeline in north-central Michigan; owns a 44 percent limited partnership interest in a partnership that owns certain pipelines of 20 and 12 miles interconnected to the Saginaw Bay Area Limited Partnership facilities; owns natural gas treating plants in Otsego County, Michigan; owns 41 miles of gas transmission pipeline in Otsego and Montmorency Counties, Michigan; owns and operates the Bluewater Pipeline, a 3.1 mile pipeline from an interconnection with Consumers natural gas transmission system to an interconnection with an existing pipeline at the St. Clair River, south of Port Huron, Michigan; and owns a 25 percent general partnership interest in TGN, which owns and operates 2,600 miles of pipeline that provides natural gas transmission service to the northern and central parts of Argentina. In 1996, CMS Gas Transmission commenced operations of the Little Bear Pipeline, a 46 mile pipeline originating in Montmorency County, Michigan at an interconnection with the Thunder Bay Pipeline to the carbon dioxide processing facility at South Chester, Otsego County, Michigan. In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company, a natural gas storage facility located in Forrest County, Mississippi. The salt dome storage cavern provides up to 3.2 bcf per day of ten day storage service and has the capability of being refilled in 20 days. In January 1996, CMS Gas Transmission acquired a 50 percent ownership interest in Nitrotec Corporation, a proprietary gas technology company, which recently received patents for its helium removal and nitrogen rejection processes. Nitrotec has helium recovery plants in Colorado and Kansas. A nitrogen rejection plant in Texas was placed in service in 1996, with another nitrogen rejection plant scheduled to be placed in service during the first quarter of 1997. Through the Cherokee Gas Processing partnership, formed in May 1996, CMS Gas Transmission owns an 82 percent interest in the Lucien, Crescent and Ames gas gathering systems and processing plants located in Oklahoma. The Lucien facilities include 380 miles of low-pressure gas-gathering lines and five compressor stations in Garfield, Logan, Noble and Payne counties in Oklahoma. It also includes a 10 million cubic feet per day processing plant in Noble county. The Crescent and Ames systems, acquired by the partnership in October 1996, contained 1,634 miles of low-pressure gathering lines, 23,500 HP of compression and a 45 million cubic feet per day processing plant west of Guthrie, Oklahoma. A portion of the Ames system consisting of 139 miles of low-pressure gathering lines and 2,395 HP of compression was sold in January 1997. CMS Energy, through certain subsidiaries, owns a 50 percent interest in Bay Harbor Limited Liability Company, a resort development in Emmet County, Michigan, owns 6,000 acres of undeveloped land in Benzie and Manistee Counties, Michigan, and owns 53 acres of undeveloped land in Muskegon County, Michigan. CONSUMERS CAPITAL EXPENDITURES Capital expenditures during 1996 for Consumers and its subsidiaries totaled $441 million for capital additions and $6 million for DSM programs. Of the $441 million, $304 million was incurred for electric utility additions and $137 million for gas utility additions. These capital additions include $34 million for environmental protection additions and $31 million for capital leases of nuclear fuel and other assets. The electric and gas utility additions include an attributed portion of capital expenditures common to both businesses. In 1997, capital expenditures are estimated to be $387 million for capital additions. Of the $387 million, $272 million will be incurred for electric utility additions and $115 million for gas utility additions. These capital addition estimates include $21 million related to environmental protection additions and $28 million related to capital leases of nuclear fuel and other assets. The estimated electric and gas utility additions include an attributed portion of anticipated capital expenditures common to both businesses. CMS ENERGY CAPITAL EXPENDITURES Capital expenditures during 1996 for CMS Energy and its subsidiaries totaled $873 million for capital additions and $6 million for DSM programs. Of the $873 million, $441 million was incurred by Consumers as discussed above. The remaining $432 million in capital additions include $88 million for oil and gas exploration and development, $142 million for independent power production, $136 million for natural gas transmission, storage and marketing, $64 million for international energy distribution and $2 million for other capital expenditures. These capital additions include $34 million for environmental protection additions and $31 million for capital leases of nuclear fuel and other assets. In 1997, capital expenditures are estimated to be $965 million for capital additions. Of the $965 million, $387 million will be incurred by Consumers as discussed above. The remaining $578 million in capital additions are estimated to be incurred as follows: $135 million for oil and gas exploration and development; $196 million for independent power production; $110 million for natural gas transmission and storage; $120 million for international energy distribution; and $17 million for marketing services and trading. These capital addition estimates include $21 million related to environmental protection additions and $28 million related to capital leases of nuclear fuel and other assets. 37 ITEM 3. LEGAL PROCEEDINGS. CMS Energy, Consumers and some of their subsidiaries and affiliates are parties to certain routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, income taxes, and rates and licensing. Reference is made to Item 1. Business - CMS Energy and Consumers Regulation, Item 7. Management's Discussion and Analysis and Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating and environmental matters. CMS ENERGY EXEMPTION UNDER PUHCA CMS Energy is exempt from registration under PUHCA. In December 1991, the Attorney General and the Michigan Municipal Cooperative Group filed a request with the SEC for the revocation of CMS Energy's exemption. In January 1992, CMS Energy responded to the revocation request affirming its position that it is entitled to the exemption. In April 1992, the MPSC filed a statement with the SEC that recommended that the SEC impose certain conditions on CMS Energy's exemption. CMS Energy is vigorously contesting the revocation request and believes it will maintain the exemption. There has been no action taken by the SEC on this matter. In June 1995, the SEC released a staff report that recommended legislative options to Congress: 1) repeal PUHCA and strengthen the ability of the FERC and state regulators to obtain books and records, conduct audits and review affiliate transactions; 2) repeal PUHCA, without condition; or 3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff supported option 1 because it would achieve the benefits of unconditional repeal, while preserving the ability of states to protect consumers. In February 1997, a bill was introduced in the United States House of Representatives to stimulate competitive electric rates and services, including provisions that would essentially repeal PUHCA on a state-by- state basis as each state certifies to the SEC that a competitive, non- discriminatory market for both electric and natural gas energy exists in such state. This bill would also strengthen the ability of the FERC to obtain books and records of public utility holding company affiliates and subsidiaries. CMS Energy management anticipates that additional bills will be introduced in Congress in 1997 which will propose the repeal or significant revision of PUHCA. CONSUMERS STRAY VOLTAGE LAWSUITS Consumers has a number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. Claimants contend that stray voltage affects farm animal behavior, reducing the productivity of their livestock operations. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of on-farm equipment, can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers' system. In October 1993, a complaint seeking certification as a class action suit was filed against Consumers in a local circuit court. The complaint alleged that in excess of a billion dollars of damages, primarily related to lost production by certain livestock owned by the purported class, were being incurred as a result of stray voltage from electricity being supplied by Consumers. Consumers believes the allegations to be without merit and vigorously opposed the certification of the class and this suit. In March 1994, the court decided to deny class certification for this complaint and to dismiss, subject to refiling as separate suits, the October lawsuit with respect to all but one of the named plaintiffs. In April 1994, the plaintiffs appealed the court's denial of class certification in this matter to the Court of Appeals. In November 1996, the Court of Appeals issued a decision dismissing the case. In January 1997, the Court of Appeals denied plaintiffs' motion for reconsideration. Subsequently the plaintiffs filed an application for leave to appeal in the Michigan Supreme Court, where the matter remains pending. A number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At January 31, 1997, Consumers had 22 separate stray voltage cases pending for trial, down from 30 pending at year end 1995. CONSUMERS HIGHLAND TOWNSHIP FRANCHISE PROCEEDING MichCon obtained a revocable franchise in 1956 to provide natural gas service to Highland Township, Michigan. In 1962, Consumers secured an irrevocable 30 year franchise to provide natural gas service to Highland Township. Neither franchise was exclusive. Although MichCon's franchise for service in Highland Township expired in 1986 and was not renewed, MichCon continued service to customers in Highland Township. Consumers secured a revocable renewal franchise for Highland Township in 1992. Thereafter in 1992, Consumers filed suit to enjoin MichCon from expanding its gas service to new customers in Highland Township. The Circuit Court of Oakland County, Michigan denied MichCon's motion for summary disposition and granted Consumers' petition for an injunction. MichCon subsequently transferred its remaining rights and interest in Highland Township to Consumers, ceased doing business there and appealed the Circuit Court decision with the Court of Appeals. In August 1995, the Court of Appeals refused to decide the issue addressed by the Circuit Court (namely whether MichCon, as a holdover utility without any franchise, could continue to lawfully do business in a township) because the Court of Appeals concluded that Consumers' 1992 revocable renewal franchise was invalid since it was not confirmed by a vote of the Highland Township electorate as the Court determined was required by the Public Utility Franchise Act. Prior to this decision, the commonly held interpretation of the Public Utility Franchise Act was that a vote of the electorate was only required for irrevocable franchises, not revocable franchises such as that held by Consumers in this case. The Court of Appeals reversed the Circuit Court decision and remanded the case to the Circuit Court for entry of summary disposition in MichCon's favor -- even though the only franchise MichCon had ever possessed was revocable and thus, under the Court of Appeals' decision, invalid. Although the Court of Appeals specifically stated in its opinion that continuing to provide utility service without a valid franchise was not necessarily unlawful, Consumers currently has over 800 revocable franchises which could be affected should the Court of Appeals order remain in place. Consumers' motion for reconsideration and for a stay of the Court of Appeals' decision was denied. In December 1995, Consumers filed an application, which is still pending, with the Michigan Supreme Court for leave to appeal the Court of Appeals' decision. In June 1996, the Michigan Legislature amended the Public Utility Franchise Act to provide that revocable franchises may be granted by a township without a vote of the electorate. CMS ENERGY INDEPENDENT POWER PRODUCTION PROJECT LITIGATION In August 1995, William R. Williams and two of his corporations, Altresco Philippines, Inc. and WRW Corporation (formerly Altresco International, Inc.), filed a lawsuit against CMS Generation in the Denver County District Court, State of Colorado, in connection with a project to be developed in Bantangas, Philippines by Luzon Power Associates, Inc. in which CMS Generation purchased a 50 percent ownership interest. Luzon Power Associates, Inc. has an agreement to supply power to the Manila Electric Company. The complaint alleges breach of a confidentiality agreement, breach of fiduciary duty, intentional interference with a contract, breach of implied covenant of good faith and fair dealing, and unfair competition. The claims primarily relate to a confidentiality agreement between the parties, and CMS Generation's alleged pursuit of another project to sell power directly to the Manila Electric Company, known as the Magellan project, in alleged violation of a restrictive covenant in the confidentiality agreement. The plaintiffs claim direct damages of approximately $85 million and indirect damages in a like amount from loss of future business, plus punitive damages, interest, and attorney's fees. CMS Generation removed the case to the United States District Court for the District of Colorado in September 1995, and in January 1996, that court denied CMS Generation's motion to dismiss the suit or to transfer the case based on improper venue. A trial date of July 1997 has been set by the court. CMS Generation believes the plaintiff's position is without merit and intends to vigorously oppose any claims they may raise but cannot predict the outcome of this matter. CONSUMERS JOINT LAWSUIT AGAINST DOE Under the Nuclear Waste Policy Act of 1982, the DOE is required to begin accepting deliveries of spent nuclear fuel from commercial operators by January 31, 1998 for disposal, even if a permanent repository is not then operational. The unconditional nature of the DOE's obligation was confirmed by the United States Court of Appeals for the District of Columbia Circuit in 1996. Utilities and their customers have been prepaying the costs of DOE transport and disposal through fees based on electric generation by their nuclear plants. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983 until the first of its spent fuel is delivered to the DOE. At December 31, 1996, Consumers had a recorded liability to the DOE of $106 million, including interest, which is to be paid prior to the first delivery of spent nuclear fuel to the DOE. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest. In January 1997, in response to the DOE's declaration in December 1996 that it would not begin to accept spent nuclear fuel deliveries by the date required by law, Consumers and other utilities filed suit in the United States Court of Appeals for the District of Columbia Circuit. The utilities are seeking a declaration that they are relieved of their obligation to remit their quarterly fee payments to the DOE and are authorized to escrow any related fees collected from their customers, unless and until the DOE begins to accept spent nuclear fuel. The suit seeks an order requiring the DOE to develop a program to begin acceptance of spent nuclear fuel by January 31, 1998. Also in 1997, federal legislation was reintroduced to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. CMS ENERGY AND CONSUMERS ENVIRONMENTAL MATTERS CMS Energy, Consumers and their subsidiaries and affiliates are subject to various federal, state and local laws and regulations relating to the environment. Several of these companies have been named parties to various actions involving environmental issues. However, based on their present knowledge and subject to future legal and factual developments, CMS Energy and Consumers believe that it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition. See Item 1. Business - CMS Energy and Consumers Environmental Compliance, Item 7. Management's Discussion and Analysis and Item 8. Financial Statements and Supplementary Data - Note 12 of Consumers' Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. CMS ENERGY None in the fourth quarter of 1996 for CMS Energy. CONSUMERS None in the fourth quarter of 1996 for Consumers. 41 PART II ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. CMS Energy Market prices for CMS Energy's common stock and related security holder matters are contained in Item 8. Financial Statements and Supplementary Data - CMS Energy's Quarterly Financial and Common Stock Information, which is incorporated by reference herein. Number of common shareholders at February 28, 1997 was 92,562. Consumers Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In May, August, November and December 1996, Consumers paid $75 million, $40 million, $48 million and $37 million in cash dividends, respectively, on its common stock. During 1995, Consumers paid $70 million in cash dividends in May on its common stock. ITEM 6. SELECTED FINANCIAL DATA. CMS Energy Selected financial information is contained in Item 8. Financial Statements and Supplementary Data - CMS Energy's Selected Financial Information which is incorporated by reference herein. Consumers Selected financial information is contained in Item 8. Financial Statements and Supplementary Data - Consumers' Selected Financial Information which is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CMS Energy Management's discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data - CMS Energy's Management's Discussion and Analysis which is incorporated by reference herein. Consumers Management's discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data - Consumers' Management's Discussion and Analysis which is incorporated by reference herein. 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements: CMS Energy Page Selected Financial Information. . . . . . . . . . . . . . . . . 44 Management's Discussion and Analysis. . . . . . . . . . . . . . 47 Consolidated Statements of Income . . . . . . . . . . . . . . . 62 Consolidated Statements of Cash Flows . . . . . . . . . . . . . 63 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 64 Consolidated Statements of Preferred Stock. . . . . . . . . . . 66 Consolidated Statements of Common Stockholders' Equity. . . . . 67 Notes to Consolidated Financial Statements. . . . . . . . . . . 68 Report of Independent Public Accountants. . . . . . . . . . . . 94 Quarterly Financial and Common Stock Information. . . . . . . . 95 Consumers Page Selected Financial Information. . . . . . . . . . . . . . . . . 98 Management's Discussion and Analysis. . . . . . . . . . . . . . 99 Consolidated Statements of Income . . . . . . . . . . . . . . . 110 Consolidated Statements of Cash Flows . . . . . . . . . . . . . 111 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 112 Consolidated Statements of Long-Term Debt . . . . . . . . . . . 114 Consolidated Statements of Preferred Stock. . . . . . . . . . . 115 Consolidated Statements of Common Stockholder's Equity. . . . . 116 Notes to Consolidated Financial Statements. . . . . . . . . . . 117 Report of Independent Public Accountants. . . . . . . . . . . . 138 Quarterly Financial Information . . . . . . . . . . . . . . . . 139 43 CMS Energy 1996 Financial Statements 44 Selected Financial Information CMS Energy Corporation
1996 1995 1994 1993 1992 Operating revenue (in millions) ($) 4,333 3,890 3,614 3,476 3,142 Consolidated net income (loss) (in millions) ($) 240 204 179 155 (297) Average common shares outstanding (in thousands) CMS Energy 92,462 88,810 85,888 81,251 79,877 Class G 7,727 7,511 - - - Earnings (loss) per average common share CMS Energy ($) 2.45 2.27 2.09 1.90 (3.72) Class G ($) 1.82 .38 - - - Cash from operations (in millions) ($) 661 682 612 484 456 Capital expenditures, excludes capital lease additions and DSM (in millions) ($) 659 535 575 550 487 Total assets (in millions) ($) 8,615 8,143 7,378 6,958 6,842 Long-term debt, excluding current maturities (in millions) ($) 2,842 2,906 2,709 2,405 2,725 Non-current portion of capital leases (in millions) ($) 103 106 108 115 98 Total preferred stock (in millions) ($) 356 356 356 163 163 Total preferred securities (in millions) ($) 100 - - - - Cash dividends declared per common share CMS Energy ($) 1.02 .90 .78 .60 .48 Class G ($) 1.15 .56 - - - Market price of common stock at year-end CMS Energy ($) 33-5/8 29-7/8 22-7/8 25-1/8 18-3/8 Class G ($) 18-3/8 18-7/8 - - - Book value per common share at year-end CMS Energy ($) 17.02 15.16 12.78 11.33 9.09 Class G ($) 11.19 10.56 - - - Return on average common equity (%) 15.2 15.9 17.3 18.3 (33.2) Return on assets (%) 5.3 5.1 4.7 4.5 (2.3) Number of common shareholders at year-end 55,708 59,983 63,628 66,795 70,801 Number of employees at year-end (full-time equivalents) 9,712 10,105 9,972 10,013 9,971
45 Selected Financial Information (Continued) CMS Energy Corporation
1996 1995 1994 1993 1992 Electric Utility Statistics Sales (billions of kWh) 37.1 35.5 34.5 32.8 31.6 Customers (in thousands) 1,594 1,570 1,547 1,526 1,506 Average sales rate per kWh (cents) 6.55 6.36 6.29 6.28 5.82 Gas Utility Statistics Sales and transportation deliveries (bcf) 448 404 409 411 384 Customers (in thousands) (a) 1,504 1,476 1,448 1,423 1,402 Average sales rate per mcf ($) 4.45 4.42 4.48 4.46 4.55 Electric and Gas Non-Utility Statistics CMS Energy's share of unconsolidated independent power production revenue (in millions) ($) 493 497 385 334 284 Independent power production sales (millions of kWh) 7,823 7,422 6,216 5,019 4,057 CMS Energy's share of unconsolidated natural gas transmission, storage and marketing revenue (in millions) ($) 42 26 7 3 4 Gas marketed for end-users (bcf) 108 101 66 60 45 Exploration and Production Statistics Sales (net equiv. MMbbls) 9.7 8.9 5.6 5.0 4.6 Proved reserves (net equiv. MMbbls) 122.6 111.2 93.3 69.8 70.9 Proved reserves added (net equiv. MMbbls) 21.1 26.8 29.0 3.9 15.0 Finding cost per net equiv. bbl ($) 2.94 5.06 5.92 4.97 4.88 (a) Excludes off-system transportation customers.
46 (This page intentionally left blank) 47 CMS Energy Corporation Management's Discussion and Analysis This Annual Report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this Annual Report, except to the extent they contain historical facts, are forward-looking and, accordingly, involve estimates, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward- looking statements. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this Annual Report, the Forward-Looking Information section of this MD&A indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses including: oil and gas exploration and production; acquisition, development and operation of independent power production facilities; energy marketing to utilities, commercial and industrial customers; storage, transmission and processing of natural gas; and international energy distribution. Consolidated Earnings In Millions, Except Per Share Amounts Years Ended December 31 1996 1995 Change Consolidated Net Income $ 240 $ 204 $ 36 Net Income Attributable to Common Stocks: CMS Energy 226 201 25 Class G 14 3 11 Earnings Per Average Common Share: CMS Energy 2.45 2.27 .18 Class G 1.82 .38 1.44 Class G Shares were issued on July 21, 1995. Pro forma net income attributable to CMS Energy Common Stock and to Class G Common Stock, which reflects the performance of the gas distribution, storage and transportation business currently conducted by Consumers and Michigan Gas Storage, assuming Class G shares were outstanding during the entire period for the year ended December 31, 1995, would be $189 million and $15 million respectively. Pro forma earnings per share for the year ended December 31, 1995 would be $2.14 and $1.93 for CMS Energy Common Stock and Class G Common Stock, respectively. The increase in consolidated net income for 1996 primarily reflects the favorable impact of an electric rate increase and operating income resulting from a refund received by the MCV Partnership which provided a $6 million earnings benefit for CMS Energy. Earnings in 1996 also reflect increased electric sales, gas deliveries and revenues from gas loaning activities. Consolidated net income was also affected by increased earnings from CMS Gas Transmission's 25 percent ownership interest in TGN and increased equity earnings resulting from the buy-out of a power purchase agreement involving a partnership in which CMS Generation owns a 50 percent ownership interest. CMS Gas Transmission and CMS Generation are subsidiaries of Enterprises. The improved consolidated net income for 1995 over the 1994 level reflects increased utility electric sales and utility gas deliveries, increased electric utility revenue as a result of the May 1994 rate increase, reversal of losses previously recorded for gas utility contingencies (see Note 4), improved operating results from Consumers' interest in the MCV Facility, and the continuing growth of the international businesses. For further information, see the individual results of operations sections of this MD&A. Cash Position, Investing and Financing CMS Energy's primary ongoing source of operating cash is dividends from its subsidiaries. In 1996, Consumers paid $200 million in common dividends to CMS Energy. Consumers temporarily suspended its common dividends from mid-1995 until early 1996 to improve its capital structure. In 1996, Enterprises paid common dividends and other distributions of $119 million to CMS Energy. Operating Activities CMS Energy's consolidated operating cash requirements are met by its operating and financing activities. CMS Energy's consolidated cash from operations is derived mainly from Consumers' sale and transportation of natural gas, Consumers' generation, transmission, and sale of electricity and CMS NOMECO's sale of oil and natural gas. CMS NOMECO's is a subsidiary of Enterprises. Consolidated cash from operations totaled $661 million and $682 million for 1996 and 1995, respectively. The $21 million decrease includes increased electricity sales and gas deliveries; lower cash losses associated with the PPA; CMS NOMECO's increased sales of oil and natural gas; and the timing of cash payments, receipts and recognition of revenues related to operations. CMS Energy uses its operating cash primarily to expand its international businesses, maintain and expand its electric and gas utility systems, retire portions of its long-term debt and pay dividends. Investing Activities Net cash used in investing activities totaled $841 million and $1,016 million for 1996 and 1995, respectively. The decrease of $175 million primarily reflects the 1995 acquisition of Hydra-Co and an increase in 1996 of proceeds from the sale of property. An increase in capital expenditures was partially offset by a decrease in investments in partnerships and unconsolidated subsidiaries during 1996. CMS Energy's 1996 expenditures for its utility and international businesses were $447 million and $432 million, respectively. Financing Activities Net cash provided by financing activities totaled $180 million and $311 million for 1996 and 1995, respectively. The net decrease of $131 million primarily reflects an increase in the repayment of bank loans, an increase in common stock dividends and a reduction in proceeds from the issuance of common stock. These changes were partially offset by increased proceeds from bank loans and notes as well as proceeds from the sale of preferred securities in 1996. In 1996, CMS Energy filed shelf-registration statements with the SEC for the issuance and sale of up to $125 million of Series B GTNs and $150 million Series C GTNs, with net proceeds to be used for general corporate purposes. On December 31, 1996, CMS Energy had issued and outstanding $250 million of Series A GTNs and $103 million of Series B GTNs with weighted-average interest rates of 7.7 percent and 8.0 percent, respectively. Also in 1996, CMS Generation refinanced the $118 million bridge credit facility obtained in connection with the acquisition of Hydra-Co with a $110 million, five-year term loan. On December 31, 1996, $107 million was outstanding with a weighted-average interest rate of 7.2 percent. CMS NOMECO replaced its $140 million revolving credit agreement with a $225 million revolving credit agreement. On December 31, 1996, $122 million was outstanding under the new agreement with a weighted-average interest rate of 6.2 percent. In 1996, CMS Energy declared and paid $94 million in cash dividends to holders of CMS Energy Common Stock and $9 million in cash dividends to holders of Class G Common Stock. In July 1996, the Board of Directors declared quarterly dividends of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock, representing an increase in the annualized dividend on CMS Energy Common Stock to $1.08 per share from the previous $.96 per share (a 12.5 percent increase) and an increase in the annualized dividend on Class G Common Stock to $1.18 per share from the previous dividend of $1.12 per share (a 5.4 percent increase). In January 1997, the Board of Directors declared a quarterly dividend of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock, which were paid in February 1997. In 1996, CMS Energy received net proceeds of $95 million from the issuance of common stock. The issuance of 2.1 million of those shares completed the remaining amount on a shelf-registration filing by CMS Energy with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities. Proceeds from the sale were used for general corporate purposes of CMS Energy. In 1996, CMS Energy filed a shelf-registration statement with the SEC for the issuance and the sale of up to $500 million of senior and subordinated debt securities. If securities are issued from this shelf-registration statement, the net proceeds will be used to invest in the business of CMS Energy and for its general corporate purposes. Initially, the net proceeds may be used to refund or refinance a portion of Series A GTNs, Series A Deferred Coupon Notes and Series B Deferred Coupon Notes. Other Investing and Financing Matters CMS Energy has available unsecured, committed lines of credit totaling $155 million and a $450 million Unsecured Revolving Credit Facility. At December 31, 1996, CMS Energy had utilized a total of $178 million under these facilities. CMS Energy will continue to evaluate the capital markets in 1997 as a source of financing its subsidiaries' investing activities and required debt retirements. Consumers has several unsecured, committed lines of credit totaling $120 million and a $425 million working capital facility available to meet short-term borrowing requirements to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. At December 31, 1996, a total of $333 million was outstanding under these facilities. In October 1996, the FERC authorized the issuance of up to $900 million of short-term securities through 1998. An agreement is in place permitting the sales of certain accounts receivable for up to $500 million. At December 31, 1996 and 1995, receivables sold totaled $318 million and $295 million, respectively. In November 1996, the FERC authorized the issuance of $500 million of long-term securities through November 1998 for refinancing or refunding purposes. Also in October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. CMS Energy is required to redeem or retire $1.9 billion of long-term debt over the three-year period ending December 1999. In addition, at December 31, 1996, Consumers had a recorded a liability to the DOE of $106 million, which is to be paid prior to the first delivery of spent nuclear fuel to the DOE. Delivery of the fuel had originally been scheduled to occur in 1998 (see Note 2). Cash provided by operating activities is expected to satisfy a substantial portion of these debt retirements. Additionally, capital markets will continue to be evaluated as a source of financing required debt retirements. At December 31, 1996 the book value per share of CMS Energy Common Stock and Class G Common Stock was $17.02 and $11.19, respectively. Electric Utility Results of Operations Pretax Operating Income: In Millions Change Compared to Prior Year 1996 vs 1995 1995 vs 1994 Sales (net of special contract discounts) $ 1 $ 59 Rate increases and other regulatory issues 50 9 Operation and maintenance 2 (13) General tax and depreciation (13) (26) Other - 1 ---- ---- Total change $ 40 $ 30 ==== ==== Electric Sales: Total electric sales in 1996 were 37.1 billion kWh, a 4.4 percent increase from the 1995 level as a result of economic growth. This increase in total electric sales included a 1.7 percent increase in sales to ultimate customers. Total electric sales in 1995 were 35.5 billion kWh, a 3.0 percent increase from the 1994 level as a result of economic growth and warmer summer temperatures. This increase in total electric sales included a 4.2 percent increase in sales to ultimate customers. The table below reflects electric kWh sales by class of customer for both periods: In Billions of kWh Years Ended December 31 1996 1995 Change 1995 1994 Change Residential 10.9 10.7 .2 10.7 10.2 .5 Commercial 10.0 9.7 .3 9.7 9.2 .5 Industrial 12.9 12.7 .2 12.7 12.3 .4 Other 3.3 2.4 .9 2.4 2.8 (.4) ---- ---- --- ---- ---- --- Total sales 37.1 35.5 1.6 35.5 34.5 1.0 ==== ==== === ==== ==== === Power Costs: In Millions Years Ended December 31 1996 1995 Change 1995 1994 Change $1,087 $970 $117 $970 $950 $20 The increases in both periods reflect greater power purchases from outside sources to meet increased sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership under the PPA is 1,240 MW through the termination of the PPA in 2025. The MPSC allows Consumers to recover substantially all payments for 915 megawatts (MW) of contract capacity purchased from the MCV Partnership. The MPSC order allowing recovery was affirmed by the Court of Appeals in March 1996. At the end of 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. In November 1996, the MPSC approved a Settlement Agreement proposed by Consumers and the MPSC staff that addressed cost recovery for the remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996, Consumers was permitted to recover an average capacity charge of 2.86 cents per kWh for this power. The approved average capacity charge increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1, 1996, and for an additional 44 MW on January 1, 1997. Cost recovery for the remaining 216 MW is based upon the escalation of the average capacity charge by three percent annually until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA contract. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries totaled $41 million, $90 million and $61 million in 1996, 1995 and 1994, respectively. For further information, see Note 3. In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $28 $23 $22 $21 $20 After considering the effects of the Settlement Agreement, Consumers believes that the original loss recorded in 1992 remains adequate. The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded. Further, Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. Electric Rate Proceedings: In February 1996, the MPSC issued a partial final order in the retail electric rate case filed in 1994, granting a $46 million annual increase in electric retail rates and authorizing a 12.25 percent return on common equity. Separate requests were before the MPSC to offer competitive special rates to certain large qualifying customers and to modify certain depreciation rates and practices. In November 1996, the MPSC issued a final order in the Settlement Agreement which combined the separate requests. The rate increase and rate of return were not changed from the partial final order and Consumers was authorized to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. Recovery of the additional 325 MW of MCV Partnership contract capacity charges was also approved (see Note 3). The Settlement Agreement also requires the establishment of a direct access program. Customers having a maximum demand of at least 2 MW are eligible to purchase generation services directly from any eligible third- party power supplier. The program is limited to 650 MW of sales, of which 410 MW has already been filled by existing contracts; 140 MW may be filled by either direct access customers or new special contracts which Consumers has signed and submitted to the MPSC for approval; and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. Rehearing petitions have been filed by Consumers and other interested parties. Nuclear Matters: In January 1997, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report rated all areas as good, unchanged from the previous assessment. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Based on continuing analysis of data from testing of similar materials, in December 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003, before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that, with a change in fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. Palisades' on-site storage pool for spent nuclear fuel is at capacity. Consequently, NRC-approved dry casks, which are steel and concrete vaults, are being used for temporary on-site storage. For further information, see Note 15. Electric Environmental Matters: The Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require that certain capital expenditures be made in order to comply with the amendments for nitrogen oxide reductions, generating units are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Management believes that annual operating costs will not be materially affected as a result of expenditures to comply. 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. Consumers is a so-called potentially responsible party at several sites being administered under Superfund. In addition, there are numerous credit worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that the liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on CMS Energy's financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 14. Stray Voltage: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. As of January 1997, 22 separate stray voltage lawsuits were awaiting trial court action, down from 30 lawsuits at December 31, 1995, and 83 lawsuits at December 31, 1994. CMS Energy believes that the resolution of the remaining lawsuits will not have a material impact on its financial position, liquidity or results of operations. Gas Utility Results of Operations Pretax Operating Income: In Millions Change Compared to Prior Year 1996 vs 1995 1995 vs 1994 Sales $ 19 $ 12 Reversal in 1995 of gas contingency (23) 23 Recovery of gas costs and other issues 7 (4) Gas loaning activities 7 - Operations and maintenance (4) (9) General taxes and depreciation (5) (7) Other 1 1 ---- ---- Total change $ 2 $ 16 ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, increased 5.1 percent for 1996 compared to 1995 and 6.5 percent for 1995 compared to 1994. The increased deliveries for each period reflect growth resulting from customer additions, conversions to natural gas from alternative fuels and continued strength in the Michigan economy. The table below indicates total system deliveries and the impact of weather. In Billions of Cubic Feet Years Ended December 31 1996 1995 Change 1995 1994 Change Weather-adjusted deliveries (variance reflects growth) 337 326 11 326 313 13 Impact of weather 15 9 6 9 1 8 --- --- --- --- --- --- System deliveries excluding transport to MCV Partnership 352 335 17 335 314 21 Transport to MCV Partnership 65 54 11 54 77 (23) Off-system transportation 31 15 16 15 18 (3) --- --- --- --- --- --- Total system deliveries 448 404 44 404 409 (5) === === === === === === Cost of Gas Sold: In Millions Years Ended December 31 1996 1995 Change 1995 1994 Change $750 $674 $76 $674 $662 $12 The cost increase for 1996 was the result of increased sales and the reversal of a $23 million gas contract contingency during 1995. Gas Utility Issues Gas Rate Proceedings: In March 1996, the MPSC issued a final order decreasing gas rates by $12 million annually and authorizing an 11.6 percent return on common equity. Consumers filed a petition for rehearing with the MPSC, requesting reconsideration of certain issues. This petition was denied in June 1996 and the matter is now closed. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to bypass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC-authorized gas transportation rates must be borne by Consumers' shareholders. In 1995, Consumers filed an appeal with the Court of Appeals, which is still pending, claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. Gas Cost Recovery Matters: In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order correctly concludes that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. In the gas cost recovery reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The Administrative Law Judge issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. For the year ended December 31, 1996, $6 million would be subject to refund. Consumers will continue to oppose this view before the MPSC. Gas Environmental Matters: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available, and continued internal review of these former manufactured gas plant sites, have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At December 31, 1996, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order, environmental clean-up costs, above the amount currently being recovered in rates, will be deferred and amortized over ten years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. For further information regarding environmental matters, see Note 14. Oil and Gas Exploration and Production Pretax Operating Income: 1996 pretax operating income increased $9 million from 1995, primarily due to higher oil and gas prices and volumes, partially offset by the recognition of a $10 million gain from assignment and novation of a gas supply contract recorded in the first quarter of 1995. Pretax operating income for 1995 increased $22 million from 1994, primarily due to higher sales volumes and oil sales prices, income attributable to the acquisitions of Walter International, Inc., and Terra Energy Ltd., oil and gas exploration and production companies, and increased gains from the assignments of gas supply contracts, partially offset by lower average market prices for gas. Capital Expenditures: Capital expenditures during 1996 relate primarily to the development of existing oil and gas reserves. Independent Power Production Pretax Operating Income: 1996 pretax operating income increased $22 million from 1995, primarily reflecting a gain on the sale of a power purchase agreement by a partnership in which CMS Generation owns a 50 percent interest, a gain on the sale of a partnership interest and increased operating income resulting from a refund received by the MCV Partnership. Pretax operating income for 1995 increased $25 million, primarily reflecting higher capacity sales by the MCV Partnership, as well as additional equity earnings by CMS Generation subsidiaries primarily due to the Hydra-Co acquisition. Capital Expenditures and Other: In 1996, CMS Generation, through a subsidiary, commenced construction of the La Plata Cogeneration Plant, a 128 MW natural gas-fueled, combined-cycle power plant in Buenos Aires Province, Argentina. Construction of the $110 million plant being built on the site of a petroleum refinery owned and operated by YPF S.A., Argentina's largest oil company, is scheduled to be completed by the fall of 1997. Also in 1996, CMS Generation increased its ownership interest in the project from 39 percent to 100 percent by purchasing the remaining 61 percent from a consortium of Argentine investors. The Overseas Private Investment Corporation is expected to provide $75 million in non-recourse project financing for the facility. In 1996, CMS Generation, through a subsidiary, and an affiliate of ABB signed an agreement with Morocco's national utility, Office National de l'Electricite, for the privatization, expansion and operation of the 1,320 MW Jorf Lasfar coal-fueled power plant located southwest of Casablanca. The agreement covers the purchase and operation of two existing 330 MW electric generating units and construction and operation of another two 330 MW electric generating units by CMS Generation and ABB. CMS Generation and ABB each will hold a 50 percent interest in the transaction. CMS Energy posted a $30 million conditional letter of credit to ensure closing under the agreement, which is targeted for the first half of 1997 and includes over $1 billion in debt financing. Construction of the second two units will begin shortly thereafter. In 1996, CMS Generation, through a subsidiary, increased its ownership interest in CTM to 81 percent. In 1996, CTM began a project to repower its electric generating plant in Western Argentina's Mendoza Province. CMS Generation currently plans to invest $185 million to refurbish and repower the facility resulting in an increase in the plant's available net output from 243 MW to 506 MW. Capital markets financing of $85 million is targeted for the first half of 1997. As of the first quarter of 1997, GVK, began generating electricity from all three of its combustion turbines. CMS Generation holds a 25.25 percent interest in GVK and operates the 235 MW plant. Construction is continuing on the combined-cycle facility with an estimated total cost of $260 million. GVK has received a Government of India counter-guarantee of performance of certain obligations under the power purchase agreement by the Andhra Pradesh State Electricity Board and expects to complete financing early in 1997. As of January 1, 1997, Jamaica Private Power Company achieved commercial operation of the two diesel generators at its 60 MW diesel-fired independent power project in Kingston, Jamaica. CMS Generation, through a subsidiary, holds a 44 percent interest in Jamaica Private Power Company and a 60 percent interest in Private Power Operators Limited, which will operate the plant. Construction on the balance of the plant, including the 4 MW waste heat steam turbine, will be complete in the first half of 1997. Natural Gas Transmission, Storage and Marketing Pretax Operating Income: 1996 pretax operating income increased $14 million from 1995, reflecting new pipeline and storage investments, primarily TGN, the continued growth of existing projects, gas marketed to end-users and the exchange of ownership interests in the Moss Bluff and Grands Lacs partnerships, as detailed below. In 1995, pretax operating income increased $5 million over 1994, reflecting growth from new pipeline investments and the continued growth of existing projects and gas marketed to end-users. Capital Expenditures and Other: In 1996, CMS Gas Transmission acquired Petal Gas Storage Company, a natural gas storage facility located in Forrest County, Mississippi. The salt dome storage cavern provides up to 3.2 billion cubic feet per day of 10-day storage service and has the capability of being refilled in 20 days. In 1996, CMS Gas Transmission acquired 32 percent of the common shares of Nitrotec. Nitrotec specializes in the development and commercialization of advanced carbon-based adsorption gas separation technologies. Nitrotec recently received patents covering its helium removal process and nitrogen rejection process. In 1996, CMS Gas Transmission sold its 50 percent ownership interest in Moss Bluff Gas Storage Systems, a partnership that owns a gas storage facility, to its partner, MHP, and purchased the remaining 50 percent ownership interest in the Grands Lacs Limited Partnership, a marketing center for natural gas, from MHP. This transaction resulted in CMS Gas Transmission receiving $26 million. In 1996, Cherokee acquired the Crescent and Ames gas gathering systems and processing plant in Oklahoma for $34 million. A portion of the Ames gas gathering system was subsequently sold in January 1997 for $8 million. CMS Gas Transmission and Heritage Gas Services have partnership interests in Cherokee of 82 percent and 18 percent, respectively. Cherokee had acquired the adjacent Lucien gas gathering system and processing plant earlier in 1996, and has now integrated the two operations. The Crescent system is providing operating synergies with the Lucien system, and has increased CMS Gas Transmission's presence in this important domestic gas- producing region. In 1996, CMS Gas Transmission, together with Empresa Nacional de Electricidad S.A., Chile's largest electricity generation and transmission company, became partners in the Atacama Pipeline, an integrated $700 million project to construct 930 kilometer pipeline that will transport natural gas across the Andes Mountains from Northern Argentina to markets in Northern Chile. A 600 MW gas-fueled, combined-cycle generating plant is planned to be built in two stages at the end of the pipeline in Chile by a consortium including CMS Generation. Construction is scheduled to begin in 1997, with gas transportation and plant operations expected in 1999. International Energy Distribution Capital Expenditures: In 1996, a seven-company consortium in which CMS Electric and Gas Company, a subsidiary of Enterprises, holds a 40 percent interest acquired 90 percent of the outstanding shares of EDEER S.A. for $160 million. EDEER S.A. serves over 200,000 customers, primarily residential and commercial, in a 55,000 square kilometer area. In 1996, the Entre Rios Province transferred ownership and operating management of EDEER S.A. to the consortium. Forward-Looking Information Forward-looking information is included throughout this Annual 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 both domestic and international (including those of the FERC and the MPSC) with respect to rates, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, operation and construction of natural gas pipeline and storage facilities, recovery of the cost of purchased power or natural gas, decommissioning costs, and present or prospective wholesale and retail competition, among others. The business and profitability of CMS Energy are also influenced by economic and geographic factors, including political and economic risks (particularly those associated with international development and operations, including currency fluctuation), changes in environmental laws and policies, weather conditions, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy, inflation, capital market conditions, unanticipated development project delays or changes in project costs, and the ability to secure agreement in pending negotiations (particularly for projects in development), among other important factors. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of CMS Energy. Capital Expenditures: CMS Energy estimates that capital expenditures, including new lease commitments and investments in partnerships and unconsolidated subsidiaries, will total $2.7 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 Electric utility (a) $272 $275 $257 Gas utility (a) 115 103 103 Oil and gas exploration and production 135 150 165 Independent power production 196 162 157 Natural gas transmission and storage 110 100 75 International energy distribution 120 100 100 Marketing, services and trading 17 13 - ---- ---- ---- $965 $903 $857 ==== ==== ==== (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. CMS Energy currently plans to invest $450 million from 1997 to 1999 in its oil and gas exploration and production operations, primarily in North and South America, offshore West Africa and North Africa. CMS Energy also plans to invest $515 million in its independent power production operations from 1997 to 1999 to pursue acquisitions and development of electric generating plants in the United States, Latin America, Southern Asia, the Pacific Rim region and North Africa. Investments totaling $285 million from 1997 to 1999, relating to non-utility gas operations, are planned to continue development of natural gas storage, gathering and pipeline operations both domestically and internationally. CMS Energy plans to invest $320 million from 1997 to 1999 in its international energy distribution operations related to international expansion. CMS MST plans to invest $30 million from 1997 to 1999. CMS MST was formed during 1996 as part of CMS Energy's expansion and reorganization of its energy marketing business. This restructuring is expected to significantly improve CMS Energy's competitive position in the energy marketplace throughout the U.S. and abroad. CMS MST will provide gas, electric, oil and coal marketing, risk management and energy management services throughout the United States and eventually worldwide. These estimates are prepared for planning purposes and are subject to revision. Electric Outlook: Consumers expects average annual growth of two to three percent per year in electric system sales over the next five years, based on the current industry configuration in Michigan. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions, or the developing competitive market for electricity. Consumers continues to work toward retaining its current retail service customers by offering electric rates that are competitive with those of other energy providers, and by improving reliability and customer communications. Consumers is also taking steps to prepare for a future environment in which open access is the predominant means by which retail service customers obtain their power requirements. Consumers' retail service is affected by competition in several areas, including the potential installation of cogeneration or other self- generation facilities by larger industrial customers; the formation of municipal utilities that would displace retail service to an entire community; competition from other utilities that offer flexible rate arrangements designed to encourage movement of facilities or production to their service areas; economic development competition between utilities; MPSC direct access programs and potential electric industry restructuring including regulatory decisions and new state or federal legislation. In 1996, the MPSC significantly 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 has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors. Under the General Motors contract, Consumers will serve certain facilities at least five years and serve other facilities at least ten years. Certain facilities will have the option of taking retail wheeling service (if available) after the first three years of the contract. The MPSC approved this contract in 1995, and has also approved long-term sales contracts with other major customers representing a substantial percentage of Consumers' industrial load deemed to have viable cogeneration alternatives. These orders have been appealed by the Michigan Attorney General. The MPSC-approved Settlement Agreement, among other things, opened up 240 MW of load to competition. Consumers believes it can compete for 140 MW of load, while 100 MW is reserved for 18 months for direct access on a lottery basis. Consumers has negotiated special contracts sufficient to fill the 140 MW of load available under the Settlement Agreement. These contracts were filed with the MPSC for approval. In January 1996, the Governor of the State of Michigan requested that the MPSC review the existing regulatory framework governing Michigan business in order to improve Michigan's business climate. After the filing of utility plans as requested by the MPSC earlier in 1996, and after discussions with many parties, in December 1996, the MPSC staff issued a report recommending a phased-in program of direct access by electric customers (also known as customer choice) based on two fundamental principles: 1) all customers should be eligible to participate in the emerging competitive market for electric supply; and 2) rates should not be increased for any customers and should be decreased where possible. The report also recommends that, beginning in 1997, customers would have the opportunity to select the power supplier of their choice. All customers would be eligible to participate, but in the initial years the total amount would be limited to 150 MW for 1997, increasing an additional 150 MW each year through 2000. In 2001, all commercial and industrial customers served at primary voltage would be eligible, and in 2004 all remaining customers would be eligible. This report also recommends recovery of electric utility transition costs (often referred to as stranded costs) from those customers exercising a right to purchase power from generators other than traditional utility suppliers.. Transition costs consist of two elements: 1) energy supply costs that were incurred during the regulated era that would not be competitive at market prices if the electric industry is restructured; and 2) costs that are incurred to facilitate the transition from regulated monopoly status to competitive market status. The MPSC staff report states that transition costs should include the following: 1) regulatory assets (see Note 19); 2) nuclear capital costs; 3) contract capacity costs in power purchase agreements; 4) employee-related restructuring costs; and 5) other costs related to implementing restructuring. The report also recommends that where possible, the recovery of the transition costs would be funded through rate reduction bonds, a potential financing which has the dual advantages of funding transition costs while simultaneously reducing customer rates. Transition costs not recovered through rate reduction bonds would be recovered through a transition charge billed to direct access customers. The transition charge would begin when the customer takes direct access service and would continue through 2007. Customers not participating in the direct access program would be charged bundled rates that include: 1) a base rate freeze; 2) suspension of the power supply cost recovery process during the transition period and establishment of a fixed level of fuel and purchase power recovery based on approved cost levels; and 3) limited performance- based regulation of the transmission and distribution functions in a manner which incorporates service standards and allows for the Consumer Price Index less one percent adjustments on transmission and distribution rates through the end of 2001. On March 7, 1997, Consumers filed supplementary data with the MPSC at its request. This data showed that Consumers has approximately $1.8 billion of existing transition costs which would be recovered by a transition charge to be paid by direct access customers through 2007. Restructuring and implementation costs of $200 million would be recovered by an implementation charge to direct access customers. Alternatively, if the securitization approach is pursued and appropriate legislation is passed, the data indicate that significant customer benefits would result. The resulting securitization charge would be paid by all customers to service $4 billion of rate reduction bonds with a proposed 15 year term. Because of the phase-in schedule for retail direct access service, a substantial portion of $4 billion in costs that would be subject to the securitization alternative would be paid by customers on bundled rates prior to getting choice, thus allowing the transition cost to be charged only to direct access customers to be limited to $1.8 billion if securitization does not occur. Securitization results in over $200 million benefit per year to customers because the 15 year repayment period of the bonds allows the cost reimbursement by the customer to be spread out over a longer period than without securitization and because securitization allows the costs being securitized to be financed at a lower rate. Several of the elements of electric utility restructuring will need to be addressed in legislation, including assurance of full transition cost recovery, securitization of rate reduction bonds and generation deregulation. Consumers currently expects that electric utility restructuring will occur in a manner consistent with the MPSC Staff Report, but cannot predict with certainty the timing of actual implementation, the extent of customer choice, or resultant financial impacts. In April 1996, the FERC issued Orders 888 and 889, which require utilities to provide open access to the interstate transmission grid for wholesale transactions. Order 888 requires public utilities owning, controlling, or operating transmission lines in interstate commerce to file non- discriminatory open access tariffs that contain minimum terms and conditions of non-discriminatory service; allows utilities to charge their current conforming transmission rates or apply for new rates; and allows the full recovery of transition costs. Order 888 also requires that power pools restructure their ongoing operations and open membership to industry participants. Order 889 requires that utilities establish electronic systems to share information about available transmission capacity and to separate their wholesale power marketing and transmission operations functions. Several FERC Order 888 and 889 requirements have been implemented, including the filing with FERC of Consumers' individual open access tariff and the Joint Transmission Tariff with Detroit Edison for transmission service across the Consumers and Detroit Edison transmission systems, separation of the wholesale merchant function from the transmission function, implementation of the required Code of Conduct, unbundling of wholesale interconnection agreements and related issues. Consumers participated in organizational discussions of a Midwest Independent System Operator, of which Consumers is a member. One issue related to FERC Orders 888 and 889 that is not resolved is the operation of the Michigan Electric Power Coordination Center. Currently, Consumers and Detroit Edison have an agreement to jointly operate the Michigan Electric Power Coordination Center pool, which provides considerable savings to Michigan electric customers. Consumers would propose to maintain the benefits of the pool for its customers and open up the pool to other participants on a non-discriminatory basis. Detroit Edison seeks to terminate the power pool agreement with Consumers effective April 30, 1997. The current Michigan Electric Power Coordination Center agreement requires a four-year advance notice for termination. The FERC is expected to rule on this issue in 1997. The impact of the FERC decision on Consumers and its customers cannot be predicted. Consumers currently 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 its generation, transmission and distribution operations (see note 19). If rate recovery of generation-related costs becomes unlikely or uncertain, whether due to competition or regulatory action, this accounting standard may no longer apply to Consumers' generation operations. This change could result in either full recovery of generation-related regulatory assets (net of related regulatory liabilities) or a loss, depending on whether Consumers' regulators adopt a transition mechanism for the recovery of all or a portion of these net regulatory assets. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, Consumers believes that its regulatory assets, including those related to generation, are probable of future recovery. At the SEC staff's request, the FASB is reviewing the accounting for closure and removal costs for long-lived assets, including decommissioning. The current electric utility industry accounting practices of recording the cost of removal as a component of depreciation could be changed. The FASB's tentative decision includes recognition of the cost of closure and removal obligation as a liability based on discounted future cash flows with the offset recorded as part of the cost of the plant asset. Gas Outlook: Consumers currently anticipates gas deliveries to grow two percent per year (excluding transportation to the MCV Facility and off- system deliveries) over the next five years, assuming a steadily growing customer base. Additionally, Consumers has several strategies that will support increased load requirements in the future. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption. In addition, Consumers has proposed to the MPSC a fixed gas price for recovery over a three-year period. Consumers is also offering a variety of energy related services to its customers including appliance maintenance, home safety, and home security. In October 1996, the MPSC issued an order requesting Consumers and other local distribution companies whose rates are regulated by the MPSC to develop pilot programs that would allow any customers to purchase gas from other suppliers and have the gas transported through local pipelines. These pilot programs, which are to be implemented in mid-1997 and last for two years, are intended to help the MPSC determine whether it is appropriate to allow all customers access to the competitive gas transportation market. 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 (see Note 19). Other New Accounting Standards: In 1996, the FASB issued SFAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which is effective for 1997 financial statements. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, Environmental Remediation Liabilities, effective for 1997 financial statements. CMS Energy does not expect the application of these statements to have a material impact on its financial position, liquidity or results of operations. 62 Consolidated Statements of Income CMS Energy Corporation
In Millions, Except Per Share Amounts Years Ended December 31 1996 1995 1994 Operating Revenue Electric utility $2,446 $2,277 $2,189 Gas utility 1,282 1,195 1,151 Oil and gas exploration and production 130 108 78 Independent power production 140 96 46 Natural gas transmission, storage and marketing 320 196 145 Other 15 18 5 ------ ------ ------ Total operating revenue 4,333 3,890 3,614 ------ ------ ------ Operating Expenses Operation Fuel for electric generation 296 283 306 Purchased power - related parties 589 491 482 Purchased and interchange power 202 196 162 Cost of gas sold 997 824 785 Other 751 695 621 ------ ------ ------ Total operation 2,835 2,489 2,356 Maintenance 178 186 192 Depreciation, depletion and amortization 441 416 379 General taxes 202 196 184 ------ ------ ------ Total operating expenses 3,656 3,287 3,111 ------ ------ ------ Pretax Operating Electric utility 402 362 332 Income (Loss) Gas utility 153 151 135 Oil and gas exploration and production 39 30 8 Independent power production 68 46 21 Natural gas transmission, storage and marketing 28 14 9 Other (13) - (2) ------ ------ ------ Total pretax operating income 677 603 503 ------ ------ ------ Other Income Accretion income (Note 2) 10 11 13 (Deductions) Accretion expense (Note 2) (22) (31) (35) Other, net 1 10 19 ------ ------ ------ Total other deductions (11) (10) (3) ------ ------ ------ Fixed Charges Interest on long-term debt 230 224 193 Other interest 29 27 18 Capitalized interest (8) (8) (6) Preferred dividends 28 28 24 Preferred securities distributions (Note 8) 8 - - ------ ------ ------ Net fixed charges 287 271 229 ------ ------ ------ Income Before Income Taxes 379 322 271 Income Taxes 139 118 92 ------ ------ ------ Consolidated Net Income $ 240 $ 204 $ 179 ====== ====== ====== Net Income Attributable to Common Stocks CMS Energy $ 226 $ 201 $ 179 Class G $ 14 $ 3 - ====== ====== ====== Average Common Shares Outstanding CMS Energy 92 89 86 Class G 8 8 - ====== ====== ====== Earnings Per Average Common Share CMS Energy $ 2.45 $ 2.27 $ 2.09 Class G $ 1.82 $ .38 - ====== ====== ====== Dividends Declared Per Common Share CMS Energy $ 1.02 $ .90 $ .78 Class G $ 1.15 $ .56 - ====== ====== ====== The accompanying notes are an integral part of these statements. /TABLE 63 Consolidated Statements of Cash Flows CMS Energy Corporation
In Millions Years Ended December 31 1996 1995 1994 Cash Flows From Consolidated net income $ 240 $ 204 $ 179 Operating Adjustments to reconcile net income to net cash Activities provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $49, $51 and $49, respectively) 441 416 379 Deferred income taxes and investment tax credit 46 75 56 Capital lease and debt discount amortization 41 61 73 Accretion expense (Note 2) 22 31 35 Accretion income - abandoned Midland project (Note 2) (10) (11) (13) Undistributed earnings of related parties (64) (53) (25) Power purchases (Note 3) (63) (137) (87) Other 20 7 3 Changes in other assets and liabilities (Note 17) (12) 89 12 ------- ------- ------- Net cash provided by operating activities 661 682 612 ------- ------- ------- Cash Flows From Capital expenditures (excludes capital lease additions Investing of $31, $31 and $36, respectively and DSM) (Note 17) (659) (535) (575) Activities Investments in partnerships and unconsolidated subsidiaries (163) (242) (52) Investments in nuclear decommissioning trust funds (49) (51) (49) Cost to retire property, net (31) (41) (38) Acquisition of companies, net of cash acquired (20) (146) - Deferred demand-side management costs (6) (9) (9) Proceeds from sale of property 79 22 20 Other 8 (14) (6) ------- ------- ------- Net cash used in investing activities (841) (1,016) (709) ------- ------- ------- Cash Flows From Proceeds from bank loans, notes and bonds 433 333 701 Financing Proceeds from preferred securities 97 - - Activities Issuance of common stock 95 160 30 Repayment of bank loans (256) (18) (473) Payment of common stock dividends (103) (84) (67) Payment of capital lease obligations (40) (37) (35) Retirement of bonds and other long-term debt (37) (44) (279) Increase (decrease) in notes payable, net (8) 2 80 Retirement of common stock (1) (1) (2) Issuance of preferred stock - - 193 ------- ------- ------- Net cash provided by financing activities 180 311 148 ------- ------- ------- Net Increase (Decrease) in Cash and Temporary Cash Investments - (23) 51 Cash and temporary cash investments Beginning of year 56 79 28 ------- ------- ------- End of year $ 56 $ 56 $ 79 ======= ======= ======= The accompanying notes are an integral part of these statements.
64 Consolidated Balance Sheets CMS Energy Corporation
ASSETS In Millions December 31 1996 1995 Plant and Property Electric $6,333 $6,103 (At Cost) Gas 2,337 2,218 Oil and gas properties (full-cost method) 1,140 1,074 Other 94 105 ------ ------ 9,904 9,500 Less accumulated depreciation, depletion and amortization (Note 2) 4,867 4,627 ------ ------ 5,037 4,873 Construction work-in-progress 243 201 ------ ------ 5,280 5,074 ------ ------ Investments Independent power production 318 275 Natural gas transmission, storage and marketing 233 193 First Midland Limited Partnership (Notes 3 and 20) 232 225 Midland Cogeneration Venture Limited Partnership (Notes 3 and 20) 134 103 Other 86 22 ------ ------ 1,003 818 ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 56 56 Accounts receivable and accrued revenue, less allowances of $10 in 1996 and $4 in 1995 (Note 6) 373 296 Inventories at average cost Gas in underground storage 186 184 Materials and supplies 86 83 Generating plant fuel stock 30 37 Deferred income taxes (Note 5) 48 24 Prepayments and other 235 230 ------ ------ 1,014 910 ------ ------ Non-current Assets Postretirement benefits (Note 12) 435 462 Nuclear decommissioning trust funds (Note 2) 386 304 Abandoned Midland project 113 131 Other 384 444 ------ ------ 1,318 1,341 ------ ------ Total Assets $8,615 $8,143 ====== ======
65 CMS Energy Corporation
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions December 31 1996 1995 Capitalization Common stockholders' equity $1,702 $1,469 Preferred stock of subsidiary 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 - Long-term debt (Note 7) 2,842 2,906 Non-current portion of capital leases (Note 13) 103 106 ------ ------ 5,103 4,837 ------ ------ Current Liabilities Current portion of long-term debt and capital leases 409 207 Notes payable 333 341 Accounts payable 348 306 Accrued taxes 262 254 Accounts payable - related parties 63 53 Power purchases (Note 3) 47 90 Accrued interest 47 45 Accrued refunds 8 22 Other 206 192 ------ ------ 1,723 1,510 ------ ------ Non-current Deferred income taxes (Note 5) 698 640 Liabilities Postretirement benefits (Note 12) 521 533 Power purchases (Note 3) 178 221 Deferred investment tax credits 161 171 Regulatory liabilities for income taxes, net (Notes 5 and 19) 66 44 Other 165 187 ------ ------ 1,789 1,796 ------ ------ Commitments and Contingencies (Notes 2, 3, 4, 13, 14 and 15) Total Stockholders' Investment and Liabilities $8,615 $8,143 ====== ====== (a) As described in Note 8, the primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers. The accompanying notes are an integral part of these statements.
66 Consolidated Statements of Preferred Stock CMS Energy Corporation
Optional Redemption Number of Shares In Millions December 31 Series Price 1996 1995 1996 1995 Consumers' Preferred Stock Cumulative, $100 par value, authorized 7,500,000 shares, with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7 4.50 110.00 373,148 373,148 37 37 7.45 101.00 379,549 379,549 38 38 7.68 101.00 207,565 207,565 21 21 7.72 101.00 289,642 289,642 29 29 7.76 102.21 308,072 308,072 31 31 Consumers' Class A Preferred Stock Cumulative, no par value, authorized 16,000,000 shares, with no mandatory redemption (a) 2.08 25.00 8,000,000 8,000,000 193 193 ----- ----- Total Preferred Stock $ 356 $ 356 ===== ===== (a) Redeemable beginning April 1, 1999. The accompanying notes are an integral part of these statements.
67 Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
In Millions, Except Number of Shares Other Retained Number Common Paid-in Revaluation Earnings of Shares Stock Capital Capital (Deficit) Total Balance at January 1, 1994 85,196,795 $ 1 $1,672 $ - $(707) $ 966 Consolidated net income 179 179 Common Stock: Dividends declared (67) (67) Reacquired (85,174) (2) (2) Issued 1,389,578 30 30 Reissued 33,350 1 1 ---------- --- ------ ---- ----- ------ Balance at December 31, 1994 86,534,549 1 1,701 - (595) 1,107 Consolidated net income 204 204 Common stock: Dividends declared: CMS Energy (80) (80) Class G (4) (4) Reacquired (21,514) (1) (1) Issued: CMS Energy 5,039,019 126 126 Class G (a) 124 124 Reissued 41,447 1 1 Change in unrealized investment-loss (8) (8) ---------- --- ------ ---- ----- ------ Balance at December 31, 1995 91,593,501 1 1,951 (8) (475) 1,469 Consolidated net income 240 240 Common stock: Dividends declared: CMS Energy (94) (94) Class G (9) (9) Reacquired (31,700) (1) (1) Issued: CMS Energy 3,248,225 90 90 Class G (a) 5 5 Reissued 3,085 - - Change in unrealized investment-gain 2 2 ---------- --- ------ ---- ----- ------ Balance at December 31, 1996 94,813,111 $ 1 $2,045 $ (6) $(338) $1,702 ========== === ====== ==== ===== ====== (a) Number of Class G common shares outstanding: Balance at December 31, 1995 7,618,602 Issued during 1996 257,872 --------- Balance at December 31, 1996 7,876,474 ========= The accompanying notes are an integral part of these statements.
68 CMS Energy Corporation Notes to Consolidated Financial Statements 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry. Enterprises is engaged in several domestic and international energy-related businesses including: oil and gas exploration and production; acquisition, development and operation of independent power production facilities; energy marketing to utility, commercial and industrial customers; storage, transmission and processing of natural gas; and international energy distribution. 2: Summary of Significant Accounting Policies and Other Matters Basis of Presentation: The consolidated financial statements include CMS Energy, Consumers and Enterprises and their wholly owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and include the use of management's estimates. 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 years ended December 31, 1996, 1995 and 1994, undistributed equity earnings were $64 million, $53 million and $25 million, respectively. Accretion Income and Expense: In 1991, the MPSC ordered that Consumers could recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, the unrecovered asset is adjusted to its present value. This adjustment is reflected as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the MCV Partnership (see Note 3), and now recognizes accretion expense annually to reflect the time value of money on the recorded loss. Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. Cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, is recorded in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities. Maintenance, Depreciation and Depletion: Consumers' property repairs and minor property replacements are charged to maintenance expense. Depreciable property retired or sold plus cost of removal (net of salvage credits) is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.5 percent for 1996, 1995 and 1994. The composite rate for gas utility plant was 4.2 percent for 1996, 4.3 percent for 1995 and 4.2 percent for 1994. The composite rate for other plant and property was 5.5 percent for 1996, 4.9 percent for 1995 and 4.7 percent for 1994. CMS NOMECO follows the full-cost method of accounting and, accordingly, capitalizes its exploration and development costs, including the cost of non-productive drilling and surrendered acreage, on a country-by-country basis. The capitalized costs in each cost center are being amortized on an overall units-of-production method based on total estimated proved oil and gas reserves. Other non-utility depreciable property is amortized over its estimated useful life; gains and losses are recognized at the time of sale. Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under current federal law, as confirmed by court decision, the DOE is required to begin accepting deliveries of spent nuclear fuel by January 31, 1998 for disposal, even if a permanent repository is not then operational. Utilities and their customers have been prepaying the costs of DOE transport and disposal through fees based on electric generation by their nuclear plants. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983 until the first of its spent fuel is delivered to the DOE. At December 31, 1996, Consumers has a recorded liability to the DOE of $106 million, including interest, which is to be paid prior to the first delivery of spent nuclear fuel to the DOE. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest. In January 1997, in response to the DOE's declaration in December 1996 that it would not begin to accept spent nuclear fuel deliveries by the date required by law, Consumers and other utilities filed suit in federal court. The utilities are seeking a declaration that they are relieved of their obligation to remit their quarterly fee payments to the DOE and are authorized to escrow any related fees collected from their customers, unless and until the DOE begins to accept spent nuclear fuel. The suit seeks an order requiring the DOE to develop a program to begin acceptance of spent nuclear fuel by January 31, 1998. Also in 1997, federal legislation was reintroduced to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. Nuclear Plant Decommissioning: Consumers collected $49 million in 1996 from its electric customers toward the future decommissioning of its two nuclear plants. In April 1996, Consumers received a decommissioning order from the MPSC which estimated decommissioning costs for Big Rock and Palisades to be $317 million and $548 million (in 1996 dollars), respectively. The estimated decommissioning costs increased from previous estimates principally due to the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. After the plants are retired, Consumers plans to maintain the facilities in protective storage until radioactive waste disposal facilities are available. As a result, the majority of decommissioning costs will be incurred after each plant's NRC operating license expires. When Big Rock's and Palisades' NRC licenses expire in 2000 and 2007, respectively, the trust funds are estimated to have accumulated $257 million and $686 million, respectively. It is estimated that at the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds will have provided $1 billion for Big Rock and $2.1 billion for Palisades, including trust earnings over this decommissioning period. Based on this plan, Consumers believes that the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants. At December 31, 1996, Consumers had an investment in nuclear decommissioning trust funds of $386 million. Reclassifications: CMS Energy has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. Related-Party Transactions: In 1996, 1995 and 1994, Consumers purchased $50 million, $53 million and $48 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy sold, stored and transported natural gas and provided other services to the MCV Partnership totaling $17 million, $26 million and $22 million for 1996, 1995 and 1994, respectively. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 20. Other related-party transactions are immaterial. Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers accrues or reduces revenue for any underrecovery or overrecovery of electric power supply costs and natural gas costs by establishing a corresponding asset or liability until it bills or refunds these differences to customers following an MPSC order. Utility Regulation: Consumers accounts for the effects of regulation based on a regulated utility accounting standard, SFAS 71. As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. If all or a separable portion of Consumers' operations becomes no longer subject to the provisions of utility regulation, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery continues through rates established and collected for Consumers' remaining operations. In addition, Consumers would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. For further discussion, see MD&A Forward-Looking Information and Note 19. Other: For significant accounting policies regarding income taxes, see Note 5; for executive incentive compensation, see Note 11; for pensions and other postretirement benefits, see Note 12; and for cash equivalents, see Note 17. 3: The Midland Cogeneration Venture The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. Consumers, through two wholly owned subsidiaries, holds the following assets related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in the MCV Facility. Summarized Statements of Income for CMS Midland and CMS Holdings: In Millions Years Ended December 31 1996 1995 1994 Pretax operating income $40 $35 $12 Income taxes and other 11 10 (1) --- --- --- Net income $29 $25 $13 === === === Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership under the PPA 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. The MPSC allows Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. The MPSC order allowing recovery was affirmed in March 1996 by the Court of Appeals. 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. Consumers previously recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA based on management's assessment of the future availability of the MCV Facility and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC-authorized level, could be resold. At December 31, 1996 and 1995, the after-tax present value of the PPA liability totaled $147 million and $202 million, respectively. The reduction in the liability since December 31, 1995 reflects after-tax cash underrecoveries of $41 million along with $28 million related to the termination of power purchase agreements, partially offset by after-tax accretion expense of $14 million. The undiscounted after-tax amount associated with the liability totaled $549 million at December 31, 1996. In November 1996, the MPSC approved a Settlement Agreement proposed by Consumers and the MPSC staff that addressed cost recovery for the remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996, Consumers was permitted to recover an average capacity charge of 2.86 cents per kWh for this power. The approved average capacity charge increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1, 1996, and for an additional 44 MW on January 1, 1997. Cost recovery for the remaining 216 MW is based upon the escalation of the average capacity charge by three percent annually until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the contract. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $28 $23 $22 $21 $20 === === === === === After considering the effects of the Settlement Agreement, Consumers believes that the original loss recorded in 1992 remains adequate. The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded. Further, Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. Power Supply Cost Recovery Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General appealed these plan case orders to the Court of Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 plan case. As part of its decision in the 1993 power supply cost recovery reconciliation case issued in 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believed this was contrary to the terms of a 1993 MPSC order and appealed this issue. The MCV Partnership and ABATE also filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's order. Consumers and the MCV Partnership filed petitions for rehearing of the Court of Appeals opinion, which were denied in January 1997. 4: Rate Matters Electric Proceedings: In February 1996, the MPSC issued a partial final order in the retail electric rate case filed in 1994, granting Consumers a $46 million annual increase in its electric retail rates and authorizing a 12.25 percent return on common equity. Consumers also had separate requests before the MPSC to offer competitive special rates to certain large qualifying customers and to modify certain depreciation rates and practices. In November 1996, the MPSC issued a final order in the Settlement Agreement which combined the separate requests. The rate increase and rate of return were not changed from the partial final order and Consumers was authorized to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. Recovery of the additional 325 MW of MCV Partnership contract capacity charges was also approved (see Note 3). The Settlement Agreement also requires Consumers to establish a direct access program. Customers having a maximum demand of at least 2 MW are eligible to purchase generation services directly from any eligible third- party power supplier. The program is limited to 650 MW of sales, of which 410 MW has already been filled by existing contracts; 140 MW may be filled by either direct access customers or new special contracts which Consumers has signed and submitted to the MPSC for approval; and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. Rehearing petitions have been filed by Consumers and other interested parties. Gas Proceedings: In March 1996, the MPSC issued a final order in a 1994 rate case, authorizing recovery of costs related to postretirement benefits and former manufactured gas plant sites (see Note 12). Overall, however, the order decreased Consumers' gas rates by $12 million annually and authorized an 11.6 percent return on common equity. In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The Administrative Law Judge issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. For the year ended December 31, 1996, $6 million would be subject to refund. Consumers will continue to oppose this view before the MPSC. In December 1996, the MPSC authorized Consumers to implement a pilot gas transportation program for 40,000 customers in Bay County, Michigan. The pilot program will provide residential and small commercial customers the opportunity to purchase gas from suppliers other than Consumers for a two year period beginning April 1997. Consumers will retain its role as sole transporter and distributor of this gas. In 1993, the MPSC issued an order favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers, which was affirmed on judicial review by state courts. In December 1996, the U.S. Supreme Court denied the producers' request to review that decision. In early 1995, management concluded that the intrastate producers' pending appeals of the order would not be successful and, accordingly, reversed a previously accrued contingency and recorded a $23 million (pretax) benefit. In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order correctly concludes that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. In December 1996, Consumers filed a request with the MPSC to totally suspend the GCR clause and employ a fixed price for recovery of gas costs for a period of three years ending in March 2000. There would be no reconciliations and no reopenings for that period of time. In April 2000, a new GCR factor would be implemented. Resolution of the issues discussed in this note is not expected to have a material impact on CMS Energy's financial position or results of operations. 5: Income Taxes CMS Energy and its subsidiaries (including Consumers) file a consolidated federal income tax return. Income taxes are generally allocated based on each company's separate taxable income. CMS Energy and Consumers practice full deferred tax accounting for temporary differences, but federal income taxes have not been recorded on the undistributed earnings of foreign subsidiaries where CMS Energy intends to permanently reinvest those earnings. CMS Energy uses ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that can be carried forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. The significant components of income tax expense (benefit) consisted of: In Millions Years Ended December 31 1996 1995 1994 Current income taxes $ 93 $ 43 $ 36 Deferred income taxes 56 85 66 Deferred ITC, net (10) (10) (10) ---- ---- ---- $139 $118 $ 92 ==== ==== ==== The principal components of CMS Energy's deferred tax assets (liabilities) recognized in the balance sheet are as follows: In Millions December 31 1996 1995 Property $ (621) $ (603) Unconsolidated investments (259) (266) Postretirement benefits (Note 12) (165) (173) Abandoned Midland project (40) (46) Employee benefit obligations (includes postretirement benefits of $167 and $175) (Note 12) 201 204 AMT carryforward 172 161 Power purchases (Note 3) 82 112 ITC carryforward - 23 Other (20) (28) --- --- $ (650) $ (616) ======= ======= Gross deferred tax liabilities $(1,715) $(1,698) Gross deferred tax assets 1,065 1,082 ------- ------- $ (650) $ (616) ======= ======= The actual income tax expense differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows: In Millions Years Ended December 31 1996 1995 1994 Consolidated net income before preferred dividends $268 $232 $203 Income tax expense 139 118 92 ---- --- - ---- 407 350 295 Statutory federal income tax rate x 35% x 35% x 35% ---- --- - ---- Expected income tax expense 142 123 103 Increase (decrease) in taxes from: Foreign income taxes 6 3 - Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 6 7 ITC amortization (10) (10) (10) Section 29 Fuel Tax Credits (13) (13) (8) Other, net 3 4 (5) ---- --- - ---- $139 $118 $ 92 ==== === = ==== 6: Short-Term Financings Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through 1998. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $120 million that are used to finance seasonal working capital requirements. At December 31, 1996, a total of $333 million was outstanding at a weighted average interest rate of 6.3 percent, compared with $341 million outstanding at December 31, 1995, at a weighted average interest rate of 6.5 percent. Consumers has in place a $500 million trade receivables purchase and sale program. At December 31, 1996 and 1995, receivables sold under the agreement totaled $318 million and $295 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In 1996, Consumers entered into a $100 million swap agreement to hedge the variable rate exposure under the trade receivables purchase and sale program. The swap agreement terminates in November 1998. 7: Long-Term Debt At December 31, 1996 and 1995, long-term debt consists of the following: In Millions December 31 Maturing/Expiring Interest Rate 1996 1995 First Mortgage Bonds 1996 to 2023 5.875% to 7.375% $1,305 $1,341 Long-Term Bank Debt July 1999 6.0%(a) 400 400 Senior Deferred Coupon Notes 1997 and 1998 9.5% and 9.875%(a) 347 347 General Term Notes (Registered Trademark): Series A 1997 to 2003 7.7%(a) 250 221 Series B 1999 to 2003 8.0%(a) 103 - Pollution Control Revenue Bonds 2000 to 2018 5.1%(a) 131 131 Term Loan Agreement: CMS Energy 2002 7.3%(a) 125 125 CMS Generation 2001 7.2%(a) 107 - Revolving Line of Credit 1999 6.2%(a) 122 112 Unsecured Revolving Credit Facility 1998 6.8%(a) 120 118 Nuclear Fuel Disposal (b) 5.1%(a) 106 100 Bank Loans 1997 to 2006 7.4%(a) 102 177 Other - - 3 4 --- --- Principal Amount Outstanding 3,221 3,076 Current Amounts (370) (161)) Net Unamortized Discount (9) (9)) ------ ------ Total Long-Term Debt $2,842 $2,906 ====== ====== (a) Represents the weighted average interest rate at December 31, 1996. (b) Due date uncertain (see Note 2). The scheduled maturities of long-term debt and improvement fund obligations are as follows: $370 million in 1997, $714 million in 1998, $845 million in 1999, $20 million in 2000 and $195 million in 2001. CMS Energy In 1995, CMS Energy amended the terms of its $400 million Unsecured Revolving Credit Facility, originally dated July 29, 1994 and increased the amount to $450 million and extended the termination date to June 30, 1998. CMS Energy also entered into a $125 million, seven-year Term Loan Agreement dated November 21, 1995. In 1996, CMS Energy filed a shelf registration with the SEC for the issuance and sale of up to $125 million CMS Energy Series B General Term Notes(Registered Trademark), with net proceeds to be used for general corporate purposes. Consumers First Mortgage Bonds: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles and the need for regulatory approvals in compliance with appropriate federal law. Long-Term Bank Debt: Consumers has a $400 million unsecured, variable rate, long-term loan. Other: Consumers has FERC authorization through November 1998 to issue up to $500 million of long-term securities for the purposes of refinancing or refunding existing long-term securities. Consumers long-term pollution control revenue bonds are secured by irrevocable letters of credit or first mortgage bonds. In October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. At December 31, 1996, the loan had a weighted average interest rate of 6.0 percent. CMS NOMECO In 1996, CMS NOMECO replaced its $140 million revolving credit agreement with a $225 million revolving credit agreement which converts to term loans maturing from March 1999 through March 2003. Senior serial notes amounting to $28 million, with a weighted average interest rate of 9.4 percent, were repaid in full on August 10, 1995. In connection with this early extinguishment of debt, CMS NOMECO incurred a $1.5 million prepayment premium. The notes were retired with available proceeds from the bank credit line. CMS Generation In 1995, CMS Generation entered into a one-year $118 million bridge credit facility for the acquisition of Hydra-Co of which $109 million remained outstanding as of December 31, 1995. In 1996, CMS Generation refinanced this bridge facility with a $110 million, five-year term loan. 8: Capitalization CMS Energy Capital Stock: In 1995, CMS Energy amended its Articles and authorized a new class of common stock of CMS Energy, designated Class G Common Stock, which reflects the separate performance of the gas distribution, storage and transportation businesses of Consumers Gas Group. The pre-existing CMS Energy Common Stock continues to be outstanding and reflects the performance of all of the businesses of CMS Energy and its subsidiaries, including the business of the Consumers Gas Group, except for the interest in the Consumers Gas Group attributable to the Outstanding Shares. The filing of the restated Articles with the Michigan Department of Commerce increased the number of authorized shares of capital stock from 255 million shares to 320 million shares, consisting of 250 million shares of CMS Energy Common Stock, par value $.01 per share, 60 million shares of Class G Common Stock, no par value, and 10 million shares of Preferred Stock, par value $.01 per share. CMS Energy filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities encompassing Common Stock, Preferred Stock of CMS Energy or of a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. In the third quarter 1995, CMS Energy received net proceeds of $123 million from the issuance of 7.52 million shares of Class G Common Stock at a price to the public of $17.75 per share, initially representing 23.50 percent of the common stockholder's equity value attributed to the Consumers Gas Group. All of the proceeds funded the capital programs and were used for general corporate purposes of CMS Energy. Initially, such proceeds were used to repay a portion of CMS Energy's indebtedness, none of which is attributable to the Consumers Gas Group. The issuance of additional shares during 1996 and 1995 increased the common stockholders' equity value attributable to the Consumers Gas Group, represented by the Outstanding Shares, to 24.24 percent and 23.73 percent as of December 31, 1996 and 1995. In 1996, CMS Energy received net proceeds of $95 million from the issuance of common stock. The issuance of 2.1 million of those shares completes the remaining amount on a shelf-registration filing by CMS Energy with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities. Proceeds from the sale were used for general corporate purposes of CMS Energy. Other: Under its most restrictive borrowing arrangement at December 31, 1996, none of CMS Energy's consolidated net income was restricted for payment of common dividends. Consumers Capital Stock: In 1996, four million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through Consumers Power Company Financing I, a business trust wholly owned by Consumers. Net proceeds from the sale totaled $97 million. Consumers Power Company Financing I was formed for the sole purpose of issuing the Trust Originated Preferred Securities. Its primary asset is $103 million principal amount of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers which mature in 2015. Consumers' obligations with respect to the Trust Originated Preferred Securities under the notes, under the indenture under which the notes have been issued, under Consumers' guarantee of the Trust Originated Preferred Securities, and under the declaration by the trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. Other: Under the provisions of its Articles at December 31, 1996, Consumers had $255 million of unrestricted retained earnings available to pay common dividends. CMS NOMECO In 1995, CMS Energy acquired Walter for $49 million, consisting of $27 million of CMS Energy Common Stock and $22 million in cash and assumed debt. Walter was merged with a wholly owned subsidiary of CMS NOMECO. In 1995, CMS Energy acquired 100 percent of the common stock of Terra for $63 million. Terra has become a wholly owned subsidiary of CMS NOMECO. 9: Earnings Per Share and Dividends Earnings per share attributable to Common Stock, for the year ended December 31, 1996 reflect the performance of the Consumers Gas Group. Earnings per share attributable to Common Stock, for the year ended December 31, 1995 reflect the performance of the Consumers Gas Group since initial issuance of Class G Common Stock during the third quarter of 1995. The Class G Common Stock has participated in earnings and dividends from its issue date. The allocation of earnings (loss) attributable to each class of common stock and the related amounts per share are computed by considering the weighted average number of shares outstanding. Earnings (loss) attributable to Outstanding Shares are equal to Consumers Gas Group net income (loss) multiplied by a fraction; the numerator is the weighted average number of Outstanding Shares during the period and the denominator represents the weighted average number of Outstanding Shares and retained interest shares, shares not held by the holders of the Outstanding Shares, during the period. The earnings attributable to Class G Common Stock on a per share basis, for the year ended December 31, 1996 and 1995, are based on 23.79 percent of the income of the Consumers Gas Group and 23.45 percent of the income of the Consumers Gas Group since the initial issuance, respectively. Earnings per share for Class G Common Stock is omitted from the statement of income for the year ended December 31, 1994, since Class G Common Stock was not part of the equity structure of CMS Energy. For purpose of analysis, following are pro forma data for the years ended December 31, 1995 and 1994 which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to Consumers Gas Group) on January 1, 1994. In Millions, Except Per Share Amounts Actual Pro Forma Pro Forma Years Ended December 31 1996 1995 1994 Consolidated Net Income $ 240 $ 204 $ 179 Net Income Attributable to Common Stocks CMS Energy 226 189 167 Class G 14 15 12 Average Common Shares Outstanding CMS Energy 92.462 88.810 85.888 Class G 7.727 7.536 7.520 Earnings Per Average Common Share CMS Energy $2.45 $2.14 $1.94 Class G $1.82 $1.93 $1.66 ====== ====== ====== Holders of Class G Common Stock have no direct rights in the equity or assets of Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of the Board of Directors, dividends may be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. The Board of Directors has stated its intention to declare and pay dividends on the CMS Energy Common Stock based primarily on the earnings and financial condition of CMS Energy. Dividends on Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of Consumers Gas Group, and to a lesser extent, CMS Energy as a whole. In February and May 1996, CMS Energy paid a dividend of $.24 per share on CMS Energy Common Stock and $.28 per share on Class G Common Stock. In August and November 1996, CMS Energy paid a dividend of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock. In January 1997, the Board of Directors declared a quarterly dividend of $.27 per share on CMS Energy Common Stock and $.295 per share on Class G Common Stock, which were paid in February 1997. 10: Financial Instruments The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments in financial instruments approximate fair value. The carrying amount of long-term debt was $2.8 billion and $2.9 billion at December 31, 1996 and 1995, respectively, and the fair value was $2.9 billion and $3.0 billion on those dates. Although the current fair value of the long-term debt may differ from the current carrying amount, settlement of the reported debt is generally not expected until maturity. The carrying amount of preferred stock and securities was $456 million and $356 million at December 31, 1996 and 1995, respectively, and the fair value was $439 million and $344 million on those dates. The fair values of CMS Energy's off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. At December 31, 1996, the fair value of CMS Energy's interest rate swap agreements, with a notional amount of $617 million, was $10 million, representing the amount that CMS Energy would have to pay to terminate the agreements. The settlement of the interest rate swap agreements in 1996 did not materially effect interest expense. At December 31, 1995, CMS Energy would have paid $16 million to terminate the agreements. Also refer to Note 14 for a discussion of CMS NOMECO's price hedging arrangements and their fair values. Guarantees were $102 million and $148 million at December 31, 1996 and 1995, respectively. The amortized cost of CMS Energy's nuclear decommissioning investments, which are considered available for sale securities in accordance with SFAS 115, Accounting For Certain Investments in Debt and Equity Securities, was $351 million and $286 million as of December 31, 1996 and 1995. The unrealized gain, which is classified in accumulated depreciation by Consumers, was $35 million and $18 million as of December 31, 1996 and 1995. 11: Executive Incentive Compensation Under CMS Energy's Performance Incentive Stock Plan, restricted shares of Common Stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. Awards under the plan may consist of any class of Common Stock of CMS Energy and are subject to performance-based business criteria for certain plan awards. The plan reserves for award not more than three percent of CMS Energy's Common Stock outstanding on January 1 each year, less the number of shares of restricted Common Stock awarded and of Common Stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1996, awards of up to 986,240 shares of CMS Energy Common Stock and 198,947 shares of Class G Common Stock may be issued. Restricted shares of Common Stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years and are subject to achievement of specified levels of total shareholder return. Further, the restricted stock is subject to forfeiture if employment terminates before vesting. If performance objectives are exceeded, the plan provides additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1996, 541,088 shares of the 600,838 restricted shares of CMS Energy Common Stock outstanding are subject to performance objectives. At December 31, 1996 all of the 16,347 restricted shares of Class G Stock outstanding are subject to performance objectives. CMS Energy's Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, expired in 1995. However, options and stock appreciation rights granted under this plan remain outstanding. Under both plans, for stock options and stock appreciation rights, the exercise price on each grant date equaled the closing market price on the grant date. Options are exercisable upon grant and expire up to ten years and one month from date of grant. The status of the restricted stock granted to CMS Energy's key employees under the Performance Incentive Stock Plan and options granted under both plans follows. Restricted Stock Options Number Number Weighted-Average of Shares of Shares Exercise Price CMS Energy Common Stock: Outstanding at January 1, 1994 316,187 1,498,966 $ 23.61 Granted 133,500 273,000 $ 22.00 Exercised or Issued (39,361) (158,300) $ 15.64 Forfeited (79,970) - - Expired - (123,000) $ 31.68 ------- -------- -------- Outstanding at December 31, 1994 330,356 1,490,666 $ 23.50 Granted 253,337 304,000 $ 25.08 Exercised or Issued (43,939) (147,666) $ 14.52 Forfeited (22,307) - - Expired - (55,000) $ 27.46 ------- --------- -------- Outstanding at December 31, 1995 517,447 1,592,000 $ 24.50 Granted 222,000 368,176 $ 30.55 Exercised or Issued (92,533) (231,550) $ 20.79 Forfeited (46,076) - - Expired - (12,000) $ 32.88 ------- --------- ------- Outstanding at December 31, 1996 600,838 1,716,626 $ 26.24 ======= ========= ======= Restricted shares of Class G Common Stock granted during 1996 and 1995 totaled 9,423 and 6,924, respectively. Options of Class G Common Stock granted at a price of $17.88 during 1996 and 1995 totaled 11,000 and 10,000, respectively. The following table summarizes information about stock options outstanding at December 31, 1996: Number Weighted- Weighted- Range of of Shares Average Average Exercise Prices Outstanding Remaining Life Exercise Price $13.00 - $19.50 154,500 4.2 years $ 15.82 $19.51 - $29.00 851,450 6.5 years $ 23.59 $29.01 - $34.25 710,676 6.4 years $ 31.67 - --------------- --------- --------- ------- $13.00 - $34.25 1,716,626 6.2 years $ 26.24 =============== ========= ========= ======= The weighted average remaining life of Class G Common Stock options is 9.2 years. The weighted average fair value of options granted for CMS Energy Common Stock was $6.94 in 1996, $5.37 in 1995, and $5.32 in 1994. The weighted average fair value of options granted for Class G Common Stock was $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using the Black- Scholes model, a mathematical formula used to value options traded on securities exchanges, with the following assumptions: Years Ended December 31 1996 1995 1994 CMS Energy Common Stock Options Risk-free interest rate 6.63% 6.17% 6.94% Expected stock-price volatility 24.08% 27.12% 28.83% Expected dividend rate $ .27 $ .24 $ .24 Expected option life 5 years 5 years 5 years Class G Common Stock Options Risk-free interest rate 6.63% 6.17% Expected stock-price volatility 16.19% 16.19% Expected dividend rate $ .295 $ .295 Expected option life 5 years 5 years ======= ======= CMS Energy applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the Performance Incentive Stock Plan. Since stock options are granted at market price, no compensation cost has been recognized for stock options granted under the plan. The compensation cost charged against income for restricted stock was $2 million in 1996, $3 million in 1995, and was less than $1 million in 1994. If compensation cost for stock options had been determined in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, CMS Energy's consolidated net income and earnings per share would have been as follows: In Millions, Except Per Share Amounts Pro Forma As Reported Years Ended December 31 1996 1995 1996 1995 Consolidated Net Income $239 $203 $ 240 $ 204 Net Income Attributable to Common Stocks CMS Energy 225 200 226 201 Class G 14 3 14 3 Earnings Per Average Common Share CMS Energy 2.43 2.26 2.45 2.27 Class G 1.76 .34 1.82 .38 ==== ==== ==== ==== 12: Retirement Benefits Postretirement Benefit Plans Other Than Pensions: CMS Energy and its subsidiaries provide certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for such benefits if they attain retirement status while working for CMS Energy or its subsidiaries. CMS Energy and its subsidiaries adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, effective as of the beginning of 1992 and Consumers recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 19). CMS Energy's international subsidiaries expensed their accumulated transition obligation liability. The amount of such transition obligation is not material to the presentation of the consolidated financial statements or significant to CMS Energy's total transition obligation. The MPSC authorized recovery of the electric utility portion of these costs in 1994 over 18 years and the gas utility portion in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver of a three-year filing requirement for cost recovery with respect to its wholesale electric business. At December 31, 1996, Consumers had recorded a regulatory asset and liability of $7 million. By early 1997, the FERC had authorized recovery of these costs. CMS Energy funds the benefits using external Voluntary Employee Beneficiary Associations, a legal entity, established under guidelines of the Internal Revenue Code, through which the company can provide certain benefits for its employees or retirees. Funding of the benefits coincides with Consumers' recovery in rates. Retiree health care costs at December 31, 1996 are based on the assumption that costs would increase 8.5 percent in 1997, then decrease gradually to 6.0 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a one percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation at December 31, 1996 by $97 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1996 by $11 million. Years Ended December 31 1996 1995 1994 Weighted average discount rate 7.75% 7.50% 8.00% Expected long-term rate of return on plan assets 7.00% 7.00% 7.00% ===== ===== ===== Net postretirement benefit costs for the health care benefits and life insurance benefits consisted of: In Millions Years Ended December 31 1996 1995 1994 Service cost $ 13 $11 $13 Interest cost 42 40 41 Actual return on assets (14) (4) - Net amortization and deferral 8 1 - --- --- --- Net postretirement benefit costs $ 49 $48 $54 === === === The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows: In Millions 1996 1995 Actuarial present value of estimated benefits Retirees $ 330 $ 331 Eligible for retirement 66 46 Active (upon retirement) 190 200 ---- ---- Accumulated postretirement benefit obligation 586 577 Plan assets (primarily stocks, bonds and money market investments) at fair value 138 78 ---- ---- Accumulated postretirement benefit obligation in excess of plan assets (448) (499) Unrecognized net (gain) loss from experience different than assumed (36) 1 Unrecognized prior service cost 7 - ---- ---- Recorded liability $(477) $(498) ===== ===== The health care portion of the accumulated postretirement benefit obligation is $570 million and $562 million at December 31, 1996 and 1995, respectively. Supplemental Executive Retirement Plan: Certain management employees qualify to participate in the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1996 and 1995, trust assets were $30 million and $28 million, respectively, and were classified as other non-current assets. Defined Benefit Pension Plan: The Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan was fully funded, no contributions were made in 1996 and 1994. A contribution of $9 million was made in 1995. Years Ended December 31 1996 1995 1994 Discount rate 7.75% 7.50% 8.00% Rate of compensation increase 4.00% 4.50% 4.50% Expected long-term rate of return on assets 9.25% 9.25% 9.25% ===== ===== ===== Net Pension Plan and SERP costs consisted of: In Millions Years Ended December 31 1996 1995 1994 Service cost $ 26 $ 23 $ 24 Interest cost 58 56 51 Actual return on plan assets (63) (168) 21 Net amortization and deferral (6) 103 (85) --- --- --- Net periodic pension cost $ 15 $ 14 $ 11 === === === The funded status of the Pension Plan and SERP reconciled to the pension liability recorded at December 31 was: In Millions Pension Plan SERP 1996 1995 1996 1995 Actuarial present value of estimated benefits Vested $504 $496 $ 21 $ 20 Non-vested 72 74 1 1 --- --- --- --- Accumulated benefit obligation 576 570 22 21 Provision for future pay increases 158 183 15 13 --- --- --- --- Projected benefit obligation 734 753 37 34 Plan assets (primarily stocks and bonds, including $117 in 1996 and $104 in 1995 in common stock of CMS Energy) at fair value 779 779 - - --- --- --- --- Projected benefit obligation less than (in excess of) plan assets 45 26 (37) (34) Unrecognized net (gain) loss from experience different than assumed (99) (69) 5 7 Unrecognized prior service cost 39 43 2 2 Unrecognized net transition (asset) (27) (32) - - --- --- --- --- Recorded liability $ (42) $(32) $(30)$(25) === === === === Beginning January 1, 1986, the amortization period for the Pension Plan's unrecognized net transition asset is 16 years and 11 years for the SERP's unrecognized net transition obligation. Prior service costs are amortized on a straight-line basis over the average remaining service period of active employees. Defined Contribution Plan: CMS Energy provides a defined contribution 401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which are at least 80 percent owned and have adopted the plan. CMS Energy will match at least one-half of the amount contributed by employees up to 3 percent of their salary. These contributions to the plan are invested in CMS Energy Common Stock. Amounts charged to expense for this plan were approximately $18 million in 1996 and $17 million in 1995 and 1994. 13: Leases CMS Energy, Consumers, and Enterprises lease various assets, including vehicles, rail cars, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1998 and provides for additional one-year extensions upon mutual agreement by the parties. Upon termination of the lease, the lessor would be entitled to a cash payment equal to its remaining investment, which was $69 million as of December 31, 1996. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance. Minimum rental commitments under CMS Energy's non-cancelable leases at December 31, 1996, were: In Millions Capital Operating Leases Leases 1997 $ 48 $ 9 1998 66 8 1999 14 7 2000 13 5 2001 11 5 2002 and thereafter 14 29 --- --- Total minimum lease payments 166 $ 63 Less imputed interest 24 === --- Present value of net minimum lease payments 142 Less current portion 39 --- Non-current portion $103 === Consumers recovers lease charges from customers and accordingly charges payments for its capital and operating leases to operating expense. Operating lease charges, including charges to clearing and other accounts for the years ended December 31, 1996, 1995 and 1994, were $8 million, $11 million and $10 million, respectively. Capital lease expenses for the years ended December 31, 1996, 1995 and 1994 were $46 million, $46 million and $43 million, respectively. Included in these amounts for the years ended 1996, 1995 and 1994 are nuclear fuel lease expenses of $25 million, $25 million and $21 million, respectively. 14: Commitments, Contingencies and Other Environmental Matters: Consumers is a so-called potentially responsible party at several sites being administered under the Superfund. Superfund liability is joint and several and along with Consumers, there are numerous credit worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the known sites will be between $2 million and $9 million. At December 31, 1996, Consumers has accrued $2 million for its estimated losses. Under the Michigan Natural Resources and Environmental Protection Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites. Four of the five plans submitted by Consumers have been approved by the appropriate environmental regulatory authority in the State of Michigan. Findings for the two completed remedial investigations indicate that the expenditures for those two sites are likely to be less than the amounts projected before the studies were performed. However, these findings may not be representative of all of the sites. Data available and continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At December 31, 1996, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions, such as remediation technique, nature and extent of contamination, and legal and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order issued in March 1996, environmental clean-up costs above the amount currently being recovered in rates will be deferred and amortized over ten years. Rate recognition of amortization expense will not begin until after a prudence review in a general rate case. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. The Clear Air Act, as amended on November 15, 1990, contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. Consumers' coal-fueled electric generating units burn low-sulfur coal and are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $40 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and proposed modifications at other coal-fired units to be an additional $35 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected as a result of expenditures that will be made to comply with the Clean Air Act. Capital Expenditures: CMS Energy estimates capital expenditures, including investments in unconsolidated subsidiaries and new lease commitments, of $965 million for 1997, $903 million for 1998 and $857 million for 1999. Commitments for Coal and Gas Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1997 to 2004. Consumers contracts for 60 - 70 percent of its annual coal requirements which in 1996 totaled $243 million (62 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs. Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1997 to 2003. Consumers' 1996 gas requirements totaled 266 bcf at a cost of $747 million, 80 percent of which was under long-term contracts for one year or more. As of the end of 1996, Consumers had 35 percent of its 1997 gas requirements under such long-term contracts, and will supplement them with additional long-term contracts and spot-market purchases. Other: As of December 31, 1996, CMS Energy and Enterprises have guaranteed up to $102 million in contingent obligations of unconsolidated affiliates and unrelated parties. CMS NOMECO periodically enters into oil and gas price hedging arrangements to mitigate its exposure to price fluctuations on the sale of crude oil and natural gas. As of December 31, 1996, CMS NOMECO had contracts on 13.8 bcf of gas for the delivery months of January though December 1997 at prices ranging from $1.92 to $2.80 per MMBtu and on 2.0 million barrels of oil at prices ranging from $19.50 to $22.90 per barrel. CMS NOMECO paid $3 million for settlement of January 1997 contracts on 1.6 bcf of gas. As of December 31, 1996, the fair value of the remaining 1997 gas and oil contracts reflected payment due by CMS NOMECO of $5 million. These arrangements are accounted for as hedges; accordingly, gains or losses are deferred and recognized at such time as the hedged transaction is completed. If there was a loss of correlation between the changes in (1) the market value of the commodity price contracts and (2) the market price ultimately received for the hedged item, and the impact was material, the open commodity price contracts would be marked to market and gains and losses would be recognized in the income statement currently. CMS NOMECO also has one arrangement which is used to fix the prices that CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing the economic equivalent of 10,000 MMBtu per day at a fixed, escalated price starting at $2.82 per MMBtu in 2001. The settlement periods are each a one-year period ending December 31, 2001 through 2006 on 3.65 MMBtu. If the floating price, essentially the then current Gulf Coast spot price, for a period is higher than the fixed price, the seller pays CMS NOMECO the difference, and vice versa. If a party's exposure at any time exceeds $5 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $5 million and up to $10 million. At December 31, 1996, the seller had arranged a letter of credit in CMS NOMECO's favor for $2.5 million. As of December 31, 1996, the fair value of this contract reflected $16 million due to the seller, representing the amount CMS NOMECO would have to pay to terminate the agreement. A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. Claimants contend that stray voltage results when low-level electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns and has an ongoing program to modify the grounding of all customer services. As of January 1997, Consumers had 22 separate stray voltage lawsuits awaiting trial court action, down from 30 lawsuits at December 31, 1995, and 83 lawsuits at December 31, 1994. In addition to the matters disclosed in these notes, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business and involving personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on CMS Energy's financial position or results of operations. 15: Nuclear Matters Consumers filed updated decommissioning information with the MPSC in 1995 which estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered Consumers to file a report on the adequacy of the surcharge revenues with the MPSC at three-year intervals beginning in 1998. Consumers filed its decommissioning plan for Big Rock with the NRC in 1995. The NRC has approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades; however, certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff has reviewed the petition and denied the request to suspend Consumers' general license to store spent fuel. Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. In a review of the cask manufacturer's quality assurance program, indications of minor flaws in welds in the steel liner of one of the loaded casks were detected. Radiographic examination of the casks has found all other welds acceptable. The cask in which the minor flaws were detected continues to store spent fuel safely and there is no requirement for its replacement. Nevertheless, Consumers plans to remove the spent fuel and insert it into a transportable cask. Bids are currently being taken for the design and fabrication of the transportable cask. Consumers is monitoring an investigation under way at another utility that also uses a dry storage cask system for spent nuclear fuel. The other utility experienced an unexpected ignition of hydrogen gas following the loading of a cask. Although the event caused no injuries or releases of radioactive material, and Consumers' procedures had already precluded a similar event, the NRC has instructed utilities using the dry storage casks to take certain additional precautions when loading or unloading casks. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs during prolonged accidental outages. Such costs would not be covered by insurance during the first 21 weeks of any outage, but the major portion of such costs would be covered during the next twelve months of the outage, followed by reduced coverage to 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $23 million in any one year to Nuclear Mutual Ltd. and National Electric Insurance Ltd.; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. 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 December 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003, before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that, with fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. 16: Jointly Owned Utility Facilities Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities: In Millions December 31 1996 1995 Net investment Ludington - 51% $116 $116 Campbell Unit 3 - 93.3% 329 332 Transmission lines - various 35 33 Accumulated depreciation Ludington $ 84 $ 81 Campbell Unit 3 252 238 Transmission lines 14 14 ===== ==== 17: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were: In Millions 1996 1995 1994 Cash transactions Interest paid (net of amounts capitalized) $240 $207 $162 Income taxes paid (net of refunds) 82 34 36 Non-cash transactions Nuclear fuel placed under capital lease $ 28 $ 26 $ 21 Other assets placed under capital leases 3 5 15 Common Stock issued to acquire companies - 90 - Assumption of debt - 20 - Capital leases refinanced - 21 - ==== ==== ==== Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below: In Millions 1996 1995 1994 Sale of receivables, net $23 $20 $(10) Accounts receivable (28) (80) (15) Accrued revenue (82) (24 20) Inventories - 43 (4) Accounts payable 55 112 26 Accrued refunds (13) (3) (3) Other current assets and liabilities, net 23 30 4 Non-current deferred amounts, net 10 (9) (6) --- --- --- $(12) $ 89 $ 12 ==== ==== ==== 18: Reportable Segments CMS Energy operates principally in the following five business segments: electric utility; gas utility; oil and gas exploration and production; independent power production; and natural gas transmission, storage and marketing. The Consolidated Statements of Income show operating revenue and pretax operating income by business segment. Other segment information follows: In Millions Years Ended December 31 1996 1995 1994 Depreciation, depletion and amortization Electric utility $ 282 $ 272 $ 257 Gas utility 87 83 76 Oil and gas exploration and production 55 52 41 Independent power production 8 4 2 Natural gas transmission, storage and marketing 7 3 2 Other 2 2 1 ---- ---- ---- $ 441 $ 416 $ 379 ====== ====== ====== Identifiable assets Electric utility (a) $4,505 $4,522 $4,364 Gas utility (a) 1,709 1,690 1,673 Oil and gas exploration and production 719 660 469 Independent power production 1,053 840 536 Natural gas transmission, storage and marketing 449 303 109 Other 180 128 227 ---- ---- ---- $8,615 $8,143 $7,378 ====== ====== ====== Capital expenditures (b) Electric utility $ 310 $ 328 $ 358 Gas utility 137 126 134 Oil and gas exploration and production (c) 88 168 115 Independent power production 142 239 29 Natural gas transmission, storage and marketing 136 178 31 Other 66 14 5 ---- ---- ---- $ 879 $1,053 $ 672 ====== ====== ====== (a) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses. (b) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses. (c) Includes common stock issued for acquisitions in 1995. 19: Effects of the Ratemaking Process The following regulatory assets (liabilities), which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. These costs are being recovered through rates over periods of up to 16 years. An accounting standard, effective January 1996, requires impairment losses on long-lived assets to be recognized when an asset's book value exceeds its expected future cash flows (undiscounted). The standard also imposes stricter criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. There was no impact on financial position or results of operations upon adoption because management believes these assets will be recovered. For further discussion, see MD&A Forward-Looking Information. In Millions December 31 1996 1995 Postretirement benefits (Note 10) $ 460 $ 487 Income taxes (Note 5) 158 176 Abandoned Midland project 113 131 DSM - deferred costs 60 68 Trunkline settlement 25 55 Manufactured gas plant sites (Note 12) 47 47 Power purchase contracts (Note 3) - 44 Uranium enrichment facility 23 25 Ludington Fish Settlement 14 - Other 18 22 ---- ---- Total regulatory assets $ 918 $1,055 ====== ====== Income taxes (Note 5) $ (224) $ (220) DSM - deferred revenue (24) (25) Other (1) (1) ---- ---- Total regulatory liabilities $ (249) $ (246) ====== ====== 20: Summarized Financial Information of Significant Related Energy Supplier Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1996 obligation to purchase electric capacity from the MCV Partnership was 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows: Statements of Income In Millions Years Ended December 31 1996 1995 1994 Operating revenue (a) $ 645 $ 618 $ 579 Operating expenses 417 386 378 ---- ---- ---- Operating income 228 232 201 Other expense, net 162 171 183 ---- ---- ---- Net income $ 66 $ 61 $ 18 ====== ====== ====== Balance Sheets In Millions December 31 1996 1995 Assets Current assets (b) $ 316 $ 257 Property, plant and equipment, net 1,889 1,948 Other assets 159 156 ----- ----- $2,364 $2,361 ======= ====== Liabilities and Partners' Equity Current liabilities $ 235 $ 219 Long-term debt and other non-current liabilities (c) 1,930 2,008 Partners' equity (d) 199 134 ----- ----- $2,364 $2,361 ====== ====== (a) Revenue from Consumers totaled $598 million, $571 million and $534 million for 1996, 1995, and 1994, respectively. (b) Receivables from Consumers totaled $52 million and $48 million at December 31, 1996 and 1995, respectively. (c) FMLP is the sole beneficiary of an owner trust that is the lessor in a long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December 31, 1996 and 1995, lease obligations of $1.6 billion were owed to the owner trust. CMS Holdings' share of the interest and principal portion for the 1996 lease payments was $64 million and $25 million, respectively, and for the 1995 lease payments was $66 million and $23 million, respectively. The lease payments service $1.1 billion in non- recourse debt outstanding as of December 31, 1996 and 1995, of the owner-trust. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1996 and 1995, the owner-trust made debt payments (including interest) of $192 million. (d) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which is being amortized to expense over the life of its investment in the MCV Partnership. 94 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have audited the accompanying consolidated balance sheets and consolidated statements of preferred stock of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CMS Energy Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Detroit, Michigan, January 24, 1997. 95 Quarterly Financial and Common Stock Information CMS Energy Corporation
In Millions, Except Per Share Amounts 1996 (Unaudited) 1995 (Unaudited) Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Operating revenue $1,283 $938 $929 $1,183 $1,117 $835 $869 $1,069 Pretax operating income $214 $156 $166 $141 $206 $124 $149 $124 Consolidated net income $88 $50 $58 $44 $86 $33 $47 $38 Earning (loss) per average common share: CMS Energy $.83 $.54 $.65 $.43 $.99 $.37 $.54 $.37 Class G $1.50 $.16 $(.28) $.44 - - $(.17) $.55 Dividends declared per common share: CMS Energy $.24 $.24 $.27 $.27 $.21 $.21 $.24 $.24 Class G $.28 $.28 $.295 $.295 - - $.28 $.28 Common stock prices (a) CMS Energy: High $31-7/8 $31-1/4 $31-5/8 $33-3/4 $24-3/4 $25-3/8 $26-3/8 $30 Low $27-13/16 $28 $29 $30-1/8 $22-5/8 $22-1/2 $23-3/8 $26 Class G: High $20 $19-3/8 $18-7/8 $19-1/4 - - $18-3/4 $18-7/8 Low $17-7/8 $17-1/2 $16-5/8 $17-3/8 - - $16-1/8 $17-5/8 (a) Based on New York Stock Exchange - Composite transactions.
96 (This page intentionally left blank) 97 Consumers Energy 1996 Financial Statements 98 Selected Financial Information Consumers Energy Company
1996 1995 1994 1993 1992 Operating revenue (in millions) ($) 3,770 3,511 3,356 3,243 2,978 Net income (loss) (in millions) ($) 296 255 226 198 (244) Net income (loss) available to common stockholder (in millions) ($) 260 227 202 187 (255) Cash from operations (in millions) ($) 672 642 598 403 470 Capital expenditures, excluding capital lease additions and DSM (in millions) ($) 410 414 447 451 411 Total assets (in millions) ($) 7,025 6,954 6,809 6,551 6,596 Long-term debt, excluding current maturities (in millions) ($) 1,900 1,922 1,953 1,839 2,079 Non-current portion of capital leases (in millions) ($) 100 104 108 106 88 Total preferred stock (in millions) ($) 356 356 356 163 163 Total preferred securities (in millions) ($) 100 - - - - Number of preferred shareholders at year-end 9,540 10,084 10,599 7,037 7,376 Book value per common share at year-end ($) 19.96 19.00 16.96 15.28 14.64 Return on average common equity (%) 15.9 15.0 14.9 14.8 (18.8) Return on assets (%) 5.7 5.3 4.9 4.7 (0.2) Number of full-time equivalent employees at year-end Consumers 8,938 9,262 9,409 9,495 9,459 Michigan Gas Storage 67 70 73 72 72 Electric statistics Sales (millions of kWh) 37,051 35,506 34,462 32,764 31,601 Customers (in thousands) 1,594 1,570 1,547 1,526 1,506 Average sales rate per kWh cents 6.55 6.36 6.29 6.28 5.82 Gas statistics Sales and transportation deliveries (bcf) 448 404 409 411 384 Customers (in thousands) (a) 1,504 1,476 1,448 1,423 1,402 Average sales rate per mcf ($) 4.45 4.42 4.48 4.46 4.55 (a) Excludes off-system transportation customers. /TABLE 99 Consumers Energy Company Management's Discussion and Analysis This Annual Report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this Annual Report, except to the extent they contain historical facts, are forward-looking and, accordingly, involve estimates, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward- looking statements. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this Annual Report, 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 Energy Company (formerly Consumers Power Company) 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 Years Ended December 31 1996 1995 Change 1995 1994 Change Net income available to common stockholder $260 $227 $33 $227 $202 $25
The improved net income for 1996 reflects the favorable impact of an electric rate increase received in February 1996. The 1996 period also reflects increased electric sales, gas deliveries, and revenues from gas loaning activities. In addition, other operating income increased during 1996 due to a FERC-ordered refund received by the MCV Partnership from a gas pipeline supplier. The improved net income for 1995 over the 1994 level reflects increased electric sales and gas deliveries, increased electric revenue as a result of a mid-1994 rate increase, reversal of losses previously recorded for gas contingencies and improved operating results from Consumers' interest in the MCV Facility. For further information, see the Electric and Gas Utility Results of Operations sections and Note 4. 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 $672 million and $642 million for 1996 and 1995, respectively. The $30 million increase resulted from increased electricity sales and gas deliveries, an electric rate increase, and lower cash losses associated with the PPA. 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 $494 million and $519 million for 1996 and 1995, respectively. The cash was used primarily for capital expenditures. Financing Activities: Cash used in financing activities totaled $188 million for 1996, compared with $134 million used in financing activities in 1995. The net increase of $54 million in cash used in 1996 reflects an additional $130 million in common dividends paid and the redemption of $36 million of maturing first mortgage bonds. These changes were partially offset by $97 million in proceeds from the sale of Trust Originated Preferred Securities (see Note 7) in 1996. Common dividends were temporarily suspended in mid-1995 to improve the capital structure, then reinstated in May 1996 and continued through year-end. Other Investing and Financing Matters: Several unsecured, committed lines of credit totaling $120 million and a $425 million working capital facility are available to meet short-term borrowing requirements to finance working capital and gas in storage, and to pay for capital expenditures between long-term financings. At December 31, 1996, a total of $333 million was outstanding under these facilities. In October 1996, the FERC authorized the issuance of up to $900 million of short-term securities through 1998. An agreement is in place permitting the sales of certain accounts receivable for up to $500 million. At December 31, 1996 and 1995, receivables sold totaled $318 million and $295 million, respectively. In November 1996, the FERC authorized the issuance of $500 million of long-term securities through November 1998 for refinancing or refunding purposes. Also in October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. Consumers is required to redeem or retire $1.1 billion of long-term debt over the three-year period ending December 1999. In addition, at December 31, 1996, Consumers had a recorded liability to the DOE of $106 million, which is to be paid prior to the first delivery of spent nuclear fuel to the DOE. Delivery of the fuel had originally been scheduled to occur in 1998 (see Note 2). Cash provided by operating activities is expected to satisfy a substantial portion of these debt retirements. Additionally, capital markets will continue to be evaluated as a source of financing required debt retirements. At December 31, 1996, Consumers' capital structure consisted of 37 percent common equity, 10 percent preferred equity (including preferred stock and preferred securities), and 53 percent long- and short-term debt (including capital leases and notes payable). The common equity portion of the capital structure is expected to improve through accumulated earnings and controlled expenditures. Electric Utility Results of Operations Electric Pretax Operating Income:
In Millions Years Ended December 31 1996 1995 Change 1995 1994 Change $402 $362 $40 $362 $332 $30
The increase in electric pretax operating income in 1996 reflects the favorable impact of an electric rate increase received in early 1996 and the benefit of increased kWh sales and lower maintenance expenses. These increases were partly offset by decreased revenues due to special contract discounts negotiated with large industrial customers and increased depreciation, general taxes and operation expenses. The 1995 electric pretax operating income compared to 1994 reflects increased kWh sales and the benefit of the mid-1994 rate increase which included the recovery of higher postretirement benefit costs. The increase was partially offset by higher depreciation, general taxes, and operation expenses during 1995, which included $9 million of additional postretirement benefit costs, along with the impact of $11 million of DSM incentive revenue during 1994. The following table quantifies these impacts on Pretax Operating Income: In Millions Change Compared to Prior Year 1996 vs 1995 1995 vs 1994 Sales (net of special contract discounts) $ 1 $ 59 Rate increases and other regulatory issues 50 9 Operation and maintenance 2 (13) General tax and depreciation (13) (26) Other - 1 ---- ---- Total change $ 40 $ 30 ==== ==== Electric Sales: Total electric sales in 1996 were 37.1 billion kWh, a 4.4 percent increase from the 1995 level as a result of economic growth. This increase in total electric sales included a 1.7 percent increase in sales to ultimate customers. Total electric sales in 1995 were 35.5 billion kWh, a 3.0 percent increase from the 1994 level as a result of economic growth and warmer summer temperatures. This increase in total electric sales included a 4.2 percent increase in sales to ultimate customers. The table below reflects electric kWh sales by class of customer for both periods:
In Billions of kWh Years Ended December 31 1996 1995 Change 1995 1994 Change Residential 10.9 10.7 .2 10.7 10.2 .5 Commercial 10.0 9.7 .3 9.7 9.2 .5 Industrial 12.9 12.7 .2 12.7 12.3 .4 Other 3.3 2.4 .9 2.4 2.8 (.4) ---- ---- ---- ---- ---- ---- Total sales 37.1 35.5 1.6 35.5 34.5 1.0 ==== ==== ==== ==== ==== ====
Power Costs:
In Millions Years Ended December 31 1996 1995 Change 1995 1994 Change $1,087 $970 $117 $970 $950 $20
The cost increases in both periods reflect greater power purchases from outside sources to meet increased sales demand. Electric Utility Issues Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract capacity from the MCV Partnership is 1,240 MW through the termination of the PPA in 2025. The MPSC allows Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. The MPSC order allowing recovery was affirmed by the Court of Appeals in March 1996. At the end of 1992, Consumers recognized a loss for the present value of the estimated future underrecoveries of power purchases from the MCV Partnership. In November 1996, the MPSC approved a Settlement Agreement proposed by Consumers and the MPSC staff that addressed cost recovery for the remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996, Consumers was permitted to recover an average capacity charge of 2.86 cents per kWh for this power. The approved average capacity charge increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1, 1996, and for an additional 44 MW on January 1, 1997. Cost recovery for the remaining 216 MW is based upon the escalation of the average capacity charge by three percent annually until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the PPA contract. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. These after-tax cash underrecoveries totaled $41 million, $90 million and $61 million in 1996, 1995 and 1994, respectively. For further information, see Note 3.
In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $28 $23 $22 $21 $20
After considering the effects of the Settlement Agreement, Consumers believes that the original loss recorded in 1992 remains adequate. The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded. Further, Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. Electric Rate Proceedings: In February 1996, the MPSC issued a partial final order in the retail electric rate case filed in 1994, granting a $46 million annual increase in electric retail rates and authorizing a 12.25 percent return on common equity. Separate requests were before the MPSC to offer competitive special rates to certain large qualifying customers and to modify certain depreciation rates and practices. In November 1996, the MPSC issued a final order in the Settlement Agreement which combined the separate requests. The rate increase and rate of return were not changed from the partial final order and Consumers was authorized to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. Recovery of the additional 325 MW of MCV Partnership contract capacity charges was also approved (see Note 3). The Settlement Agreement also requires the establishment of a direct access program. Customers having a maximum demand of at least 2 MW are eligible to purchase generation services directly from any eligible third- party power supplier. The program is limited to 650 MW of sales, of which 410 MW has already been filled by existing contracts; 140 MW may be filled by either direct access customers or new special contracts which Consumers has signed and submitted to the MPSC for approval; and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. Rehearing petitions have been filed by Consumers and other interested parties. Nuclear Matters: In January 1997, the NRC issued its Systematic Assessment of Licensee Performance report for Palisades. The report rated all areas as good, unchanged from the previous assessment. Consumers is required to make certain calculations and report to the NRC about the continuing ability of the Palisades reactor vessel to withstand postulated pressurized thermal shock events during its remaining license life, in light of the embrittlement of reactor vessel materials over time due to operation in a radioactive environment. Based on continuing analysis of data from testing of similar materials, in December 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003, before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with a change in fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. Palisades' on-site storage pool for spent nuclear fuel is at capacity. Consequently, NRC-approved dry casks, which are steel and concrete vaults, are being used for temporary on-site storage. For further information, see Note 13. Electric Environmental Matters: The 1990 amendment of the Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require that certain capital expenditures be made in order to comply with the amendments for nitrogen oxide reductions, generating units are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. Management believes that annual operating costs will not be materially affected as a result of expenditures that will be made to comply with the Clean Air Act. 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. Consumers is a so-called potentially responsible party at several sites being administered under Superfund. In addition, there are numerous credit worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based on current information, management believes it is unlikely that the liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position, liquidity or results of operations. For further information regarding electric environmental matters, see Note 12. Stray Voltage: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. As of January 1997, 22 separate stray voltage lawsuits were awaiting trial court action, down from 30 lawsuits at December 31, 1995, and 83 lawsuits at December 31, 1994. Consumers believes that the resolution of the remaining lawsuits will not have a material impact on its financial position, liquidity or results of operations. Gas Utility Results of Operations Gas Pretax Operating Income:
In Millions Years Ended December 31 1996 1995 Change 1995 1994 Change $153 $151 $2 $151 $135 $16
Gas pretax operating income increased in 1996 compared to 1995 as a result of increased gas deliveries and revenues from value added services and gas loaning activities. Partially offsetting these increases were the reversal of a previously recorded gas contract contingency during 1995 and higher operating expenses. Gas pretax operating income increased in 1995 compared to 1994, reflecting higher 1995 gas deliveries, and the reversal of losses previously recorded for gas contingencies. Partially offsetting these increases were higher depreciation and gas operation expenses (see Note 4). The following table quantifies these impacts on Pretax Operating Income: In Millions Change Compared to Prior Year 1996 vs 1995 1995 vs 1994 Sales $ 19 $ 12 Reversal in 1995 of gas contingency (23) 23 Recovery of gas costs and other issues 7 (4) Gas loaning activities 7 - Operations and maintenance (4) (9) General taxes and depreciation (5) (7) Other 1 1 ---- ---- Total change $ 2 $ 16 ==== ==== Gas Deliveries: Total system deliveries, excluding transport to the MCV Facility and other miscellaneous transportation, increased 5.1 percent for 1996 compared to 1995 and 6.5 percent for 1995 compared to 1994. The increased deliveries for each period reflect growth resulting from customer additions, conversions to natural gas from alternative fuels and continued strength in the Michigan economy. The table below indicates total deliveries and the impact of weather.
In bcf Years Ended December 31 1996 1995 Change 1995 1994 Change Weather-adjusted deliveries (variance reflects growth) 337 326 11 326 313 13 Impact of weather 15 9 6 9 1 8 --- --- --- --- --- --- System deliveries excluding transport to MCV Partnership 352 335 17 335 314 21 Transport to MCV Partnership 65 54 11 54 77 (23) Other Transportation 31 15 16 15 18 (3) --- --- --- --- --- --- Total deliveries 448 404 44 404 409 (5) === === === === === ===
Cost of Gas Sold:
In Millions Years Ended December 31 1996 1995 Change 1995 1994 Change $750 $674 $76 $674 $662 $12
The cost increase for 1996 was the result of increased sales and the reversal of a $23 million gas contract contingency during 1995. Gas Utility Issues Gas Rate Proceedings: In March 1996, the MPSC issued a final order decreasing gas rates by $12 million annually and authorizing an 11.6 percent return on common equity. Consumers filed a petition for rehearing with the MPSC, requesting reconsideration of certain issues. This petition was denied in June 1996 and the matter is now closed. Consumers entered into a special natural gas transportation contract with one of its transportation customers in response to the customer's proposal to bypass Consumers' system in favor of a competitive alternative. The contract provides for discounted gas transportation rates in an effort to induce the customer to remain on Consumers' system. In 1995, the MPSC approved the contract but stated that the revenue shortfall created by the difference between the contract's discounted rate and the floor price of one of Consumers' MPSC-authorized gas transportation rates must be borne by Consumers' shareholders. In 1995, Consumers filed an appeal with the Court of Appeals, which is still pending, claiming that the MPSC decision denies Consumers the opportunity to earn its authorized rate of return and is therefore unconstitutional. GCR Matters: In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order correctly concludes that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The ALJ issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. For the year ended December 31, 1996, $6 million would be subject to refund. Consumers will continue to oppose this view before the MPSC. Gas Environmental Matters: Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some that formerly housed manufactured gas plant facilities. Data available, and continued internal review of these former manufactured gas plant sites, have resulted in an estimate for all costs related to investigation and remedial action of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At December 31, 1996, Consumers has accrued a liability for $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions such as remediation technique, nature and extent of contamination and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order, environmental clean-up costs, above the amount currently being recovered in rates, will be deferred and amortized over ten years. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. For further information regarding environmental matters, see Note 12. Forward-Looking Information Forward-looking information is included throughout this Annual Report. Material contingencies are also described in the Notes to Consolidated Financial Statements and should be read accordingly. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include prevailing governmental policies and regulatory actions (including those of the FERC and the MPSC) with respect to rates, industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and construction of plant facilities, operation and construction of natural gas pipeline and storage facilities, recovery of the cost of purchased power or natural gas, decommissioning costs, and present or prospective wholesale and retail competition, among others. The business and profitability of Consumers are also influenced by economic and geographic factors, including political and economic risks, changes in environmental laws and policies, weather conditions, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy, inflation, capital market conditions, and the ability to secure agreement in pending negotiations, among other important factors. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Consumers. Capital Expenditures: Consumers estimates the following capital expenditures, including new lease commitments, by company and by business segment over the next three years. These estimates are prepared for planning purposes and are subject to revision. In Millions Years Ended December 31 1997 1998 1999 Consumers Construction $356 $334 $330 Nuclear fuel lease 14 27 13 Capital leases other than nuclear fuel 14 14 14 Michigan Gas Storage 3 3 3 ---- ---- ---- $387 $378 $360 ==== ==== ==== Electric utility operations (a) $272 $275 $257 Gas utility operations (a) 115 103 103 ---- ---- ---- $387 $378 $360 ==== ==== ==== (a) These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses. Electric Outlook: Consumers expects average annual growth of two to three percent per year in electric system sales over the next five years, based on the current industry configuration in Michigan. Actual electric sales in future periods may be affected by abnormal weather, changing economic conditions, or the developing competitive market for electricity. Consumers continues to work toward retaining its current retail service customers by offering electric rates that are competitive with those of other energy providers, and by improving reliability and customer communications. Consumers is also taking steps to prepare for a future environment in which open access is the predominant means by which retail service customers obtain their power requirements. Consumers' retail service is affected by competition in several areas, including the potential installation of cogeneration or other self- generation facilities by larger industrial customers; the formation of municipal utilities that would displace retail service to an entire community; competition from other utilities that offer flexible rate arrangements designed to encourage movement of facilities or production to their service areas; economic development competition between utilities; MPSC direct access programs and potential electric industry restructuring including regulatory decisions and new state or federal legislation. In 1996, the MPSC significantly 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 has signed long-term sales contracts with some of its largest industrial customers, including its largest customer, General Motors Corporation. Under the General Motors contract, Consumers will serve certain facilities at least five years and serve other facilities at least ten years. Certain facilities will have the option of taking retail wheeling service (if available) after the first three years of the contract. The MPSC approved this contract in 1995, and has also approved long-term sales contracts with other major customers representing a substantial percentage of Consumers' industrial load deemed to have viable cogeneration alternatives. These orders have been appealed by the Attorney General. The MPSC-approved Settlement Agreement, among other things, opened up 240 MW of load to competition. Consumers believes it can compete for 140 MW of load while 100 MW is reserved for 18 months for direct access on a lottery basis. Consumers has negotiated special contracts sufficient to fill the 140 MW of load available under the Settlement Agreement. These contracts were filed with the MPSC for approval. In January 1996, the Governor of the State of Michigan requested that the MPSC review the existing regulatory framework governing Michigan business in order to improve Michigan's business climate. After the filing of utility plans as requested by the MPSC earlier in 1996, and after discussions with many parties, in December 1996, the MPSC staff issued a report recommending a phased-in program of direct access by electric customers (also known as customer choice) based on two fundamental principles: 1) all customers should be eligible to participate in the emerging competitive market for electric supply; and 2) rates should not be increased for any customers and should be decreased where possible. The report also recommends that, beginning in 1997, customers would have the opportunity to select the power supplier of their choice. All customers would be eligible to participate, but in the initial years the total amount would be limited to 150 MW for 1997, increasing an additional 150 MW each year through 2000. In 2001, all commercial and industrial customers served at primary voltage would be eligible, and in 2004 all remaining customers would be eligible. This report also recommends recovery of electric utility transition costs (often referred to as stranded costs) from those customers exercising a right to purchase power from generators other than their traditional utility supplier. Transition costs consist of two elements: 1) energy supply costs that were incurred during the regulated era that would not be competitive at market prices if the electric industry is restructured; and 2) costs that are incurred to facilitate the transition from regulated monopoly status to competitive market status. The MPSC staff report states that transition costs should include the following: 1) regulatory assets (see Note 18); 2) nuclear capital costs; 3) contract capacity costs in power purchase agreements; 4) employee-related restructuring costs; and 5) other costs related to implementing restructuring. The report also recommends that where possible, the recovery of the transition costs would be funded through Rate Reduction Bonds. Transition costs not recovered through Rate Reduction Bonds would be recovered through a transition charge billed to direct access customers. The transition charge would begin when the customer takes direct access service and would continue through 2007. Customers not participating in the direct access program would be charged bundled rates that include: 1) a base rate freeze; 2) suspension of the PSCR process during the transition period and establishment of a fixed level of fuel and purchase power recovery; and 3) limited performance-based regulation of the transmission and distribution functions in a manner which incorporates service standards and allows for the Consumer Price Index less one percent adjustments on transmission and distribution rates through the end of 2001. On March 7, 1997, Consumers filed supplementary data with the MPSC at its request. This data showed that Consumers has approximately $1.8 billion of existing transition costs which would be recovered by a transition charge to be paid by direct access customers through 2007. Restructuring and implementation costs of $200 million would be recovered by an implementation charge to direct access customers. Alternatively, if the securitization approach is pursued and appropriate legislation is passed, the data indicate that significant customer benefits would result. The resulting securitization charge would be paid by all customers to service $4 billion of Rate Reduction Bonds with a proposed 15-year term. Because of the phase-in schedule for retail direct access service, a substantial portion of $4 billion in costs that would be subject to the securitization alternative would be paid by customers on bundled rates prior to getting choice, thus allowing the transition cost to be charged only to direct access customers to be limited to $1.8 billion if securitization does not occur. Securitization results in over a $200 million benefit per year to customers because the 15-year repayment period of the bonds allows the cost reimbursement by the customer to be spread out over a longer period than without securitization and because securitization allows the costs being securitized to be financed at a lower rate. Several of the elements of electric utility restructuring will need to be addressed in legislation, including assurance of full transition cost recovery, securitization of Rate Reduction Bonds and generation deregulation. Consumers currently expects that electric utility restructuring will occur in a manner consistent with the MPSC staff report, but cannot predict with certainty the timing of actual implementation, the extent of customer choice, or resultant financial impacts. In April 1996, the FERC issued Orders 888 and 889, which require utilities to provide open access to the interstate transmission grid for wholesale transactions. Order 888 requires public utilities owning, controlling, or operating transmission lines in interstate commerce to file non- discriminatory open access tariffs that contain minimum terms and conditions of non-discriminatory service; allows utilities to charge their current conforming transmission rates or apply for new rates; and allows the full recovery of transition costs. Order 888 also requires that power pools restructure their ongoing operations and open membership to industry participants. Order 889 requires that utilities establish electronic systems to share information about available transmission capacity and to separate their wholesale power marketing and transmission operations functions. Several FERC Order 888 and 889 requirements have been implemented, including the filing with FERC of Consumers' individual open access tariff and the Joint Transmission Tariff with Detroit Edison for transmission service across the Consumers and Detroit Edison transmission systems, separation of the wholesale merchant function from the transmission function, implementation of the required Code of Conduct, unbundling of wholesale interconnection agreements and related issues. Consumers participated in organizational discussions of a Midwest Independent System Operator, of which Consumers is a member. One issue related to FERC Orders 888 and 889 that is not resolved is the operation of the Michigan Electric Power Coordination Center. Currently, Consumers and Detroit Edison have an agreement to jointly operate the Michigan Electric Power Coordination Center pool, which provides considerable savings to Michigan electric customers. Consumers would propose to maintain the benefits of the pool for its customers and open up the pool to other participants on a non-discriminatory basis. Detroit Edison seeks to terminate the power pool agreement with Consumers effective April 30, 1997. The current Michigan Electric Power Coordination Center agreement requires a four-year advance notice for termination. The FERC is expected to rule on this issue in 1997. The impact of the FERC decision on Consumers and its customers cannot be predicted. Consumers currently 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 its generation, transmission and distribution operations (see Note 18). If rate recovery of generation-related costs becomes unlikely or uncertain, whether due to competition or regulatory action, this accounting standard may no longer apply to Consumers' generation operations. This change could result in either full recovery of generation-related regulatory assets (net of related regulatory liabilities) or a loss, depending on whether Consumers' regulators adopt a transition mechanism for the recovery of all or a portion of these net regulatory assets. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, Consumers believes that its regulatory assets, including those related to generation, are probable of future recovery. At the SEC staff's request, the FASB is reviewing the accounting for closure and removal costs for long-lived assets, including decommissioning. The current electric utility industry accounting practices of recording the cost of removal as a component of depreciation could be changed. The FASB's tentative decision includes recognition of the cost of closure and removal obligation as a liability based on discounted future cash flows with the offset recorded as part of the cost of the plant asset. Gas Outlook: Consumers currently anticipates gas deliveries to grow two percent per year (excluding transportation to the MCV Facility and off- system deliveries) over the next five years, assuming a steadily growing customer base. Additionally, Consumers has several strategies that will support increased load requirements in the future. These strategies include increased efforts to promote natural gas to both current and potential customers that are using other fuels for space and water heating. In addition, as air quality standards continue to become more stringent, management believes that greater opportunities exist for converting industrial boiler load and other processes to natural gas. Consumers also plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Actual gas deliveries in future periods may be affected by abnormal weather, alternative energy prices, changes in competitive conditions, and the level of natural gas consumption. In addition, Consumers has proposed to the MPSC a fixed gas price for recovery over a three-year period. Consumers is also offering a variety of energy related services to its customers including appliance maintenance, home safety, and home security. In October 1996, the MPSC issued an order requesting Consumers and other local distribution companies whose rates are regulated by the MPSC to develop pilot programs that would allow any customers to purchase gas from other suppliers and have the gas transported through local pipelines. These pilot programs, which are to be implemented in mid-1997 and last for two years, are intended to help the MPSC determine whether it is appropriate to allow all customers access to the competitive gas transportation market. 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 (see Note 18). Other New Accounting Standards: In 1996, the FASB issued SFAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which is effective for 1997 financial statements. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, Environmental Remediation Liabilities, effective for 1997 financial statements. Consumers does not expect the application of these statements to have a material impact on its financial position, liquidity or results of operations. 110 Consolidated Statements of Income Consumers Energy Company In Millions
Years Ended December 31 1996 1995 1994 Operating Revenue Electric $2,446 $2,277 $2,189 Gas 1,282 1,195 1,151 Other 42 39 16 ------------------------------ Total operating revenue 3,770 3,511 3,356 ------------------------------ Operating Expenses Operation Fuel for electric generation 296 283 306 Purchased power - related parties 589 491 482 Purchased and interchange power 202 196 162 Cost of gas sold 750 674 662 Other 600 589 562 ------------------------------ Total operation 2,437 2,233 2,174 Maintenance 174 183 188 Depreciation, depletion and amortization 371 357 335 General taxes 191 189 178 ------------------------------ Total operating expenses 3,173 2,962 2,875 ------------------------------ Pretax Operating Electric 402 362 332 Income Gas 153 151 135 Other 42 36 14 ------------------------------ Total pretax operating income 597 549 481 ------------------------------ Other Income Dividends from affiliates (Note 17) 17 17 17 (Deductions) Accretion income (Note 2) 10 11 13 Accretion expense (Note 2) (22) (31) (35) Other, net (4) 5 9 ------------------------------ Total other income 1 2 4 ------------------------------ Interest Charges Interest on long-term debt 139 141 135 Other interest 15 24 17 Capitalized interest (2) (2) (1) ------------------------------ Net interest charges 152 163 151 ------------------------------ Net Income Before Income Taxes 446 388 334 Income Taxes 150 133 108 ------------------------------ Net Income 296 255 226 Preferred Stock Dividends 28 28 24 Preferred Securities Distributions (Note 7) 8 - - ------------------------------ Net Income Available to Common Stockholder $ 260 $ 227 $ 202 ============================== The accompanying notes are an integral part of these statements.
111 Consolidated Statements of Cash Flows Consumers Energy Company
In Millions Years Ended December 31 1996 1995 1994 Cash Flows From Net income $ 296 $ 255 $ 226 Operating Activities Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $49, $51 and $49, respectively) 371 357 335 Capital lease and other amortization 40 38 35 Deferred income taxes and investment tax credit 48 57 57 Accretion expense (Note 2) 22 31 35 Accretion income - abandoned Midland project (Note 2) (10) (11) (13) Undistributed earnings of related parties (40) (36) (16) Power purchases (Note 3) (63) (137) (87) Other 5 4 2 Changes in other assets and liabilities (Note 15) 3 84 24 --- --- --- Net cash provided by operating activities 672 642 598 ----- ----- ----- Cash Flows From Capital expenditures (excludes capital lease additions of Investing Activities $31, $31 and $36, respectively and DSM) (Note 15) (410) (414) (447) Investments in nuclear decommissioning trust funds (49) (51) (49) Cost to retire property, net (31) (41) (38) Deferred demand-side management costs (6) (9) (9) Proceeds from sale of property - 1 14 Other 2 (5) 1 --- --- --- Net cash used in investing activities (494) (519) (528) ----- ----- ----- Cash Flows From Payment of common stock dividends (200) (70) (176) Financing Activities Payment of capital lease obligations (40) (37) (34) Retirement of bonds and other long-term debt (37) (1) (133) Payment of preferred stock dividends (28) (28) (19) Increase (decrease) in notes payable, net (8) 2 80 Preferred securities distributions (8) - - Proceeds from preferred securities 97 - - Proceeds from bank loans 23 - 400 Contribution from stockholder 13 - 100 Repayment of bank loans - - (469) Proceeds from preferred stock - - 193 --- --- --- Net cash used in financing activities (188) (134) (58) ----- ----- ----- Net Increase (Decrease) in Cash and Temporary Cash Investments (10) (11) 12 Cash and temporary cash investments Beginning of year 14 25 13 --- --- --- End of year $ 4 $ 14 $ 25 ==== ==== ==== The accompanying notes are an integral part of these statements.
112 Consolidated Balance Sheets Consumers Energy Company
ASSETS In Millions December 31 1996 1995 Plant Electric $6,333 $6,103 (At original cost) Gas 2,203 2,169 Other 26 30 ----------------------------- 8,562 8,302 Less accumulated depreciation, depletion and amortization (Note 2) 4,269 4,090 ----------------------------- 4,293 4,212 Construction work-in-progress 158 190 ----------------------------- 4,451 4,402 ----------------------------- Investments Stock of affiliates (Note 17) 298 337 First Midland Limited Partnership (Notes 3 and 19) 232 225 Midland Cogeneration Venture Limited Partnership (Notes 3 and 19) 134 103 Other 8 7 ----------------------------- 672 672 ----------------------------- Current Assets Cash and temporary cash investments at cost, which approximates market 4 14 Accounts receivable and accrued revenue, less allowances of $10 in 1996 and $3 in 1995 (Note 6) 148 137 Accounts receivable - related parties (Note 17) 63 10 Inventories at average cost Gas in underground storage 186 184 Materials and supplies 68 72 Generating plant fuel stock 30 37 Deferred income taxes (Note 5) 27 26 Postretirement benefits (Note 10) 25 25 Prepayments and other 183 181 ----------------------------- 734 686 ----------------------------- Non-current Assets Postretirement benefits (Note 10) 435 462 Nuclear decommissioning trust funds (Note 2) 386 304 Abandoned Midland project 113 131 Other 234 297 ----------------------------- 1,168 1,194 ----------------------------- Total Assets $7,025 $6,954 =============================
113
Consumers Energy Company STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions December 31 1996 1995 Capitalization Common stockholder's equity (Note 7) Common stock $ 841 $ 841 Paid-in-capital 504 491 Revaluation capital 37 29 Retained earnings since December 31, 1992 297 237 ----------------------------- 1,679 1,598 Preferred stock 356 356 Company-obligated mandatorily redeemable preferred securities of Consumers Power Company Financing I (a) 100 - Long-term debt 1,900 1,922 Non-current portion of capital leases 100 104 ----------------------------- 4,135 3,980 ----------------------------- Current Liabilities Current portion of long-term debt and capital leases 98 90 Notes payable 333 341 Accounts payable 212 207 Accrued taxes 211 225 Accounts payable - related parties 68 56 Power purchases (Note 3) 47 90 Accrued interest 33 32 Accrued refunds 8 22 Other 176 178 ----------------------------- 1,186 1,241 ----------------------------- Non-current Deferred income taxes (Note 5) 646 605 Liabilities Postretirement benefits (Note 10) 500 517 Power purchases (Note 3) 178 221 Deferred investment tax credit 159 169 Regulatory liabilities for income taxes, net (Notes 5 and 18) 66 44 Other 155 177 ----------------------------- 1,704 1,733 ----------------------------- Commitments and Contingencies (Notes 2, 3, 4, 11, 12 and 13) Total Stockholders' Investment and Liabilities $7,025 $6,954 ============================= (a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers. The accompanying notes are an integral part of these statements.
114 Consolidated Statements of Long-Term Debt Consumers Energy Company
In Millions December 31 1996 1995 First Mortgage Bonds Series (%) Due 5-7/8 1996 $ - $ 36 6 1997 50 50 8-3/4 1998 248 248 6-5/8 1998 45 45 6-7/8 1998 43 43 8-7/8 1999 200 200 7-1/2 2001 57 57 7-1/2 2002 62 62 6-3/8 2003 300 300 7-3/8 2023 300 300 ----- ----- 1,305 1,341 Long-Term Bank Debt 400 400 Pollution Control Revenue Bonds 131 131 Nuclear Fuel Disposal (a) 106 100 Other 26 4 ----- ----- Principal Amount Outstanding 1,968 1,976 Current Amounts (59) (45) Net Unamortized Discount (9) (9) ----- ----- Total Long-Term Debt $1,900 $1,922 ====== ======
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
First Mortgage Improvement Long-Term Bonds Fund Bank Debt Other Total 1997 $ 50 $8 $ - $ 1 $ 59 1998 336 7 200 3 546 1999 200 3 200 105 508 2000 - 1 - 5 6 2001 57 1 - 5 63 (a) Due date uncertain (see Note 2) The accompanying notes are an integral part of these statements.
115 Consolidated Statements of Preferred Stock Consumers Energy Company
Optional Redemption Number of Shares In Millions December 31 Series Price 1996 1995 1996 1995 Preferred Stock Cumulative, $100 par value, authorized 7,500,000 shares, with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7 4.50 110.00 373,148 373,148 37 37 7.45 101.00 379,549 379,549 38 38 7.68 101.00 207,565 207,565 21 21 7.72 101.00 289,642 289,642 29 29 7.76 102.21 308,072 308,072 31 31 Class A Preferred Stock Cumulative, no par value, authorized 16,000,000 shares, with no mandatory redemption 2.08 25.00 (a) 8,000,000 8,000,000 193 193 ---- ---- Total Preferred Stock $356 $356 ==== ==== (a) Redeemable beginning April 1, 1999. The accompanying notes are an integral part of these statements.
116 Consolidated Statements of Common Stockholder's Equity Consumers Energy Company
In Millions Other Common Paid-in Revaluation Retained Stock Capital Capital Earnings Total Balance at January 1, 1994 (a) $841 $391 $ - $ 54 $1,286 Net income 226 226 Cash dividends declared Common stock (176) (176) Preferred stock (24) (24) Unrealized investment-gain 15 15 Stockholder's contribution 100 100 ---------------------------------------------------------- Balance at December 31, 1994 (a) 841 491 15 80 1,427 Net income 255 255 Cash dividends declared Common stock (70) (70) Preferred stock (28) (28) Change in unrealized investment-gain 14 14 ---------------------------------------------------------- Balance at December 31, 1995 (a) 841 491 29 237 1,598 Net income 296 296 Cash dividends declared Common stock (200) (200) Preferred stock (28) (28) Preferred securities distributions (8) (8) Change in unrealized investment-gain 8 8 Stockholder's contribution 13 13 ---------------------------------------------------------- Balance at December 31, 1996 (a) $841 $504 $37 $ 297 $1,679 ========================================================== (a) Number of shares of common stock outstanding was 84,108,789. The accompanying notes are an integral part of these statements.
117 Consumers Energy Company Notes to Consolidated Financial Statements 1: Corporate Structure Consumers Energy Company (formerly Consumers Power Company) 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: Summary of Significant Accounting Policies and Other Matters Basis of Presentation: The consolidated financial statements include Consumers and its wholly owned subsidiaries. The financial statements are prepared in conformity with generally accepted accounting principles and include the use of management's estimates. Consumers uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest. Accretion Income and Expense: In 1991, the MPSC ordered that Consumers could recover a portion of its abandoned Midland investment over a 10-year period, but did not allow Consumers to earn a return on that amount. Consumers reduced the recoverable investment to the present value of the future recoveries. During the recovery period, the unrecovered asset is adjusted to its present value. This adjustment is reflected as accretion income. Conversely, Consumers recorded a loss in 1992 for the present value of its estimated future underrecoveries of power costs resulting from purchases from the MCV Partnership (see Note 3), and now recognizes accretion expense annually to reflect the time value of money on the recorded loss. Gas Inventory: Consumers uses the weighted average cost method for valuing working gas inventory. Cushion gas, which is gas stored to maintain reservoir pressure for recovery of working gas, is recorded in the appropriate gas utility plant account. Consumers stores gas inventory in its underground storage facilities. Maintenance, Depreciation and Depletion: Property repairs and minor property replacements are charged to maintenance expense. Depreciable property retired or sold plus cost of removal (net of salvage credits) is charged to accumulated depreciation. Consumers bases depreciation provisions for utility plant on straight-line and units-of-production rates approved by the MPSC. The composite depreciation rate for electric utility property was 3.5 percent for 1996, 1995 and 1994. The composite rate for gas utility plant was 4.2 percent for 1996, 4.3 percent for 1995 and 4.2 percent for 1994. The composite rate for other plant and property was 5.5 percent for 1996, 4.9 percent for 1995 and 4.7 percent for 1994. Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense based on the quantity of heat produced for electric generation. Interest on leased nuclear fuel is expensed as incurred. Under current federal law, as confirmed by court decision, the DOE is required to begin accepting deliveries of spent nuclear fuel by January 31, 1998 for disposal, even if a permanent repository is not then operational. Utilities and their customers have been prepaying the costs of DOE transport and disposal through fees based on electric generation by their nuclear plants. For fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers them through electric rates and remits to the DOE quarterly. Consumers elected to defer payment for disposal of spent nuclear fuel burned before April 7, 1983 until the first of its spent fuel is delivered to the DOE. At December 31, 1996, Consumers had a recorded liability to the DOE of $106 million, including interest, which is to be paid prior to the first delivery of spent nuclear fuel to the DOE. Consumers recovered through electric rates the amount of this liability, excluding a portion of interest. In January 1997, in response to the DOE's declaration in December 1996 that it would not begin to accept spent nuclear fuel deliveries by the date required by law, Consumers and other utilities filed suit in federal court. The utilities are seeking a declaration that they are relieved of their obligation to remit their quarterly fee payments to the DOE and are authorized to escrow any related fees collected from their customers, unless and until the DOE begins to accept spent nuclear fuel. The suit seeks an order requiring the DOE to develop a program to begin acceptance of spent nuclear fuel by January 31, 1998. Also in 1997, federal legislation was reintroduced to clarify the timing of the DOE's obligation to accept spent nuclear fuel and to direct the DOE to establish an integrated spent fuel management system that includes designing and constructing an interim storage facility in Nevada. Nuclear Plant Decommissioning: Consumers collected $49 million in 1996 from its electric customers toward the future decommissioning of its two nuclear plants. In April 1996, Consumers received a decommissioning order from the MPSC which estimated decommissioning costs for Big Rock and Palisades to be $317 million and $548 million (in 1996 dollars), respectively. The estimated decommissioning costs increased from previous estimates principally due to the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. After the plants are retired, Consumers plans to maintain the facilities in protective storage until radioactive waste disposal facilities are available. As a result, the majority of decommissioning costs will be incurred after each plant's NRC operating license expires. When Big Rock's and Palisades' NRC licenses expire in 2000 and 2007, respectively, the trust funds are estimated to have accumulated $257 million and $686 million, respectively. It is estimated that at the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds will have provided $1 billion for Big Rock and $2.1 billion for Palisades, including trust earnings over this decommissioning period. Based on this plan, Consumers believes that the current decommissioning surcharge will be sufficient to provide for decommissioning of its nuclear plants. At December 31, 1996, Consumers had an investment in nuclear decommissioning trust funds of $386 million. Reclassifications: Consumers has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect net income for the years presented. Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers accrues or reduces revenue for any underrecovery or overrecovery of electric power supply costs and natural gas costs by establishing a corresponding asset or liability until it bills or refunds these differences to customers following an MPSC order. Utility Regulation: Consumers accounts for the effects of regulation based on a regulated utility accounting standard (SFAS 71). As a result, the actions of regulators affect when revenues, expenses, assets and liabilities are recognized. If all or a separable portion of Consumers' operations becomes no longer subject to the provisions of utility regulation, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery continues through rates established and collected for Consumers' remaining operations. In addition, Consumers would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. For further discussion, see MD&A Forward-Looking Information and Note 18. Other: For significant accounting policies regarding income taxes, see Note 5; for executive incentive compensation, see Note 9; for pensions and other postretirement benefits, see Note 10; and for cash equivalents, see Note 15. 3: 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 Years Ended December 31 1996 1995 1994 Pretax operating income $40 $35 $12 Income taxes and other 11 10 (1) --- --- --- Net income $29 $25 $13 === === === Power Purchases from the MCV Partnership: Consumers' annual obligation to purchase contract 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. The MPSC allows Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity. The MPSC order allowing recovery was affirmed in March 1996 by the Court of Appeals. 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. Consumers previously recognized a loss in 1992 for the present value of the estimated future underrecoveries of power costs under the PPA based on management's assessment of the future availability of the MCV Facility and the effect of the future power market on the amount, timing and price at which various increments of the capacity, above the MPSC-authorized level, could be resold. At December 31, 1996 and 1995, the after-tax present value of the PPA liability totaled $147 million and $202 million, respectively. The reduction in the liability since December 31, 1995 reflects after-tax cash underrecoveries of $41 million along with $28 million related to the termination of power purchase agreements, partially offset by after-tax accretion expense of $14 million. The undiscounted after-tax amount associated with the liability totaled $549 million at December 31, 1996. In November 1996, the MPSC approved a Settlement Agreement proposed by Consumers and the MPSC staff that addressed cost recovery for the remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996, Consumers was permitted to recover an average capacity charge of 2.86 cents per kWh for this power. The approved average capacity charge increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1, 1996, and for an additional 44 MW on January 1, 1997. Cost recovery for the remaining 216 MW is based upon the escalation of the average capacity charge by three percent annually until it reaches 3.62 cents per kWh in 2004, and remains at this ceiling rate through the end of the contract. Consumers anticipates it will continue to experience cash underrecoveries associated with the PPA as shown below. In Millions 1997 1998 1999 2000 2001 Estimated cash underrecoveries, net of tax $28 $23 $22 $21 $20 After considering the effects of the Settlement Agreement, Consumers believes that the original loss recorded in 1992 remains adequate. The amount of underrecoveries of power costs continues to be based, in part, on management's best assessment of the future availability of the MCV Facility. If the MCV Facility operates at levels above management's estimate over the remainder of the PPA, future losses will need to be recognized over and above amounts previously recorded. Further, Consumers would experience greater amounts of cash underrecoveries than originally anticipated. Management will continue to evaluate the adequacy of the accrued liability considering actual facility operations. PSCR Matters Related to Power Purchases from the MCV Partnership: As part of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of certain costs related to power purchases from the MCV Partnership. ABATE or the Attorney General appealed these plan case orders to the Court of Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order in the 1993 plan case. As part of its decision in the 1993 PSCR reconciliation case issued in 1995, the MPSC disallowed a portion of the costs related to purchases from the MCV Partnership, and instead assumed recovery of those costs from wholesale customers. Consumers believed this was contrary to the terms of a 1993 MPSC order and appealed this issue. The MCV Partnership and ABATE also filed separate appeals of this order. In November 1996, the Court of Appeals affirmed the MPSC's order. Consumers and the MCV Partnership filed petitions for rehearing of the Court of Appeals opinion, which were denied in January 1997. 4: Rate Matters Electric Proceedings: In February 1996, the MPSC issued a partial final order in the retail electric rate case filed in 1994, granting Consumers a $46 million annual increase in its electric retail rates and authorizing a 12.25 percent return on common equity. Consumers also had separate requests before the MPSC to offer competitive special rates to certain large qualifying customers and to modify certain depreciation rates and practices. In November 1996, the MPSC issued a final order in the Settlement Agreement which combined the separate requests. The rate increase and rate of return were not changed from the partial final order and Consumers was authorized to accelerate recovery of its nuclear plant investment by charging $18 million of annual steam production plant depreciation expense to the nuclear production depreciation reserve. Recovery of the additional 325 MW of MCV Partnership contract capacity charges was also approved (see Note 3). The Settlement Agreement also requires Consumers to establish a direct access program. Customers having a maximum demand of at least 2 MW are eligible to purchase generation services directly from any eligible third- party power supplier. The program is limited to 650 MW of sales, of which 410 MW has already been filled by existing contracts; 140 MW may be filled by either direct access customers or new special contracts which Consumers has signed and submitted to the MPSC for approval; and the remaining 100 MW must be made available solely to direct access customers for at least 18 months. Rehearing petitions have been filed by Consumers and other interested parties. Gas Proceedings: In March 1996, the MPSC issued a final order in a 1994 rate case, authorizing recovery of costs related to postretirement benefits and former manufactured gas plant sites (see Note 12). Overall, however, the order decreased Consumers' gas rates by $12 million annually and authorized an 11.6 percent return on common equity. In the GCR reconciliation proceeding for the period April 1995 through March 1996, an issue has arisen questioning whether revenue from gas loaning (which was a new business activity for Consumers) should, in whole or in part, be immediately passed through to customers. The ALJ issued a proposal for decision in January 1997 that agreed with the MPSC staff's position that the gas loaning program uses storage assets of Consumers and therefore recommended that 90 percent of the revenue should be refunded to customers. For the year ended December 31, 1996, $6 million would be subject to refund. Consumers will continue to oppose this view before the MPSC. In December 1996, the MPSC authorized Consumers to implement a pilot gas transportation program for 40,000 customers in Bay County, Michigan. The pilot program will provide residential and small commercial customers the opportunity to purchase gas from suppliers other than Consumers for a two- year period beginning April 1997. Consumers will retain its role as transporter and distributor of this gas. In 1993, the MPSC issued an order favorable to Consumers regarding a gas pricing disagreement between Consumers and certain intrastate producers, which was affirmed on judicial review by state courts. In December 1996, the U.S. Supreme Court denied the producers' request to review that decision. In early 1995, management concluded that the intrastate producers' pending appeals of the order would not be successful and, accordingly, reversed a previously accrued contingency and recorded a $23 million (pretax) benefit. In 1995, the MPSC issued an order regarding a $44 million (excluding interest) gas supply contract pricing dispute between Consumers and certain intrastate producers. The order stated that Consumers was not obligated to seek prior approval of market-based pricing provisions that were implemented under the contracts in question. The producers subsequently filed a claim of appeal of the MPSC order with the Court of Appeals. Consumers believes the MPSC order correctly concludes that the producers' theories are without merit and will vigorously oppose any claims they may raise, but cannot predict the outcome of this issue. In December 1996, Consumers filed a request with the MPSC to totally suspend the GCR clause and employ a fixed price for recovery of gas costs for a period of three years ending in March 2000. There would be no reconciliations and no reopenings for that period of time. In April 2000, a new GCR factor would be implemented. Resolution of the issues discussed in this note is not expected to have a material impact on Consumers' financial position or results of operations. 5: Income Taxes Consumers and its subsidiaries file a consolidated federal income tax return with CMS Energy. Income taxes are generally allocated based on each company's separate taxable income. Consumers practices full deferred tax accounting for all temporary differences as authorized by the MPSC. Consumers uses ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid becomes a tax credit that can be carried forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT. The significant components of income tax expense (benefit) consisted of: In Millions Years Ended December 31 1996 1995 1994 Current federal income taxes $102 $ 76 $ 51 Deferred income taxes 58 67 67 Deferred ITC, net (10) (10) (10) ---- ---- ---- $150 $133 $108 ==== ==== ==== Operating $162 $145 $120 Other (12) (12) (12) ---- ---- ---- $150 $133 $108 ==== ==== ==== The principal components of Consumers' deferred tax assets (liabilities) recognized in the balance sheet are as follows: In Millions December 31 1996 1995 Property $ (556) $ (539) Unconsolidated investments (239) (245) Postretirement benefits (Note 10) (165) (173) Abandoned Midland project (40) (46) Employee benefit obligations (includes postretirement benefits of $165 and $173) (Note 10) 195 200 Power purchases (Note 3) 82 112 AMT carryforward 93 94 ITC carryforward - 23 Other 11 (5) ------- ------- $ (619) $ (579) ======= ======= Gross deferred tax liabilities $(1,375) $(1,388) Gross deferred tax assets 756 809 ------- ------- $ (619) $ (579) ======= ======= The actual income tax expense differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows: In Millions Years Ended December 31 1996 1995 1994 Net income $ 296 $ 255 $ 226 Income tax expense 150 133 108 Preferred securities distributions (8) - - --- --- --- Pretax income 438 388 334 Statutory federal income tax rate x 35% x 35% x 35% ---- ---- ---- Expected income tax expense 153 136 117 Increase (decrease) in taxes from Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 6 7 ITC amortization (10) (10) (10) Affiliated companies' dividends (6) (6) (6) Other, net 2 2 (5) ---- ---- ---- Actual income tax expense $ 150 $ 133 $ 108 ==== ==== ==== Effective tax rate 34.2% 34.3% 32.3% 6: Short-Term Financings Consumers has FERC authorization to issue or guarantee up to $900 million of short-term debt through 1998. Consumers has an unsecured $425 million facility and unsecured, committed lines of credit aggregating $120 million that are used to finance seasonal working capital requirements. At December 31, 1996, a total of $333 million was outstanding at a weighted average interest rate of 6.3 percent, compared with $341 million outstanding at December 31, 1995, at a weighted average interest rate of 6.5 percent. Consumers has in place a $500 million trade receivables purchase and sale program. At December 31, 1996 and 1995, receivables sold under the agreement totaled $318 million and $295 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold. In 1996, Consumers entered into a $100 million swap agreement to hedge the variable rate exposure under the trade receivables purchase and sale program. The swap agreement terminates in November 1998. 7: Capitalization Capital Stock: In 1996, four million shares of 8.36 percent Trust Originated Preferred Securities were issued and sold through Consumers Power Company Financing I, a business trust wholly owned by Consumers. Net proceeds from the sale totaled $97 million. Consumers Power Company Financing I was formed for the sole purpose of issuing the Trust Originated Preferred Securities. Its primary asset is $103 million principal amount of 8.36 percent unsecured subordinated deferrable interest notes issued by Consumers which mature in 2015. Consumers' obligations with respect to the Trust Originated Preferred Securities under the notes, under the indenture under which the notes have been issued, under Consumers' guarantee of the Trust Originated Preferred Securities, and under the declaration by the trust, taken together, constitute a full and unconditional guarantee by Consumers of the trust's obligations under the Trust Originated Preferred Securities. First Mortgage Bonds: Consumers secures its first mortgage bonds by a mortgage and lien on substantially all of its property. Consumers' ability to issue and sell securities is restricted by certain provisions in its First Mortgage Bond Indenture, its Articles and the need for regulatory approvals in compliance with appropriate federal law. Long-Term Bank Debt: Consumers has a $400 million unsecured, variable rate, long-term loan. At December 31, 1996, the loan carried a weighted average interest rate of 6.0 percent. In 1996, an existing interest rate swap ended and Consumers entered into a new $125 million interest rate swap agreement, again exchanging variable-rate interest for fixed-rate interest to hedge a portion of its long-term debt. The swap agreement terminates in November 1997. At December 31, 1996, the amount of the swap totaled $125 million at 6.2 percent. After taking into account the effect of the swaps, the weighted average interest rate on the long-term loan for the year ended December 31, 1996 was 6.1 percent. Other: Consumers has FERC authorization through November 1998 to issue up to $500 million of long-term securities for the purposes of refinancing or refunding existing long-term securities. Consumers has a total of $131 million of long-term pollution control revenue bonds outstanding, secured by irrevocable letters of credit or first mortgage bonds, with a weighted average interest rate of 5.1 percent at December 31, 1996. In October 1996, Michigan Gas Storage entered into a $23 million secured, variable rate, seven-year term loan. At December 31, 1996, the loan had a weighted average interest rate of 6.0 percent. Under the provisions of its Articles at December 31, 1996, Consumers had $255 million of unrestricted retained earnings available to pay common dividends. 8: Financial Instruments The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments, except as shown below, approximate fair value.
In Millions December 31 1996 1995 Amortized Fair Unrealized Amortized Fair Unrealized Available-for-sale securities Cost Value Gain Cost Value Gain Common stock of CMS Energy $ 43 $ 99 $ 56 $ 43 $ 88 $ 45 Nuclear decommissioning investments (a) 351 386 35 286 304 18 (a) Consumers classifies its unrealized gains and losses on nuclear decommissioning investments in accumulated depreciation.
The carrying amount of long-term debt was $1.9 billion at December 31, 1996 and 1995, and the fair value was $1.9 billion on those dates. For held-to-maturity securities and related-party financial instruments, see Note 17. 9: Executive Incentive Compensation Consumers participates in CMS Energy's Performance Incentive Stock Plan. Under the plan, restricted shares of Common Stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. Awards under the plan may consist of any class of Common Stock of CMS Energy and are subject to performance-based business criteria for certain plan awards. The plan reserves for award not more than three percent of CMS Energy's Common Stock outstanding on January 1 each year, less the number of shares of restricted Common Stock awarded and of Common Stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1996, awards of up to 986,240 shares of CMS Energy Common Stock and 198,947 shares of Class G Common Stock may be issued. Restricted shares of Common Stock are outstanding shares with full voting and dividend rights. These awards vest over five years at the rate of 25 percent per year after two years and are subject to achievement of specified levels of total shareholder return. Further, the restricted stock is subject to forfeiture if employment terminates before vesting. If performance objectives are exceeded, the plan provides additional awards. Restricted shares vest fully if control of CMS Energy changes, as defined by the plan. At December 31, 1996, 261,866 of the 277,366 shares of restricted CMS Energy Common Stock outstanding are subject to performance objectives. Of the 16,347 restricted shares of Class G Common Stock, all are subject to performance objectives. Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, expired in 1995. However, options and stock appreciation rights granted under this plan remain outstanding. Under both plans, for stock options and stock appreciation rights, the exercise price on each grant date equaled the closing market price on the grant date. Options are exercisable upon grant and expire up to ten years and one month from date of grant. The status of the restricted stock granted to Consumers' key employees under the Performance Incentive Stock Plan and options granted under both plans follows.
Restricted Stock Options Number Number Weighted Average CMS Energy Common Stock of Shares of Shares Exercise Price Outstanding at January 1, 1994 200,125 919,033 $ 24.18 Granted 72,250 145,500 $ 22.02 Exercised or Issued (22,510) (138,650) $ 16.85 Forfeited (60,087) - Expired - (123,000) $ 31.68 ------- ------- ------- Outstanding at December 31, 1994 189,778 802,883 $ 23.90 Granted 123,615 147,200 $ 25.53 Exercised or Issued (27,533) (93,333) $ 15.64 Forfeited (16,807) - Expired - (51,000) $ 27.56 ------- ------ ------- Outstanding at December 31, 1995 269,053 805,750 $ 24.93 Granted 84,760 138,520 $ 30.63 Exercised or Issued (50,925) (169,525) $ 21.72 Forfeited (25,522) - Expired - (12,000) $ 32.88 ------- ------- ------- Outstanding at December 31, 1996 277,366 762,745 $ 26.55 ======= ======= =======
Restricted shares of Class G Common Stock granted during 1996 and 1995 totaled 9,423 and 6,924, respectively. Options of Class G Common Stock granted at a price of $17.88 during 1996 and 1995 totaled 11,000 and 10,000, respectively. The following table summarizes information about CMS Energy Common Stock options outstanding at December 31, 1996: Number Weighted Weighted Range of of Shares Average Average Exercise Prices Outstanding Remaining Life Exercise Price $13.00 - $19.50 70,400 4.1 years $ 15.75 $19.51 - $29.00 353,825 6.5 years $ 23.52 $29.01 - $34.25 338,520 5.6 years $ 31.96 --------------- ------- --------- ------- $13.00 - $34.25 762,745 5.9 years $ 26.55 =============== ======= ========= ======= The weighted average remaining life of Class G Common Stock options is 9.2 years.
The weighted average fair value of options granted for the CMS Energy Common Stock was $6.94 in 1996, $5.37 in 1995, and $5.32 in 1994. The weighted average fair value of options granted for the Class G Common Stock was $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using the Black-Scholes model, a mathematical formula used to value options traded on securities exchanges, with the following assumptions: Years Ended December 31 1996 1995 1994 CMS Energy Common Stock Options Risk-free interest rate 6.63% 6.17% 6.94% Expected stock price volatility 24.08% 27.12% 28.83% Expected dividend rate $ .27 $ .24 $ .24 Expected option life 5 years 5 years 5 years Class G Common Stock Options Risk-free interest rate 6.63% 6.17% Expected stock price volatility 16.19% 16.19% Expected dividend rate $ .295 $ .295 Expected option life 5 years 5 years Consumers applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the Performance Incentive Stock Plan. Since stock options are granted at market price, no compensation cost has been recognized for stock options granted under the plan. If compensation cost for stock options had been determined in accordance with SFAS 123, Accounting for Stock-Based Compensation, Consumers' net income would have decreased by less than $1 million for 1996 and 1995. The compensation cost charged against income for restricted stock was $1 million in 1996, $2 million in 1995, and was less than $1 million in 1994. 10: Retirement Benefits Postretirement Benefit Plans Other Than Pensions: Consumers provides certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for such benefits if they attain retirement status while working for Consumers or its subsidiaries. Consumers adopted the required accounting for these benefits effective in 1992 and recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 18). The MPSC authorized recovery of the electric utility portion of these costs in 1994 over 18 years and the gas utility portion in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver of a three-year filing requirement for cost recovery with respect to its wholesale electric business. At December 31, 1996, Consumers had recorded a regulatory asset and liability of $7 million. By early 1997, the FERC had authorized recovery of these costs. Consumers funds the benefits using external Voluntary Employee Beneficiary Associations. Funding of the benefits coincides with Consumers' recovery in rates. Retiree health care costs at December 31, 1996 are based on the assumption that costs would increase 8.5 percent in 1997, then decrease gradually to 6.0 percent in 2004 and thereafter. The health care cost trend rate assumption significantly affects the amounts reported. For example, a one percentage point increase in each year's estimated health care cost assumption would increase the accumulated postretirement benefit obligation at December 31, 1996 by $96 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1996 by $11 million. Years Ended December 31 1996 1995 1994 Weighted average discount rate 7.75% 7.50% 8.00% Expected long-term rate of return on plan assets 7.00% 7.00% 7.00% Net postretirement benefit costs for the health care benefits and life insurance benefits consisted of: In Millions Years Ended December 31 1996 1995 1994 Service cost $ 12 $ 11 $ 13 Interest cost 41 39 40 Actual return on assets (14) (4) - Net amortization and deferral 8 1 - ---- ---- ---- Net postretirement benefit costs $ 47 $ 47 $ 53 ==== ==== ==== The funded status of the postretirement benefit plans for the health care benefits and life insurance benefits is reconciled with the liability recorded at December 31 as follows: In Millions 1996 1995 Actuarial present value of estimated benefits Retirees $ 327 $ 329 Eligible for retirement 65 45 Active (upon retirement) 183 195 ---- ---- Accumulated postretirement benefit obligation 575 569 Plan assets (primarily stocks, bonds and money market investments) at fair value 134 76 ---- ---- Accumulated postretirement benefit obligation in excess of plan assets (441) (493) Unrecognized prior service cost 6 - Unrecognized net gain from experience different than assumed (37) (1) --- -- Recorded liability $(472) $(494) ===== ===== The health care portion of the accumulated postretirement benefit obligation is $560 million and $554 million at December 31, 1996 and 1995, respectively. Supplemental Executive Retirement Plan: Certain management employees qualify to participate in the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1996 and 1995, trust assets were $18 million and $19 million, respectively, and were classified as other noncurrent assets. Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan was fully funded, no contributions were made in 1996 and 1994. A contribution of $9 million was made in 1995. Amounts presented below for the Pension Plan include amounts for employees of CMS Energy and non-utility affiliates which were not distinguishable from the plan's total assets. Years Ended December 31 1996 1995 1994 Discount rate 7.75% 7.50% 8.00% Rate of compensation increase 4.00% 4.50% 4.50% Expected long-term rate of return on assets 9.25% 9.25% 9.25% Net Pension Plan and SERP costs consisted of: In Millions Years Ended December 31 1996 1995 1994 Service cost $ 25 $ 22 $ 23 Interest cost 57 54 50 Actual return on plan assets (63) (168) 21 Net amortization and deferral (6) 103 (85) ---- ---- ---- Net periodic pension cost $ 13 $ 11 $ 9 ==== ==== === The funded status of the Pension Plan and SERP reconciled to the pension liability recorded at December 31 was:
In Millions Pension Plan SERP 1996 1995 1996 1995 Actuarial present value of estimated benefits Vested $ 504 $ 496 $ 13 $ 12 Non-vested 72 74 - - ---- ---- --- --- Accumulated benefit obligation 576 570 13 12 Provision for future pay increases 158 183 8 7 ---- ---- --- --- Projected benefit obligation 734 753 21 19 Plan assets (primarily stocks and bonds, including $117 in 1996 and $104 in 1995 of CMS Energy Common Stock) at fair value 779 779 - - ---- ---- --- --- Projected benefit obligation less than (in excess of) plan assets 45 26 (21) (19) Unrecognized net (gain) loss from experience different than assumed (99) (69) 1 2 Unrecognized prior service cost 39 43 1 1 Unrecognized net transition (asset) obligation (27) (32) - - ---- ---- --- --- Recorded liability $ (42) $ (32) $ (19) $(16) ==== ==== === ===
Beginning January 1, 1986, the amortization period for the Pension Plan's unrecognized net transition asset is 16 years and 11 years for the SERP's unrecognized net transition obligation. Prior service costs are amortized on a straight-line basis over the average remaining service period of active employees. Defined Contribution Plan: Consumers provides a defined contribution 401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which are at least 80 percent owned and have adopted the plan. Consumers will match at least one-half of the amount contributed by employees up to 3 percent of their salary. These contributions to the plan are invested in CMS Energy Common Stock. Amounts charged to expense for this plan were $17 million in 1996 and $16 million in 1995 and 1994. 11: Leases Consumers leases various assets, including vehicles, rail cars, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1998 and provides for additional one-year extensions upon mutual agreement by the parties. Upon termination of the lease, the lessor would be entitled to a cash payment equal to its remaining investment, which was $69 million as of December 31, 1996. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance. Minimum rental commitments under Consumers' non-cancelable leases at December 31, 1996, were: In Millions Capital Operating Leases Leases 1997 $ 47 $ 3 1998 65 3 1999 14 2 2000 12 2 2001 11 2 2002 and thereafter 14 22 --- --- Total minimum lease payments 163 $ 34 === Less imputed interest 24 --- Present value of net minimum lease payments 139 Less current portion 39 --- Non-current portion $100 === Consumers recovers these charges from customers and accordingly charges payments for its capital and operating leases to operating expense. Operating lease charges, including charges to clearing and other accounts for the years ended December 31, 1996, 1995 and 1994, were $3 million, $7 million and $8 million, respectively. Capital lease expenses for the years ended December 31, 1996, 1995 and 1994 were $45 million, $45 million and $40 million, respectively. Included in these amounts for the years ended 1996, 1995 and 1994, are nuclear fuel lease expenses of $25 million, $25 million and $21 million, respectively. 12: Commitments and Contingencies Environmental Matters: Consumers is a so-called potentially responsible party at several sites being administered under Superfund. Superfund liability is joint and several and along with Consumers, there are numerous credit worthy, potentially responsible parties with substantial assets cooperating with respect to the individual sites. Based upon past negotiations, Consumers estimates that its share of the total liability for the known sites will be between $2 million and $9 million. At December 31, 1996, Consumers has accrued $2 million for its estimated losses. Under the Michigan Natural Resources and Environmental Protection Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Consumers has prepared plans for remedial investigation/feasibility studies for several of these sites. Four of the five plans submitted by Consumers have been approved by the appropriate environmental regulatory authority in the State of Michigan. Findings for the two completed remedial investigations indicate that the expenditures for those two sites are likely to be less than the amounts projected before the studies were performed. However, these findings may not be representative of all of the sites. Data available to Consumers and its continued internal review have resulted in an estimate for all costs related to investigation and remedial action for all 23 sites of between $48 million and $98 million. These estimates are based on undiscounted 1996 costs. At December 31, 1996, Consumers has accrued a liability of $48 million and has established a regulatory asset for approximately the same amount. Any significant change in assumptions, such as remediation technique, nature and extent of contamination, and legal and regulatory requirements, could affect the estimate of remedial action costs for the sites. In accordance with an MPSC rate order issued in March 1996, environmental clean-up costs above the amount currently being recovered in rates will be deferred and amortized over ten years. Rate recognition of amortization expense will not begin until after a prudence review in a general rate case. The order authorizes current recovery of $1 million annually. Consumers is continuing discussions with certain insurance companies regarding coverage for some or all of the costs that may be incurred for these sites. The Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. Consumers' coal-fueled electric generating units burn low-sulfur coal and are currently operating at or near the sulfur dioxide emission limits that will be effective in the year 2000. The Clean Air Act's provisions required Consumers to make capital expenditures totaling $40 million to install equipment at certain generating units. Consumers estimates capital expenditures for in-process and proposed modifications at other coal-fired units to be an additional $35 million by the year 2000. Management believes that Consumers' annual operating costs will not be materially affected as a result of expenditures that will be made to comply with the Clean Air Act. Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, of $387 million for 1997, $378 million for 1998 and $360 million for 1999. For further information regarding capital expenditures, see Forward-Looking Information in the MD&A. Commitments for Coal and Gas Supplies: Consumers has entered into coal supply contracts with various suppliers for its coal-fired generating stations. These contracts have expiration dates that range from 1997 to 2004. Consumers contracts for 60 - 70 percent of its annual coal requirements which in 1996 totaled $243 million (62 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its coal needs. Consumers has entered into gas supply contracts with various suppliers for its natural gas business. These contracts have expiration dates that range from 1997 to 2003. Consumers' 1996 gas requirements totaled 266 bcf at a cost of $747 million, 80 percent of which was under long-term contracts for one year or more. As of the end of 1996, Consumers had 35 percent of its 1997 gas requirements under such long-term contracts, and will supplement them with additional long-term contracts and spot-market purchases. Other: A number of lawsuits have been filed against Consumers relating to the effect of so-called stray voltage on certain livestock. Claimants contend that stray voltage results when low-level electrical currents present in grounded electrical systems are diverted from their intended path. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns and has an ongoing program to modify the grounding of all customer services. As of January 1997, Consumers had 22 separate stray voltage lawsuits awaiting trial court action, down from 30 lawsuits at December 31, 1995, and 83 lawsuits at December 31, 1994. In addition to the matters disclosed in these notes, Consumers and certain of its subsidiaries are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business and involving personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters. Estimated losses for certain contingencies discussed in this note have been accrued. Resolution of these contingencies is not expected to have a material impact on Consumers' financial position or results of operations. 13: Nuclear Matters Consumers filed updated decommissioning information with the MPSC in 1995 which estimated decommissioning costs for Big Rock and Palisades. In April 1996, the MPSC issued an order in Consumers' nuclear decommissioning case, which fully supported Consumers' request and did not change the overall surcharge revenues collected from retail customers. The MPSC ordered Consumers to file a report on the adequacy of the surcharge revenues with the MPSC at three-year intervals beginning in 1998. Consumers filed its decommissioning plan for Big Rock with the NRC in 1995. The NRC has approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades; however, certain parties, including the Attorney General, have petitioned the NRC to suspend Consumers' general license to store spent fuel, claiming that Consumers' cask unloading procedure does not satisfy NRC regulations. The NRC staff has reviewed the petition and denied the request to suspend Consumers general license to store spent fuel. Consumers has loaded 13 dry storage casks with spent nuclear fuel at Palisades. In a review of the cask manufacturer's quality assurance program, indications of minor flaws in welds in the steel liner of one of the loaded casks were detected. Radiographic examination of the casks has found all other welds acceptable. The cask in which the minor flaws were detected continues to store spent fuel safely and there is no requirement for its replacement. Nevertheless, Consumers plans to remove the spent fuel and insert it into a transportable cask. Bids are currently being taken for the design and fabrication of the transportable cask. Consumers is monitoring an investigation under way at another utility that also uses a dry storage cask system for spent nuclear fuel. The other utility experienced an unexpected ignition of hydrogen gas following the loading of a cask. Although the event caused no injuries or releases of radioactive material, and Consumers' procedures had already precluded a similar event, the NRC has instructed utilities using the dry storage casks to take certain additional precautions when loading or unloading casks. Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. This insurance includes coverage for replacement power costs during prolonged accidental outages. Such costs would not be covered by insurance during the first 21 weeks of any outage, but the major portion of such costs would be covered during the next twelve months of the outage, followed by reduced coverage to 80 percent for two additional years. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of $23 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote. 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 December 1996, Consumers received an interim Safety Evaluation Report from the NRC indicating that the reactor vessel can be safely operated through 2003 before reaching the NRC's screening criteria for reactor embrittlement. Consumers believes that with fuel management designed to minimize embrittlement, Palisades might be operated to the end of its license life in the year 2007 without annealing of the reactor vessel, but will continue to monitor the matter. 14: Jointly Owned Utility Facilities Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities: In Millions December 31 1996 1995 Net investment Ludington - 51% $116 $116 Campbell Unit 3 - 93.3% 329 332 Transmission lines - various 35 33 Accumulated depreciation Ludington $ 84 $ 81 Campbell Unit 3 252 238 Transmission lines 14 14 15: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were: In Millions 1996 1995 1994 Cash transactions Interest paid (net of amounts capitalized) $143 $158 $147 Income taxes paid (net of refunds) 119 43 34 Non-cash transactions Nuclear fuel placed under capital lease $ 28 $ 26 $ 21 Other assets placed under capital leases 3 5 15 Capital leases refinanced - 21 - Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below: In Millions 1996 1995 1994 Sale of receivables, net $ 23 $ 20 $(10) Accounts receivable 12 (55) (4) Accrued revenue (49) 1 24 Inventories 8 54 (5) Accounts payable 17 48 19 Accrued refunds (14) (4) (3) Other current assets and liabilities, net (14) 28 12 Non-current deferred amounts, net 20 (8) (9) ---- --- --- $ 3 $ 84 $ 24 ===== ==== ==== 16: Reportable Segments The Consolidated Statements of Income show operating revenue and pretax operating income by segments. These amounts include earnings from investments accounted for by the equity method of $42 million, $39 million and $16 million for 1996, 1995 and 1994, respectively. Other segment information follows: In Millions Years Ended December 31 1996 1995 1994 Depreciation, depletion and amortization Electric $ 282 $ 272 $ 257 Gas 87 83 76 Other 2 2 2 ----- ----- ----- $ 371 $ 357 $ 335 ======= ======= ======= Identifiable assets Electric (a) $4,505 $4,522 $4,364 Gas (a) 1,709 1,690 1,673 Other 811 742 772 ----- ----- ----- $7,025 $6,954 $6,809 ====== ====== ====== Capital expenditures (b) Electric $ 310 $ 328 $ 358 Gas 137 126 134 ----- ----- ----- $ 447 $ 454 $ 492 ======= ======= ======= (a) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses. (b) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses. 17: Related-Party Transactions Consumers has an investment of $250 million in ten shares of Enterprises' preferred stock. Beginning in 1997, a five-year redemption program of $50 million per year will commence. In addition, Consumers has an investment in three million shares of CMS Energy Common Stock with a fair value totaling $99 million (see Note 8) at December 31, 1996. As a result of these two investments, Consumers received dividends on affiliates' common and preferred stock totaling $17 million in 1996, 1995 and 1994. Consumers purchases a portion of its gas from CMS NOMECO. The amounts of purchases for the years ended 1996, 1995 and 1994 were $24 million, $19 million and $1 million, respectively. In 1996, 1995 and 1994, Consumers purchased $50 million, $53 million and $48 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Consumers and its subsidiaries sold, stored and transported natural gas and provided other services to the MCV Partnership totaling $13 million for 1996, 1995 and 1994. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 19. Other related-party transactions are immaterial. 18: Effects of the Ratemaking Process The following regulatory assets (liabilities), which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. These costs are being recovered through rates over periods of up to 16 years. A new accounting standard, effective January 1996, requires impairment losses on long-lived assets to be recognized when an asset's book value exceeds its expected future cash flows (undiscounted). The standard also imposes stricter criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. There was no impact on financial position or results of operations upon adoption because management believes these assets will be recovered. For further discussion, see MD&A Forward-Looking Information. In Millions December 31 1996 1995 Postretirement benefits (Note 10) $ 460 $ 487 Income taxes (Note 5) 158 176 Abandoned Midland project 113 131 DSM - deferred costs 60 68 Trunkline settlement 25 55 Manufactured gas plant sites (Note 12) 47 47 Power purchase contracts (Note 3) - 44 Uranium enrichment facility 23 25 Ludington Fish Settlement 14 - Other 18 22 ---- ----- Total regulatory assets $ 918 $1,055 ==== ===== Income taxes (Note 5) $ (224) $ (220) DSM - deferred revenue (24) (25) Other (1) (1) ---- ----- Total regulatory liabilities $ (249) $ (246) ===== ===== 19: Summarized Financial Information of Significant Related Energy Supplier Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1996 obligation to purchase electric capacity from the MCV Partnership was 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows: Statements of Income In Millions Years Ended December 31 1996 1995 1994 Operating revenue (a) $ 645 $ 618 $ 579 Operating expenses 417 386 378 ---- ---- ---- Operating income 228 232 201 Other expense, net 162 171 183 ---- ---- ---- Net income $ 66 $ 61 $ 18 ==== ==== ==== Balance Sheets In Millions December 31 1996 1995 Assets Current assets (b) $ 316 $ 257 Property, plant and equipment, net 1,889 1,948 Other assets 159 156 ----- ----- $2,364 $2,361 ====== ====== Liabilities and Partners' Equity Current liabilities $ 235 $ 219 Long-term debt and other non-current liabilities (c) 1,930 2,008 Partners' equity (d) 199 134 ----- ----- $2,364 $2,361 ====== ====== (a) Revenue from Consumers totaled $598 million, $571 million and $534 million for 1996, 1995, and 1994, respectively. (b) Receivables from Consumers totaled $52 million and $48 million, at December 31, 1996 and 1995, respectively. (c) FMLP is the sole beneficiary of an owner trust that is the lessor in a long-term direct finance lease with the lessee, MCV Partnership. CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December 31, 1996 and 1995, lease obligations of $1.6 billion, were owed to the owner trust. CMS Holdings' share of the interest and principal portion for the 1996 lease payments was $64 million and $25 million, respectively, and for the 1995 lease payments was $66 million and $23 million, respectively. The lease payments service $1.1 billion in non- recourse debt outstanding as of December 31, 1996 and 1995, of the owner-trust. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1996 and 1995, the owner-trust made debt payments (including interest) of $192 million. (d) CMS Midland's recorded investment in the MCV Partnership includes capitalized interest, which is being amortized to expense over the life of its investment in the MCV Partnership. 138 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To Consumers Energy Company: We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt and preferred stock of CONSUMERS ENERGY COMPANY (formerly Consumers Power Company) (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Energy Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Detroit, Michigan, January 24, 1997. 139 Quarterly Financial Information Consumers Energy Company
In Millions 1996 (Unaudited) 1995 (Unaudited) Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Operating revenue $1,141 $797 $798 $1,034 $1,032 $750 $772 $957 Pretax operating income $197 $126 $144 $130 $187 $109 $136 $117 Net income $102 $58 $69 $67 $94 $45 $63 $53 Preferred stock dividends $7 $7 $7 $7 $7 $7 $7 $7 Preferred securities distributions $1 $2 $2 $3 - - - - Net income available to common stockholder $94 $49 $60 $57 $87 $38 $56 $46
140 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CMS Energy None for CMS Energy. Consumers None for Consumers. PART III (ITEMS 10., 11., 12. and 13.) CMS Energy CMS Energy's definitive proxy statement, except for the organization and compensation committee report and cumulative total return performance graph contained therein, is incorporated by reference herein. See also Item 1. Business for information pursuant to Item 10. Consumers Consumers' definitive proxy statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. Business for information pursuant to Item 10. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are listed in Item 8. Financial Statements and Supplementary Data and are incorporated by reference herein. (a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are listed after the Exhibits in the Index to Financial Statement Schedules, and are incorporated by reference herein. (a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below and are incorporated by reference herein. (b) Reports on Form 8-K for CMS Energy and Consumers. CMS Energy Current Report dated November 14, 1996 covering matters reported pursuant to Item 5. Other Events. Consumers Current Report dated November 14, 1996 covering matters reported pursuant to Item 5. Other Events. (c) Exhibits, including those incorporated by reference (see also Exhibit volume). 141 CMS ENERGY AND CONSUMERS EXHIBITS Previously Filed ------------------- With As File Exhibit Exhibits Number Number Description - -------------------------------------------------------------------------- (3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation of CMS Energy. (3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994 Form 10-K) (3)(c) - Certificate of Amendment to the Articles of Incorporation dated March 10, 1997 and Restated Articles of Incorporation dated March 25, 1994 of Consumers Energy. (3)(d) - By-Laws of Consumers Energy. (4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1, 1945, between Consumers and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. - Indentures Supplemental thereto: 1-5611 (4) - 65th 02/15/88 (Form 8-K dated Feb. 18, 1988) 33-31866 (4)(d) - 67th 11/15/89 33-41126 (4)(c) - 68th 06/15/93 1-5611 (4) - 69th 09/15/93 (Form 8-K dated Sept. 21, 1993) (4)(b) 1-9513 (4)(b) - Indenture dated as of January 1, 1996 between Consumers and The Bank of New York, as Trustee. First Supplemental Indenture dated as of January 18, 1996 between Consumers and The Bank of New York, as Trustee. (1995 Form 10-K) (4)(c) 33-47629 (4)(a) - Indenture between CMS Energy and NBD Bank, as Trustee. 1-9513 (4) - First Supplemental Indenture dated as of October 1, 1992 between CMS Energy and NBD Bank, as Trustee. (Form 8-K dated Oct. 1, 1992) 1-9513 (4) - Second Supplemental Indenture dated as of October 1, 1992 between CMS Energy and NBD Bank, as Trustee. (Form 8-K dated Oct. 1, 1992) (4)(d) 1-9513 (4a) - Indenture between CMS Energy and Chase Manhattan Bank, as Trustee, dated as of January 15, 1994. (Form 8-K dated Mar. 29, 1994) 1-9513 (4b) - First Supplemental Indenture dated as of January 20, 1994 between CMS Energy and Chase Manhattan Bank, as Trustee. (Form 8-K dated Mar. 29, 1994) 1-9513 (4) - Second Supplemental Indenture dated as of March 19, 1996 between CMS Energy and Chase Manhattan Bank, as Trustee. (1st qtr 1996 Form 10-Q) (10)(a) 33-60007 (4)(ii) - Credit Agreement dated as of November 21, 1995, among CMS Energy, the Banks, the Co- Agents, the Documentation Agent, the Operational Agent and the Co- Managers, all as defined therein, and the Exhibits thereto. (10)(b) 33-60007 (4)(ii)(A) - Term Loan Agreement dated as of November 21, 1995, among CMS Energy, the Banks, the Co- Agents, the Documentation Agent, the Operational Agent and the Co- Managers, all as defined therein, and the Exhibits thereto. (10)(c) 1-5611 (10) - Credit Agreement dated as of July 14, 1995 among Consumers, the Banks named therein and the First National Bank of Chicago, as Administrative Agent. (10)(d) 1-9513 (10)(c) - Employment Agreement dated as of August 1, 1990 among CMS Energy, Consumers and William T. McCormick, Jr. (1990 Form 10-K) (10)(e) 1-5611 (10)(i) - Employment Agreement effective as of June 15, 1988 among CMS Energy, Consumers and Victor J. Fryling. (1988 Form 10-K) (10)(f) 1-5611 (10)(f) - Employment Agreement dated May 26, 1989 between Consumers and Michael G. Morris. (1990 Form 10-K) (10)(g) 1-5611 (10)(h) - Employment Agreement dated May 26, 1989 between Consumers and David A. Mikelonis. (1991 Form 10-K) (10)(h) 1-9513 (10)(f) - Employment Agreement dated May 26, 1989 among CMS Energy, Consumers and John W. Clark. (1990 Form 10-K) (10)(i) 1-5611 (10)(j) - Employment Agreement dated March 25, 1992 between CMS Energy, Consumers and Alan M. Wright. (1992 Form 10-K) (10)(j) 1-5611 (10)(k) - Employment Agreement dated March 25, 1992 between Consumers and Paul A. Elbert. (1992 Form 10-K) (10)(k) 1-9513 (10)(j) - Employment Agreement dated January 12, 1996 between CMS Energy and Rodger A. Kershner. (1995 Form 10-K) (10)(l) 1-9513 (10) - Employment Agreement dated March 20, 1996 between CMS Energy and Preston D. Hopper. (1st qtr 1996 Form 10-Q) (10)(m) - Employment Agreement dated April 2, 1996 between CMS Energy and William J. Haener. (10)(n) - Employment Agreement dated April 4, 1996 between CMS Energy, CMS Enterprises and James W. Cook. (10)(o) - Employment Agreement dated March 19, 1996 between Consumers and David W. Joos. (10)(p) 1-5611 (10)(g) - Consumers' Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (1990 Form 10-K) (10)(q) 33-61595 (4)(d) - CMS Energy's Performance Incentive Stock Plan effective as of December 1, 1989. (10)(r) 1-9513 (10)(m) - CMS Energy Deferred Salary Savings Plan effective January 1, 1994. (1993 Form 10-K) (10)(s) 1-5611 (10)(n) - CMS Energy and Consumers Annual Executive Incentive Compensation Plan effective January 1, 1986, as amended January 1995. (1995 Form 10-K) (10)(t) 1-5611 (10)(o) - Consumers' Supplemental Executive Retirement Plan effective November 1, 1990. (1993 Form 10-K) (10)(u) 33-37977 (4.1) - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (MCV Partnership) - Indenture Supplemental thereto: 33-37977 (4.2) - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership) (10)(v) 1-9513 (28)(b) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, MCV Partnership and United States Trust Company of New York, Trustee. (3rd qtr 1990 Form 10-Q) - Indenture Supplemental thereto: 33-37977 (4.4) - Supplement No. 1 dated as of June 1, 1990. (MCV Partnership) (10)(w) 1-9513 (10)(v) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland as Indemnitor and CMS Energy as Guarantor. (1990 Form 10-K) (10)(x) 1-9513 (19)(d)* - Environmental Agreement dated as of June 1, 1990 made by CMS Energy to The Connecticut National Bank and Others. (1990 Form 10-K) (10)(y) 1-9513 (10)(z)* - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy to Midland Cogeneration Venture Limited Partnership. (1990 Form 10-K) (10)(z) 1-9513 (10)(aa)* - Environmental Agreement dated as of June 1, 1990 made by CMS Energy to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (1990 Form 10-K) (10)(aa) 33-37977 (10.4) - Amended and Restated Participation Agreement dated as of June 1, 1990 among MCV Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (MCV Partnership) 1-5611 (10)(w) - Amendment No. 1 dated as of July 1, 1991. (1991 Form 10-K) (10)(bb) 33-37977 (10.4) - Power Purchase Agreement dated as of July 17, 1986 between MCV Partnership and Consumers. (MCV Partnership) - Amendments thereto: 33-37977 (10.5) - Amendment No. 1 dated September 10, 1987. (MCV Partnership) 33-37977 (10.6) - Amendment No. 2 dated March 18, 1988. (MCV Partnership) 33-37977 (10.7) - Amendment No. 3 dated August 28, 1989. (MCV Partnership) 33-37977 (10.8) - Amendment No. 4A dated May 25, 1989. (MCV Partnership) (10)(cc) 1-5611 (28) - Request for Approval of Settlement Proposal to Resolve MCV 1-9513 Cost Recovery Issues and Court Remand, filed with the MPSC on July 7, 1992, MPSC Case No. U-10127. (1992 Form 8) (10)(dd) 1-5611 (28) - Settlement Proposal Filed on July 7, 1992 as Revised on 1-9513 September 8, 1992 by Filing with the MPSC. (Form 8-K dated September 8, 1992) (10)(ee) 1-5611 (10)(cc) - MPSC Order Dated March 31, 1993, Approving with 1-9513 Modifications the Settlement Proposal Filed on July 7, 1992, as Revised on September 8, 1992. (1992 Form 10-K) (10)(ff) 1-5611 (10)(y) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy, Midland Group, Ltd., Consumers, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (1991 Form 10-K) (10)(gg) 1-5611 (10)(z) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy, Consumers and The Dow Chemical Company. (1991 Form 10-K) (10)(hh) 1-5611 (10)(aa)* - Parent Guaranty dated as of June 14, 1990 from CMS Energy to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (1991 Form 10-K) (12) - Statements regarding computation of CMS Energy's Ratio of Earnings to Fixed Charges. (21)(a) - Subsidiaries of CMS Energy. (21)(b) - Subsidiaries of Consumers. (23) - Consent of experts for CMS Energy. (24) - Power of Attorney for CMS Energy and Consumers Energy. (27)(a) - Financial Data Schedule UT for CMS Energy. (27)(b) - Financial Data Schedule UT for Consumers. (99)(a) - CMS Energy: Consumers Gas Group Financials (99)(b) - Consumers' March 7, 1997 Response to MPSC's Request for Information in MPSC Case No. U-11290 * Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers. Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith. 146 Index to Financial Statement Schedules Page Schedule II Valuation and Qualifying Accounts and Reserves 1996, 1995 and 1994: CMS Energy Corporation. . . . . . . . . . . 147 Consumers Power Company . . . . . . . . . . 147 Report of Independent Public Accountants CMS Energy Corporation. . . . . . . . . . . 148 Consumers Power Company . . . . . . . . . . 148 Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. 147 CMS ENERGY CORPORATION Schedule II - Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1996, 1995 and 1994 (In Millions)
Balance at Charged Charged to Balance Beginning to other at End Description of Period Expense Accounts Deductions of Period Accumulated provision for uncollectible accounts (substantially all Consumers Energy Company): 1996 $4 $21 - $15(a) $10 1995 $5 $10 - $11(a) $4 1994 $4 $12 - $11(a) $5 (a) Accounts receivable written off including net uncollectible amounts of $13 in 1996, $10 in 1995 and $10 in 1994 charged directly to operating expense and credited to accounts receivable.
CONSUMERS ENERGY COMPANY Schedule II - Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1996, 1995 and 1994 (In Millions)
Balance at Charged Charged to Balance Beginning to other at End Description of Period Expense Accounts Deductions of Period Accumulated provision for uncollectible accounts: 1996 $3 $21 - $14(a) $10 1995 $4 $10 - $11(a) $3 1994 $4 $11 - $11(a) $4 (a) Accounts receivable written off including net uncollectible amounts of $13 in 1996, $10 in 1995 and $10 in 1994 charged directly to operating expense and credited to accounts receivable.
148 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CMS Energy Corporation's 1996 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 24, 1997. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Detroit, Michigan, January 24, 1997. Report of Independent Public Accountants ---------------------------------------- To Consumers Energy Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consumers Energy Company's 1996 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 24, 1997. Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Detroit, Michigan, January 24, 1997. 149 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 1997. CMS ENERGY CORPORATION By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 14th day of March 1997. Signature Title (i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director ----------------------------- William T. McCormick, Jr. (ii) Principal financial officer: Senior Vice President, Chief Financial Officer A. M. Wright and Treasurer ----------------------------- Alan M. Wright (iii) Controller or principal accounting officer: Senior Vice President, Controller P. D. Hopper and Chief Accounting Officer ----------------------------- Preston D. Hopper (iv) A majority of the Directors including those named above: John M Deutch* Director ----------------------------- John M. Deutch James J. Duderstadt* Director ----------------------------- James J. Duderstadt K R Flaherty* Director ----------------------------- Kathleen R. Flaherty Victor J. Fryling* Director ----------------------------- Victor J. Fryling Earl D. Holton* Director ----------------------------- Earl D. Holton Lois A. Lund* Director ----------------------------- Lois A. Lund Michael G. Morris* Director ----------------------------- Michael G. Morris W. U. Parfet* Director ----------------------------- William U. Parfet Percy A. Pierre* Director ----------------------------- Percy A. Pierre K. Whipple* Director ----------------------------- Kenneth Whipple John B. Yasinsky* Director ----------------------------- John B. Yasinsky * By Thomas A. McNish ----------------------------- Thomas A. McNish, Attorney-in-Fact 151 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Energy Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 1997. CONSUMERS ENERGY COMPANY By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Energy Company and in the capacities and on the 14th day of March 1997. Signature Title (i) Principal executive officer: President, Chief Executive Officer Michael G. Morris and Director ----------------------------- Michael G. Morris (ii) Principal financial officer: Senior Vice President and A. M. Wright Chief Financial Officer ----------------------------- Alan M. Wright (iii) Controller or principal accounting officer: Vice President and Dennis DaPra Controller ----------------------------- Dennis DaPra (iv) A majority of the Directors including those named above: John M Deutch* Director ----------------------------- John M. Deutch James J. Duderstadt* Director ----------------------------- James J. Duderstadt K R Flaherty* Director ----------------------------- Kathleen R. Flaherty Victor J. Fryling* Director ----------------------------- Victor J. Fryling Earl D. Holton* Director ----------------------------- Earl D. Holton Lois A. Lund* Director ----------------------------- Lois A. Lund William T. McCormick, Jr.* Director ----------------------------- William T. McCormick, Jr. W. U. Parfet* Director ----------------------------- William U. Parfet Percy A. Pierre* Director ----------------------------- Percy A. Pierre K. Whipple* Director ----------------------------- Kenneth Whipple John B. Yasinsky* Director ----------------------------- John B. Yasinsky *By Thomas A. McNish ----------------------------- Thomas A. McNish, Attorney-in-Fact EX-3 2 CONSUMERS EXHIBIT 3(C) ARTICLES OF INCORP. Exhibit 3(c) MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU Date Received (FOR BUREAU USE ONLY) Name Mr. Thomas A. McNish, Vice President and Secretary Consumers Energy Company Address 212 West Michigan Avenue City State Zip EFFECTIVE DATE: Jackson MI 49201 DOCUMENT WILL BE RETURNED TO NAME AND ADDRESS INDICATED ABOVE CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION For use by Domestic Corporations (Please read information and instructions on last page) Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the following Certificate: 1. The present name of the corporation is: Consumers Power Company 2. The identification number assigned by the Bureau is: 021-395 3. The location of its registered office is: 212 West Michigan Avenue Jackson MICHIGAN 49201 (Street Address) (City) (ZIP Code) 4. Article I of the Articles of Incorporation is hereby amended to read as follows: The name of the corporation is Consumers Energy Company. 5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE BOTH. a. * The foregoing amendment to the Articles of Incorporation were duly adopted on the * day of * * , 19* , in accordance with the provisions of the Act by the unanimous consent of the incorporator(s) before the first meeting of the Board of Directors or Trustees. Signed this * day of * , 19 * ------------------------------ --------------------------------- (Signature) (Signature) * * ------------------------------ --------------------------------- (Type or Print Name) (Type or Print Name) ------------------------------ --------------------------------- (Signature) (Signature) * * ------------------------------ --------------------------------- (Type or Print Name) (Type or Print Name) b. X The foregoing amendment to the Articles of Incorporation was duly adopted on 10th day of March, 1997. The amendment: (check one of the following) X was duly adopted in accordance with Section 611(2) of the Act by the vote of the shareholders if a profit corporation, or by the vote of the shareholders or members if a nonprofit corporation, or by the vote of the directors if a nonprofit corporation organized on a non-stock directorship basis. The necessary votes were cast in favor of the amendment. * was duly adopted by the written consent of all the directors pursuant to Section 525 of the Act and the corporation is a nonprofit corporation organized on a non- stock directorship basis. * was duly adopted by the written consent of the shareholders or members having not less than the minimum number of votes required by statute in accordance with Section 407(1) and (2) of the Act if a nonprofit corporation, and Section 407(1) of the Act if a profit corporation. Written notice to shareholders who have not consented in writing has been given. (Note: Written consent by less than all of the shareholders or members is permitted only if such provision appears in the Articles of Incorporation.) * was duly adopted by the written consent of all the shareholders or members entitled to vote in accordance with Section 407(3) of the Act if a non-profit corporation, and Section 407(2) of the Act if a profit corporation. Signed this 10th day of March, 1997 By: /s/ Thomas A. McNish ---------------------------------------------- (Signature) Thomas A. McNish, Vice President and Secretary ------------------------------------------------- (Type or Print Name and Title) Name of Person or Organization Preparer's Name and Business Remitting Fees: Telephone Number: Consumers Power Company Joyce H. Norkey ------------------------------ ---------------------------- * (517) 788-1031 ------------------------------ ---------------------------- INFORMATION AND INSTRUCTIONS 1. The amendment cannot be filed until this form, or a comparable document, is submitted. 2. Submit one original copy of this document. Upon filing, the document will be added to the records of the Corporation and Securities Bureau. The original copy will be returned to the address appearing in the box on front as evidence of filing. Since this document will be maintained on optical disk media, it is important that the filing be legible. Documents with poor black and white contrast, or otherwise illegible, will be rejected. 3. This document is to be used pursuant to the provisions of section 631 of the Act for the purpose of amending the articles of incorporation of a domestic profit or nonprofit corporation. Do not use this form for restated articles. 4. Item 2 - Enter the identification number previously assigned by the Bureau. If this number is unknown, leave it blank. 5. Item 4 - The article(s) being amended must be set forth in its entirety. However, if the article(s) being amended is divided into separately identifiable sections, only the sections being amended need be included. 6. This document is effective on the date endorsed "filed" by the Bureau. A later effective date, no more than 90 days after the date of delivery, may be stated as an additional article. 7. Amendments adopted before the first meeting of the board of directors must be adopted by all incorporators with Item 5(a) being completed and signed in ink by at least a majority of the incorporators of profit corporations and by all incorporators of nonprofit corporations. One signature is not sufficient if Article V of the Articles of Incorporation names more than one incorporator. Item 5(b) must be completed for amendments adopted after the first meeting of the board of directors and must be signed in ink by the president, vice-president, chairperson or vice-chairperson of the corporation. 8. FEES: Make remittance payable to the State of Michigan. Include corporation name and identification number on check or money order. NON-REFUNDABLE FEE ...................................... $10.00 TOTAL MINIMUM FEE ....................................... $10.00 ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES OF PROFIT CORPORATIONS ARE: each additional 20,000 authorized shares or portion thereof .................................... $30.00 maximum fee for first 10,000,000 authorized shares ..................................... $5,000.00 each additional 20,000 authorized shares or portion thereof in excess of 10,000,000 shares ..................................... $30.00 maximum fee per filing for authorized shares in excess of 10,000,000 shares ............. $200,000.00 9. Mail form and fee to: The office is located at: Michigan Department of Commerce 6546 Mercantile Way Corporation and Securities Bureau Lansing, MI 48910 Corporation Division P.O. Box 30054 Telephone: (517) 334-6302 Lansing, Michigan 48909-7554 4 STATE OF MICHIGAN MICHIGAN DEPARTMENT OF COMMERCE CORPORATION DIVISION LANSING, MICHIGAN RESTATED ARTICLES OF INCORPORATION (Profit Corporation) 021-395 These Restated Articles of Incorporation are executed pursuant to the provisions of Sections 641 through 651, Act 284, Public Acts of 1972, as amended, (the "Act"). These Restated Articles of Incorporation were duly adopted on March 25, 1994 by the Board of Directors of Consumers Power Company, without a vote of the shareholders, in accordance with provisions of Section 642 of the Act. These Restated Articles of Incorporation only restate and integrate and do not further amend the provisions of the Articles of Incorporation as heretofore amended and there is no material discrepancy between those provisions and the provisions of these Restated Articles. The present name of the corporation is Consumers Power Company. The former name of the corporation was Consumers Power Company of Michigan. Consumers Power Company is the successor to a corporation of the same name which was organized in Maine in 1910 and did business in Michigan from 1915 to 1968. The date of filing the original Articles of Incorporation in Michigan was January 22, 1968. RESTATED ARTICLES OF INCORPORATION The following restated Articles of Incorporation supersede the original Articles as amended and shall be the Articles of Incorporation of the corporation. ARTICLE I The name of the corporation is CONSUMERS POWER COMPANY (hereinafter called the "Company"). ARTICLE II The purposes for which the Company is formed are as follows: (a) To generate, manufacture, produce, gather, purchase, store, transmit, distribute, transform, use, sell and supply electric energy or gas, either artificial or natural, or both electric energy and gas, to the public generally, and to public utilities, natural gas companies and to any and all other entities (whether governmental, public or private); and generally to carry on the electric business or the gas business, or both businesses, as a public utility. (b) To generate, manufacture, produce, purchase, transmit, distribute, transform, use, sell and supply hot water, steam, heat, power and energy, or any or all thereof, to the public generally, and to any and all other entities (whether governmental, public or private); and generally to carry on any or all of such businesses as a public utility. (c) To acquire by lease, purchase, grant, donation, devise, bequest or otherwise, all such lands, easements, royalties, leaseholds, flowage rights, water power and other property, real, personal or mixed, tangible or intangible, and any interest therein, wherever the same may be located and whether within or without the State of Michigan, as may be necessary, incidental or appropriate to the carrying out of any of its purposes, and to hold, convey, mortgage or lease, with or without any of its franchises, corporate or otherwise, any of the foregoing. (d) To dam any stream or streams, lake or other body of water, and excavate, construct, maintain, repair and improve any existing stream, lake, reservoir, body of water, or canal, or which it may excavate and construct, with water power appurtenant thereto; to flood, flow and submerge land and property by any means whatsoever, including but not limited to, the construction of the necessary dams or other facilities in any canal, or in creeks, streams, reservoirs, lakes or other bodies of water or watercourses, natural or artificial; to excavate, construct, improve, maintain, repair, remove and replace reservoirs, dams, dikes and other facilities; and to condemn all lands, easements, rights of way, waterpowers, flowage rights, gas royalties, natural gas leaseholds, royalty interests, and other property, and any and all interests therein, to the extent authorized, and subject to the limitations imposed by the laws of the State of Michigan or of any other State applicable thereto. (e) To explore for, mine, produce, gather, purchase, store, transmit, distribute, refine, sell and supply natural gas, oil and other hydrocarbons. (f) To sell appliances and carry on an appliance business. (g) To carry on any and all other businesses and perform any and all other acts incident to or appropriate in connection with any of the foregoing. (h) To guarantee, subscribe for, purchase, invest in, own, hold or otherwise acquire, sell, assign, transfer, mortgage, pledge or otherwise dispose of, the shares of the capital stock of, or any bonds, securities or evidences of indebtedness created by, or any other evidences of interest in, any other corporation or corporations or other entity of the District of Columbia or of the State of Michigan or any other State, country, nation or government so far as permitted by the laws applicable thereto, and while the owner thereof to exercise all the rights, powers and privileges of ownership, including the right to vote thereon or with respect thereto and to receive all dividends or payments thereon, so far as permitted by the laws applicable thereto; to lend money to or aid in any lawful manner whatsoever any corporation or other entity now existing or hereafter formed whose shares of capital stock, bonds, securities or evidences of indebtedness, or other evidences of interest therein, are held or are in any manner guaranteed by the Company; and to do any and all lawful acts and things to protect, preserve, improve or enhance the value of any such shares of capital stock, bonds, securities, evidences of indebtedness or other interests. (i) To acquire, purchase, hold, sell and transfer shares of its own capital stock, bonds and other evidences of indebtedness to the extent and in the manner authorized by, and subject to any requirements of, the laws applicable thereto. (j) To borrow money and issue, sell or pledge bonds, promissory notes, bills of exchange, debentures and other obligations and evidences of indebtedness, whether secured by mortgage, pledge or otherwise, or unsecured. (k) To make contributions of money, property, services or otherwise for public welfare, including, among other things, charitable, scientific, educational and religious purposes. (l) To conduct its business in the State of Michigan, other States, the District of Columbia, the territories and colonies of the United States and in foreign countries and the territories and colonies thereof and to have one or more offices within or without the State of Michigan. (m) To have and to exercise all such powers as may be conferred by the laws of the State of Michigan applicable to the Company or to corporations engaged in the State of Michigan in any business which may be carried on by the Company. The foregoing clauses shall be construed both as purposes and powers, but no recitation, expression or declaration of specific or special purposes or powers hereinabove enumerated shall be deemed to be exclusive, it being hereby expressly declared that all purposes and powers not inconsistent therewith or with the laws of the State of Michigan applicable to the Company are hereby included, and the Company shall possess all such incidental and other powers as are reasonably necessary, appropriate or convenient to the accomplishment of any of the foregoing purposes or powers, either alone or in association with other corporations, associations, firms, individuals or entities (whether governmental, public or private), to the same extent and as fully as individuals might or could do, as principals, agents, contractors or otherwise. ARTICLE III The street and mailing address of the registered office is 212 West Michigan Avenue, Jackson, Michigan 49201. The name of the resident agent at the registered office is T. A. McNish. ARTICLE IV The total number of shares of all classes of stock which the Company shall have authority to issue is 188,500,000: 23,500,000 shares of preferred stock, 7,500,000 of which are of the par value of $100 per share and are of a class designated Preferred Stock, and 16,000,000 shares of which are of no par value and are of a class designated Class A Preferred Stock; 40,000,000 shares are of the par value of $1 per share and are of a class designated Preference Stock; and 125,000,000 shares are of the par value of $10 per share and are of a class designated Common Stock. ARTICLE V A director shall not be personally liable to the Company or its shareholders for monetary damages for breach of duty as a director except (i) for a breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for a violation of Section 551(1) of the Michigan Business Corporation Act, and (iv) any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article V, and no modification to its provisions by law, shall apply to, or have any effect upon, the liability or alleged liability of any director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment, repeal or modification. ARTICLE VI Each director and each officer of the Company shall be indemnified by the Company to the fullest extent permitted by law against expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the defense of any proceeding in which he or she was or is a party or is threatened to be made a party by reason of being or having been a director or an officer of the Company. Such right of indemnification is not exclusive of any other rights to which such director or officer may be entitled under any now or hereafter existing statute, any other provision of these Articles, bylaw, agreement, vote of shareholders or otherwise. If the Business Corporation Act of the State of Michigan is amended after approval by the shareholders of this Article VI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the Business Corporation Act of the State of Michigan, as so amended. Any repeal or modification of this Article VI by the shareholders of the Company shall not adversely affect any right or protection of a director of the Company existing at the time of such repeal or modification. ARTICLE VII The statement of the designations and the voting and other powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the Common Stock, of the Preference Stock, of the Preferred Stock and of the Class A Preferred Stock is as follows: PREFERRED STOCK Preferred Stock Issuable in Series ---------------------------------- The shares of Preferred Stock may be divided into and issued in series. Each such series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes, and all shares of the Preferred Stock shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The rate of dividend; (b) The price at which shares may be redeemed, such price to be not less than $100 or more than $115 per share, plus accrued dividends to the date of redemption; (c) The amount payable upon shares in event of involuntary liquidation, which amount shall not be less than $100 per share or more than $115 per share, plus accrued dividends; (d) The amount payable upon shares in event of voluntary liquidation, which amount shall not be less than $100 per share or more than $115 per share, plus accrued dividends; (e) The terms and conditions, if any, on which shares shall be by their terms convertible into or exchangeable for shares of any other class of stock of the Company over which the Preferred Stock has preference as to payment of dividends and as to assets; (f) Subject to the rights and preferences of shares of Preferred Stock set forth under the heading "General Provisions", the terms and conditions of a sinking or purchase fund, if any, for the redemption or purchase of such shares. No change shall be made in any of the rights and preferences of any series of Preferred Stock at the time outstanding in those respects in which the shares thereof vary from the shares of other series of Preferred Stock at the time outstanding without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of such series of Preferred Stock at the time outstanding, in addition to such other vote, if any, as may be required for such change under the applicable provisions of these Articles or of the Michigan General Corporation Act. Series Established By Articles ------------------------------ There are hereby established six series of Preferred Stock designated, respectively, as $4.50 Preferred Stock, $4.16 Preferred Stock, $7.45 Preferred Stock, $7.72 Preferred Stock, $7.76 Preferred Stock and $7.68 Preferred Stock. $4.50 Preferred Stock --------------------- The rights and preferences of the shares of $4.50 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $4.50 per annum; (b) The price at which shares may be redeemed is $110 per share, plus accrued dividends to the date of redemption; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $105 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $4.16 Preferred Stock --------------------- The rights and preferences of the shares of $4.16 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $4.16 per annum; (b) The price at which shares may be redeemed is $103.25 per share, plus accrued dividends to the date of redemption; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $101 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.45 Preferred Stock --------------------- The rights and preferences of the shares of $7.45 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.45 per annum; (b) The price at which shares may be redeemed is $108 per share if redeemed prior to April 1, 1978; $106 per share if redeemed thereafter and prior to April 1, 1981; $103 per share if redeemed thereafter and prior to April 1, 1986; and at $101 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to April 1, 1978 none of the shares may be redeemed if such redemption is a part of or in anticipation of any refunding operation involving the application, directly or indirectly, of borrowed funds or the proceeds of an issue of any stock ranking prior to or on a parity with the $7.45 Preferred Stock if such borrowed funds have an interest rate or cost to the Company (computed in accordance with generally accepted financial practice), or such stock has a dividend rate or cost to the Company (so computed), less than $7.45 per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $100 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.72 Preferred Stock --------------------- The rights and preferences of the shares of $7.72 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.72 per annum; (b) The price at which shares may be redeemed is $108 per share if redeemed prior to July 1, 1977; $106 per share if redeemed thereafter and prior to July 1, 1982; $103 per share if redeemed thereafter and prior to July 1, 1987; and at $101 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to July 1, 1977 none of the shares may be redeemed if such redemption is a part of or in anticipation of any refunding operation involving the application, directly or indirectly, of borrowed funds or the proceeds of an issue of any stock ranking prior to or on a parity with the $7.72 Preferred Stock if such borrowed funds have an interest rate or cost to the Company (computed in accordance with generally accepted financial practice), or such stock has a dividend rate or cost to the Company (so computed), less than 7.72% per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $100 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.76 Preferred Stock --------------------- The rights and preferences of the shares of $7.76 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.76 per annum; (b) The price at which shares may be redeemed is $109.19 per share if redeemed prior to June 1, 1978; $107.25 per share if redeemed thereafter and prior to June 1, 1983; $105.31 per share if redeemed thereafter and prior to June 1, 1988; and at $102.21 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to June 1, 1978 none of the shares may be redeemed if such redemption is for the purpose or in anticipation of refunding such share through the use, directly or indirectly, of funds borrowed by the Company, or through the use, directly or indirectly, of funds derived through the issuance by the Company of stock ranking prior to or on a parity with the $7.76 Preferred Stock as to dividends or assets, if such borrowed funds have an effective interest cost to the Company (computed in accordance with generally accepted financial practice) or such stock has an effective dividend cost to the Company (so computed) of less than 7.7439% per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in the event of voluntary liquidation is $101.43 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. $7.68 Preferred Stock --------------------- The rights and preferences of the shares of $7.68 Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $7.68 per annum; (b) The price at which shares may be redeemed is $108 per share if redeemed prior to November 1, 1978; $106 per share if redeemed thereafter and prior to November 1, 1983; $103 per share if redeemed thereafter and prior to November 1, 1988; and at $101 per share thereafter, plus, in each case, accrued dividends to the date of redemption; provided, however, that prior to November 1, 1978 none of the shares may be redeemed if such redemption is for the purpose or in anticipation of refunding such share through the use, directly or indirectly, of funds borrowed by the Company, or through the use, directly or indirectly, of funds derived through the issuance by the Company of stock ranking prior to or on a parity with the $7.68 Preferred Stock as to dividends or assets, if such borrowed funds have an effective interest cost to the Company (computed in accordance with generally accepted financial practice) or such stock has an effective dividend cost to the Company (so computed), of less than 7.68% per annum; (c) The amount payable in event of involuntary liquidation is $100 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $100 per share, plus accrued dividends; (e) Shares are not, by their terms, convertible or exchangeable; (f) Shares are not, by their terms, entitled to the benefit of any sinking or purchase fund. Authority of Board of Directors as to Other Series -------------------------------------------------- To the extent that series of Preferred Stock have not been established and variations in the relative rights and preferences as between series have not been fixed and determined as hereinbefore set forth in these Articles, authority is vested in the Board of Directors of the Company to divide the shares of Preferred Stock into and to establish series of Preferred Stock, to fix and determine within the limitations hereinabove set forth in these Articles the relative rights and preferences of the shares of any series so established, to issue and sell any and all of the authorized and unissued shares of Preferred Stock as shares of any series thereof established by these Articles or by action of the Board of Directors pursuant hereto, and to create a sinking or purchase fund for the redemption or purchase of shares of any series without the necessity of providing a sinking or purchase fund for any other series, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Preferred Stock of any series, the Board of Directors may resell or convert and sell or otherwise dispose of, in their discretion, any shares so acquired as shares of the same series or of any other duly created series of Preferred Stock. CLASS A PREFERRED STOCK Class A Preferred Stock Issuable in Series ------------------------------------------ The shares of Class A Preferred Stock may be divided into and issued in series. Each such series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes, and all shares of the Class A Preferred Stock shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The rate of dividend; (b) The price at which shares may be redeemed; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) The voting rights of the holders of such series, if any; provided that such holders of all series shall have the voting rights hereinafter specified in these Articles; (f) The terms and conditions, if any, on which shares shall be by their terms convertible into or exchangeable for any other securities; and (g) The terms and conditions of a sinking or purchase fund, if any, for the redemption or purchase of such shares. No change shall be made in any of the rights and preferences of any series of Class A Preferred Stock at the time outstanding in those respects in which the shares thereof vary from the shares of other series of Class A Preferred Stock at the time outstanding without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of such series of Class A Preferred Stock at the time outstanding, in addition to such other vote, if any, as may be required for such change under the applicable provisions of these Articles or of the Michigan Business Corporation Act. Series Established by Articles ------------------------------ There is hereby established one series of Class A Preferred Stock designated $2.08 Class A Preferred Stock, Cumulative, without par value. $2.08 Class A Preferred Stock ----------------------------- The rights and preferences of $2.08 Class A Preferred Stock in those respects in which the shares thereof may vary from the shares of other series are as follows: (a) The rate of dividend is $2.08 per annum; (b) The shares of this series will not be redeemable prior to April 1, 1999. On or after April 1, 1999, all or any of the shares of the $2.08 Class A Preferred Stock will be redeemable at the option of the Company, in the manner provided in the Articles of the Company, upon not less than 30 nor more than 60 days' notice, at a redemption price equal to $25 per share, plus an amount equivalent to accrued dividends; (c) The amount payable in event of involuntary liquidation is $25 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation is $25 per share, plus accrued dividends; (e) The holders of shares of this series shall not be entitled to any voting rights, except for those voting rights provided to such holders of all series of Class A Preferred Stock as specified in the Articles or as provided by applicable law; (f) Shares are not, by their terms, convertible or exchangeable; (g) The holders of shares of this series shall not be entitled to the benefit of a sinking or purchase fund. Authority of Board of Directors As to Other Series -------------------------------------------------- To the extent that series of Class A Preferred Stock have not been established and variations in the relative rights and preferences as between series have not been fixed and determined as hereinbefore set forth in these Articles, authority is vested in the Board of Directors of the Company to divide the shares of Class A Preferred Stock into and to establish series of Class A Preferred Stock, to fix and determine the relative rights and preferences of the shares of any series so established, to issue and sell any and all of the authorized and unissued shares of Class A Preferred Stock as shares of any series thereof established by these Articles or by action of the Board of Directors pursuant hereto, and to create a sinking or purchase fund for the redemption or purchase of shares of any series without the necessity of providing a sinking or purchase fund for any other series, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Class A Preferred Stock of any series, the Board of Directors may resell or convert and sell or otherwise dispose of, in their discretion, any shares so acquired as shares of the same series or of any other duly created series of Class A Preferred Stock. PREFERRED STOCK AND CLASS A PREFERRED STOCK ------------------------------------------- General Provisions ------------------ In these General Provisions, the Company's Preferred Stock, par value $100 per share, is referred to as the "Preferred Stock"; the Company's Class A Preferred Stock is referred to as the "Class A Preferred Stock"; and the Preferred Stock and Class A Preferred Stock are together referred to as the "Company Preferred Stock". (A) The holders of the Company Preferred Stock of each series shall be entitled to receive dividends, payable when and as declared by the Board of Directors, at such rates as shall be determined for the respective series thereof from the first day of the current dividend period within which such stock shall have been originally issued except that, as to any share of Company Preferred Stock originally issued subsequent to December 31, 1972, from the date upon which such share shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other stock of the Company not having preference over the Company Preferred Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Company Preferred Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other stock of the Company not having preference over the Company Preferred Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Company Preferred Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on all series of the Company Preferred Stock for all dividend periods terminating on the same or an earlier date. As to all series of the Company Preferred Stock, the term "dividend period" shall mean any of the four calendar quarters in each year commencing, respectively, the first day of January, April, July and October and the first days of each such calendar quarter shall be the dividend payment dates for the regular quarterly dividends payable for the preceding dividend period on such series. (B) When full cumulative dividends as aforesaid upon all series of the Company Preferred Stock then outstanding for all past dividend periods and for the current dividend periods shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock or any other stock over which the Company Preferred Stock has a preference as to payment of dividends, and no holders of any series of the Company Preferred Stock as such shall be entitled to share therein; provided, however, that no dividends (other than dividends paid in or presently thereafter repaid to the Company for or as a capital contribution with respect to stock over which the Company Preferred Stock has preference as to payment of dividends and as to assets) shall be paid or any other distribution of assets made, by purchase of shares or otherwise, on Common Stock or on any other stock over which the Company Preferred Stock has preference as to payment of dividends or as to assets except out of earned surplus of the Company available for distribution to stock over which the Company Preferred Stock has preference as to payment of dividends and as to assets, or if, at the time of declaration thereof or the making of such distribution there shall not remain to the credit of earned surplus account (after deducting therefrom the amount of such dividends and distribution), an amount at least equal to (i) $7.50 per share on all then outstanding shares of the Preferred Stock, (ii) in respect to the Class A Preferred Stock 7.5% of the aggregate amount established by the Board of Directors to be payable on the shares of each series thereof in the event of involuntary liquidation of the Company, and (iii) $7.50 per share on all then outstanding shares of all other stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets. So long as any shares of the Company Preferred Stock are outstanding, the payment of dividends on the Common Stock (other than dividends payable in Common Stock) and the making of any distribution of assets to holders of Common Stock by purchase of shares or otherwise (each of such actions being herein embraced within the term "payment of Common Stock dividends") shall be subject to the following limitations (except as such payments may be approved or permitted by subsequent order of the Securities and Exchange Commission or any successor thereto or any other Federal governmental agency having the same or similar jurisdiction, or, in the event that the Company ceases to be subject to the jurisdiction of said Commission or of any successor thereto or of any such other Federal governmental agency, except as such payments may be permitted in accordance with a waiver of such limitations which shall have been approved by the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Preferred Stock and Class A Preferred Stock (voting as separate classes) at the time outstanding): (a) If and so long as the ratio of the aggregate of the par value of, or stated capital represented by, the outstanding shares of Common Stock (including premiums on the Common Stock but excluding premiums on the Company Preferred Stock) and of the surplus of the Company to the total capitalization and surplus of the Company at the end of a period of twelve consecutive calendar months within the fourteen calendar months immediately preceding the calendar month in which the proposed payment of Common Stock dividends is to be made (which period is hereinafter referred to as the "base period"), adjusted to reflect the proposed payment of Common Stock dividends (which ratio is hereinafter referred to as the "capitalization ratio"), is less than 20%, the payment of Common Stock dividends, including the proposed payment, during the twelve calendar months period ending with and including the calendar month in which the proposed payment is to be made shall not exceed 50% of the net income of the Company available for the payment of dividends on the Common Stock during the base period; (b) If and so long as the capitalization ratio is 20% or more but less than 25%, the payment of Common Stock dividends, including the proposed payment, during the twelve calendar months period ending with and including the calendar month in which the proposed payment is to be made shall not exceed 75% of the net income of the Company available for the payment of dividends on the Common Stock during the base period; (c) Except to the extent permitted under paragraphs (a) and (b) above, the Company shall not make any payment of Common Stock dividends which would reduce the capitalization ratio to less than 25%. For the purpose of the foregoing provisions, the following terms shall have the following meanings: (1) The term "net income of the Company available for the payment of dividends on the Common Stock" shall mean for any base period the balance remaining after deducting from the total gross revenues of the Company from all sources during such period the following: (a) All operating expenses and taxes, including charges to income for general taxes and for federal and state taxes measured by income, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant; (b) the amount, if any, by which the aggregate of the charges to income during the period in question for repairs, maintenance and provision for depreciation is less than the maintenance and replacement requirement embodied in the Indenture, or any indenture supplemental thereto, succeeding the same or in substitution therefor; (c) all interest charges and other income deductions, including charges to income for amortization of debt discount, premium and expense and of the Company Preferred Stock premium and expense; and (d) all dividends applicable to the period in question on stock having preference over the Common Stock as to the payment of dividends. (2) The term "total capitalization" shall mean the aggregate of the principal amount of all outstanding indebtedness of the Company maturing more than twelve months after the date of determination of total capitalization, plus the par value of, or stated capital represented by, the outstanding shares of all classes of stock of the Company, including any premiums on capital stock. (3) The term "surplus" shall include capital surplus, earned surplus and any other surplus of the Company, adjusted to eliminate any amounts which may then be classified by the Company on its books as amounts in excess of the original cost of utility plant and which are not provided for by reserve and any items set forth on the asset side of the balance sheet of the Company as a result of accounting convention, such as unamortized debt discount and expense and the Company Preferred Stock expense, unless any such amount or item, as the case may be, is being amortized or is being provided for by reserve. (C) Upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Company Preferred Stock of each series, without any preference of the shares of any series of the Company Preferred Stock over the shares of any other series of the Company Preferred Stock, shall be entitled to receive out of the assets of the Company, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other stock not having preference as to assets over the Company Preferred Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. In case the assets shall not be sufficient to pay in full the amounts determined to be payable on all the shares of the Company Preferred Stock in the event of voluntary or involuntary liquidation, as the case may be, then the assets available for such payment shall be distributed to the extent available as follows: first, to the payment, pro rata, of $100 per share on each share of Preferred Stock outstanding irrespective of series and the amount established by the Board of Directors to be payable on each outstanding share of each series of Class A Preferred Stock in the event of involuntary liquidation; second, to the payment of the accrued dividends on such shares, such payment to be made pro rata in accordance with the amount of accrued dividends on each such share; and, third, to the payment of any amounts in excess of $100 per share of the Preferred Stock outstanding and the difference between the amount established by the Board of Directors to be payable on the outstanding shares of each series of Class A Preferred Stock in the event of voluntary liquidation and the amount similarly determined to be payable on such shares in the event of involuntary liquidation, plus accrued dividends which shall have been determined to be payable on the shares of any series in the event of voluntary or involuntary liquidation, as the case may be, such payment also to be made pro rata in accordance with the amounts, if any, so payable on each such share. After payment to the holders of the Company Preferred Stock of the full preferential amounts hereinbefore provided for, the holders of the Company Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed among the holders of the Common Stock or of any other stock over which the Company Preferred Stock has preference as to assets. Without limiting the right of the Company to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger, or consolidation, the sale of all the property of the Company to, or the merger or consolidation of the Company into or with any other corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (D) At the option of the Board of Directors of the Company, the Company may redeem any series of the Company Preferred Stock determined to be redeemable, or any part of any series, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Company Preferred Stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the By-laws of the Company or by resolution of the Board of Directors; and, provided, further, that in every case of redemption of less than all of the outstanding shares of any one series of the Company Preferred Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the By-laws of the Company or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Company may deposit, or may cause its nominee to deposit, the aggregate redemption price with some bank or trust company named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Company or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no such deposit is made, upon said redemption date (unless the Company defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares, and from and after the making of said deposit, or, if no such deposit is made, after the redemption date (the Company not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Company, or its nominee, with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust company, or if no such deposit is made, from the Company, without interest thereon, upon endorsement, if required, and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Company as aforesaid, such nominee shall upon such deposit become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Company Preferred Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Company such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. Nothing herein contained shall limit any legal right of the Company to purchase any shares of the Company Preferred Stock. (E) So long as any shares of the Preferred Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of the Preferred Stock (voting together as a single class) at the time outstanding, adopt an amendment to these Articles if such amendment would either (i) authorize or create any class of stock preferred as to dividends or assets over the Preferred Stock or (ii) change any of the rights and preferences of the then outstanding Preferred Stock; provided, however, that nothing in this paragraph contained shall authorize the adoption of any amendment of these Articles by the vote of the holders of a less number of shares of the Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for such amendment by the laws of the State of Michigan at the time applicable thereto. (F) So long as any shares of Class A Preferred Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Class A Preferred Stock at the time outstanding (voting together as a single class) adopt an amendment to these Articles if such amendment would either (i) authorize or create any class of stock preferred as to dividends or assets over the Class A Preferred Stock or (ii) change any of the rights and preferences of the then outstanding Class A Preferred Stock; provided, however, that nothing in this paragraph contained shall authorize the adoption of any amendment of these Articles by the vote of the holders of a lesser number of shares of Class A Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for such amendment by the laws of the State of Michigan at the time applicable thereto. (G) So long as any shares of the Company Preferred Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of the Preferred Stock and Class A Preferred Stock (voting as separate classes) at the time outstanding, (a) issue, sell or otherwise dispose of any shares of the Company Preferred Stock or issue, sell or otherwise dispose of any stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, unless, in any such case, (i) the net income of the Company available for the payment of dividends for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance, sale or disposition of such stock (including, in any case in which such stock is to be issued, sold or otherwise disposed of in connection with the acquisition of new property, the net income of the property to be so acquired, computed on the same basis as the net income of the Company available for the payment of dividends) is at least equal to two times the annual dividend requirements on all outstanding shares of the Company Preferred Stock and of all stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued, and (ii) the gross income of the Company available for the payment of interest for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance, sale or disposition of such stock (including, in any case in which such stock is to be issued, sold or otherwise disposed of in connection with the acquisition of new property, the gross income of the property to be so acquired, computed on the same basis as the gross income of the Company available for the payment of interest) is at least equal to one and one-half times the aggregate of the annual interest requirements (adjusted by provision for amortization of debt discount and expense or of premium on debt, as the case may be) on all outstanding indebtedness of the Company and the annual dividend requirements (adjusted by provision for amortization of the Company Preferred Stock premium and expense) on all outstanding shares of the Company Preferred Stock and of all stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued; or (b) issue, sell or otherwise dispose of any shares of the Company Preferred Stock or issue, sell or otherwise dispose of any stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, unless, in any such case, the aggregate of the par value of, or stated capital represented by, the outstanding shares of Common Stock and of the surplus of the Company (paid-in, earned and other, if any) shall be not less than the aggregate amount payable in the event of involuntary liquidation upon all outstanding shares of the Company Preferred Stock and of all stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued, provided that no portion of the surplus of the Company utilized to satisfy the foregoing requirement shall be available for dividends or other distributions of assets, by purchase of shares or otherwise, on Common Stock or on any other stock over which the Company Preferred Stock has preference as to the payment of dividends and as to assets until shares of the Company Preferred Stock or of stock over which the Company Preferred Stock does not have preference as to the payment of dividends and as to assets are retired and then only to the extent of the amount payable in the event of involuntary liquidation upon such shares or until and then only to the extent that the par value of, or stated capital represented by, the outstanding shares of Common Stock shall have been increased. For the purpose of the foregoing provisions, the following terms shall have the following meanings: (1) The term "net income of the Company available for the payment of dividends" shall mean the balance remaining after deducting from the total gross revenues of the Company from all sources the following: (a) all operating expenses and taxes, including charges to income for general taxes and for federal and state taxes measured by income, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant, (b) the amount, if any, by which the aggregate of the charges to income during the period in question for repairs, maintenance and provision for depreciation is less than the maintenance and replacement requirement embodied in the Indenture, or any indenture supplemental thereto, succeeding the same or in substitution therefor, and (c) all interest charges and other income deductions, including charges to income for the amortization of debt discount, premium and expense and of the Company Preferred Stock premium and expense. (2) The term "gross income of the Company available for the payment of interest" shall mean the balance remaining after deducting from the total gross revenues of the Company from all sources the following: (a) all operating expenses and taxes, including charges to income for general taxes and for federal and state taxes measured by income, for retirement or depreciation reserve and for amortization or other disposition of amounts, if any, classified as amounts in excess of original cost of utility plant and (b) the amount, if any, by which the aggregate of the charges to income during the period in question for repairs, maintenance and provision for depreciation is less than the maintenance and replacement requirement embodied in the Indenture, or any indenture supplemental thereto, succeeding the same or in substitution therefor. (3) The term "accrued dividends" shall be deemed to mean in respect of any share of any series of the Company Preferred Stock as of any given date, the amount, if any, by which the product of the rate of dividend per annum, determined upon the shares of such series, multiplied by the number of years and any fractional part of a year which shall have elapsed from the date after which dividends on such stock became cumulative to such given date, exceeds the total dividends actually paid on such stock and the dividends declared and set apart for payment. Accumulations of dividends shall not bear interest. The term "outstanding", whenever used herein with respect to shares of the Company Preferred Stock or of any other class of stock which are by their terms redeemable, or with respect to bonds or other evidences of indebtedness shall not include any such shares or bonds or evidences of indebtedness which have been called for redemption in accordance with the provisions applicable thereto, of which call for redemption notice shall have been given, as required by such provisions and for the redemption of which a sum of money sufficient to pay the amount payable on such redemption shall have been deposited with a bank or trust company, irrevocably in trust for such purpose, or any bonds or other evidences of indebtedness for the payment of which at maturity provision has been made in a similar manner. The term "capital represented by" whenever used herein with respect to shares of stock of the Company shall mean at any time the amount paid in on or contributed, transferred or otherwise then held and recorded or accounted for, as permitted by the provisions of law applicable thereto, as capital with respect to said shares. COMMON STOCK ------------ Each share of Common Stock of the Company shall be equal to every other share of said stock in every respect. The entire consideration received for shares of Common Stock shall be capital. VOTING POWERS GENERALLY ----------------------- At all meetings of the shareholders of the Company, the holders of the Preferred Stock and the holders of Common Stock shall be entitled on all questions to one vote for each share of stock held by them respectively, regardless of class. Whenever and as often as four quarterly dividends payable on the Company Preferred Stock of any series shall be in default, in whole or in part, the holders of the Company Preferred Stock of all series shall have the exclusive right, voting separately and as a single class, to vote for and to elect the smallest number of directors which shall constitute a majority of the then authorized number of directors of the Company, and, in all matters other than the election of directors, each holder of one or more shares of the Company Preferred Stock shall be entitled to one vote for each such share of stock held. In the event of defaults entitling the holders of Company Preferred Stock to elect a majority of the directors as aforesaid, the holders of the Common Stock shall, subject to the prior rights of the holders of the Preference Stock, have the exclusive right, voting separately and as a class, to vote for and to elect the greatest number of directors which shall constitute a minority of the then authorized number of directors of the Company, and, in all matters other than the election of directors, each holder of Common Stock shall be entitled to one vote for each such share of stock held. The right of the holders of the Company Preferred Stock to elect a majority of the directors, however, shall cease when all defaults in the payment of dividends on their stock shall have been cured, and such dividends shall be declared and paid out of any funds legally available therefor as soon as, in the judgment of the Board of Directors, is reasonably practicable. The terms of office of all persons who may be directors of the Company at the time when the right to elect a majority of the directors shall accrue to the holders of the Company Preferred Stock, as herein provided, shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders, at the request in writing of the holders of not less than 1,000 shares of the then outstanding Company Preferred Stock entitled to vote addressed to the Secretary of the Company at its principal business office. Any vacancy in the Board of Directors occurring during any period that the Company Preferred Stock shall have elected representatives on the Board shall be filled by a majority vote of the remaining directors (or the one director) representing the class of stock theretofore represented by the director causing the vacancy. Upon the termination of such exclusive right of the holders of the Company Preferred Stock to elect a majority of the directors of the Company, the terms of office of all the directors of the Company shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders, at the request in writing of the holders of not less than 1,000 shares of the then outstanding Common Stock addressed to the Secretary of the Company at its principal business office. At all meetings of the shareholders held for the purpose of electing directors during such times as the holders of the Company Preferred Stock shall have the exclusive right to elect a majority of the directors of the Company, the presence in person or by proxy of the holders of a majority of the outstanding shares of Common Stock shall be required to constitute a quorum of such class for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of the Company Preferred Stock shall be required to constitute a quorum of such class for the election of directors; provided, however, that the absence of a quorum of the holders of stock of either class shall not prevent the election at any such meeting, or adjournment thereof, of directors by the other class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting; and provided, further, that, in the absence of a quorum of the holders of stock of either class, a majority of those holders of such stock who are present in person or by proxy shall have the power to adjourn the election of those directors to be elected by that class from time to time without notice, other than announcement at the meeting, until the requisite amount of holders of stock of such class shall be present in person or by proxy. At all elections of directors, shareholders will be entitled to as many votes as shall equal the number of their shares of stock multiplied by the number of directors to be elected for whom such shareholders may vote, and they may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as they may see fit. For the purposes of the foregoing provisions, the Company Preferred Stock of all series shall be deemed to be a single class. PRE-EMPTIVE RIGHTS ------------------ The holders of shares of Preferred Stock, Class A Preferred Stock, or of Common Stock shall have no pre-emptive rights to subscribe for or purchase any additional issues of shares of the capital stock of the Company of any class now or hereafter authorized or any bonds, debentures, or other obligations or rights or options convertible into or exchangeable for or entitling the holder or owner to subscribe for or purchase any shares of capital stock, or any rights to exchange shares issued for shares to be issued. PREFERENCE STOCK Preference Stock Issuable in Series ----------------------------------- The shares of Preference Stock may be divided into and issued in series. Each such series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes, and all shares of the Preference Stock shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The rate of dividend; (b) The price at which shares may be redeemed; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) The terms and conditions, if any, on which shares shall be by their terms convertible into or exchangeable for shares of any other class of stock of the Company; (f) The terms and conditions of a sinking or purchase fund, if any, for the redemption or purchase of such shares. No change shall be made in any of the rights and preferences of any series of Preference Stock at the time outstanding in those respects in which the shares thereof vary from the shares of other series of Preference Stock at the time outstanding without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of such series of Preference Stock at the time outstanding, in addition to such other vote, if any, as may be required for such change under the applicable provisions of these Articles or of the laws of the State of Michigan at the time applicable thereto. PREFERENCE STOCK ---------------- Authority of Board of Directors as to Other Series -------------------------------------------------- To the extent that series of Preference Stock have not been established and variations in the relative rights and preferences as between series have not been fixed and determined in these Articles, authority is vested in the Board of Directors of the Company to divide the shares of Preference Stock into and to establish series of Preference Stock, to fix and determine the relative rights and preferences of the shares of any series so established, to issue and sell any and all of the authorized and unissued shares of Preference Stock as shares of any series thereof established by action of the Board of Directors pursuant hereto, and to create a sinking or purchase fund for the redemption or purchase of shares of any series without the necessity of providing a sinking or purchase fund for any other series. PREFERENCE STOCK ---------------- General Provisions ------------------ The following provisions shall apply to all shares of the Preference Stock irrespective of series: (A) The shares of Preference Stock shall be subordinate to the Preferred Stock but in preference to the Common Stock as to the payment of dividends. The holders of the Preference Stock of each series shall be entitled to receive dividends, payable when and as declared by the Board of Directors, at such rates as shall be determined for the respective series, from the date upon which such share shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other stock of the Company not having preference over the Preference Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Preference Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other stock of the Company not having preference over the Preference Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Preference Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on the Preference Stock of all series for all dividend periods terminating on the same or an earlier date. As to all series of Preference Stock, the term "dividend period" shall mean any of the four calendar quarters in each year commencing, respectively, the first day of January, April, July and October and the first days of each such calendar quarter shall be the dividend payment dates for the regular quarterly dividends payable for the preceding dividend period of such series. (B) When full cumulative dividends as aforesaid upon the Preference Stock of all series then outstanding for all past dividend periods and for the current dividend periods shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock or any other stock over which the Preference Stock has a preference as to payment of dividends, and no holders of any series of the Preference Stock as such shall be entitled to share therein. (C) The shares of Preference Stock shall be subordinate to the Preferred Stock but in preference to the Common Stock upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary. Upon any such dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of Preference Stock of each series, without any preference of the shares of any series of Preference Stock over the shares of any other series of Preference Stock, shall be entitled to receive out of the assets of the Company, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other stock not having preference as to assets over the Preference Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. In case the assets shall not be sufficient to pay in full the amounts determined to be payable on all the shares of Preference Stock in the event of voluntary or involuntary liquidation, as the case may be, then the assets available for such payment shall be distributed ratably among the holders of the Preference Stock of all series in accordance with the amounts determined to be payable on the shares of each series, in the event of voluntary or involuntary liquidation, as the case may be, in proportion to the full preferential amounts to which they are respectively entitled. After payment to the holders of the Preference Stock of the full preferential amounts hereinbefore provided for, the holders of the Preference Stock as such shall have no right or claim to any of the remaining assets of the Company, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed among the holders of the Common Stock or of any other stock over which the Preference Stock has preference as to assets. Without limiting the right of the Company to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger, or consolidation, the sale of all the property of the Company to, or the merger or consolidation of the Company into or with any other corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (D) At the option of the Board of Directors of the Company, the Company may redeem any series of Preference Stock determined to be redeemable, or any part of any series, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Preference Stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the By-laws of the Company or by resolution of the Board of Directors; and, provided, further, that in every case of redemption of less than all of the outstanding shares of any one series of Preference Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the By-laws of the Company or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Company may deposit, or may cause its nominee to deposit, the aggregate redemption price with some bank or trust Company named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Company or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no such deposit is made, upon said redemption date (unless the Company defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares and from and after the making of said deposit, or, if no such deposit is made, after the redemption date (the Company not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Company, or its nominee, with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust Company, or if no such deposit is made, from the Company, without interest thereon, upon endorsement, if required, and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Company as aforesaid, such nominee shall upon such deposit become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Preference Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Company such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. Nothing herein contained shall limit any legal right of the Company to purchase any shares of the Preference Stock. (E-1) So long as any shares of the Preference Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least 66-2/3% of the shares of Preference Stock at the time outstanding, adopt an amendment to these Articles if such amendment would either (i) authorize or create, or increase the authorized amount of, any class of stock, other than shares of the Preferred Stock (whether now or hereafter authorized), which is entitled to dividends or assets in priority to the Preference Stock or (ii) change any of the rights and preferences of the then outstanding Preference Stock. (E-2) So long as any shares of the Preference Stock are outstanding, the Company shall not, without the affirmative vote in favor thereof of the holders of at least a majority of the shares of Preference Stock at the time outstanding, adopt an amendment to these Articles if such amendment would either (i) increase the authorized amount of Preference Stock or (ii) authorize or create, or increase the authorized amount of, any class of stock, which is entitled to dividends or assets on a parity with the Preference Stock, provided; however, that nothing in this paragraph or in paragraph E-1 above contained shall authorize the adoption of any amendment of these Articles by the vote of the holders of a less number of shares of Preference Stock, or of any other class of stock, or of all classes of stock, than is required for such amendment by the laws of the State of Michigan at the time applicable thereto. PREFERENCE STOCK ---------------- Voting Powers ------------- The holders of Preference Stock shall not have any right to vote for the election of directors or for any other purpose, except as otherwise provided by law, as set forth in the two immediately preceding paragraphs and as set forth below. Whenever and as often as six quarterly dividends payable on the Preference Stock of any series shall be in default, in whole or in part, the holders of the Preference Stock of all series shall have the exclusive right, voting separately and as a single class, to vote for and to elect two directors, subject to the prior rights of the holders of the Preferred Stock. In the event of defaults entitling the Preference Stock to elect two directors as aforesaid, the holders of the Common Stock shall have the exclusive right, voting separately and as a class, to elect the remaining number of directors of the Company, subject to the prior rights of the holders of the Preferred Stock. The right of the holders of the Preference Stock to elect two directors, however, shall cease when all defaults in the payment of dividends on their stock shall have been cured, and such dividends shall be declared and paid out of any funds legally available therefor as soon as, in the judgment of the Board of Directors, is reasonably practicable. The terms of office of all persons who may be directors of the Company at the time when the right to elect two directors shall accrue to the holders of the Preference Stock, as herein provided, shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders, at the request in writing of the holders of not less than 1,000 shares of the then outstanding Preference Stock addressed to the Secretary of the Company at its principal business office. Any vacancy in the Board of Directors occurring during any period when the Preference Stock shall have elected representatives on the Board shall be filled by a majority vote of the remaining directors (or the one director) representing the class of stock theretofore represented by the director causing the vacancy. In the event of simultaneous vacancies among directors elected by the holders of the Preference Stock, an election, pursuant to the provisions of this paragraph, will be held. Upon the termination of such exclusive right of the holders of the Preference Stock to elect two directors of the Company, the terms of office of all the directors of the Company shall terminate upon the election of their successors at a meeting of the shareholders of the Company then entitled to vote. Such election shall be held at the next annual meeting of shareholders or may be held at a special meeting of shareholders, which shall be held upon notice as provided in the By-laws of the Company for a special meeting of the shareholders at the request in writing of the holders of not less than 1,000 shares of the then outstanding Common Stock addressed to the Secretary of the Company at its principal business office. At all meetings of the shareholders held for the purpose of electing directors during such times as the holders of the Preference Stock shall have the exclusive right to elect two of the directors of the Company, the presence in person or by proxy of the holders of a majority of the outstanding shares of Common Stock shall be required to constitute a quorum of such class for the election of directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of Preference Stock of all series shall be required to constitute a quorum of such class for the election of directors; provided, however, that the absence of a quorum of the holders of stock of either class shall not prevent the election at any such meeting, or adjournment thereof, of directors by the other class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting; and provided, further, that, in the absence of a quorum of the holders of stock of either class, a majority of those holders of such stock who are present in person or by proxy shall have the power to adjourn the election of those directors to be elected by that class from time to time without notice, other than announcement at the meeting, until the requisite amount of holders of stock of such class shall be present in person or by proxy. At all elections of directors, each shareholder will be entitled to as many votes as shall equal the number of his shares of stock multiplied by the number of directors to be elected for whom such shareholder may vote, and he may cast all of such votes for a single director or may distribute them between the two directors to be voted for, as he may see fit. For the purposes of the foregoing provisions, the Preference Stock of all series shall be deemed to be a single class. PREFERENCE STOCK ---------------- Pre-emptive Rights ------------------ The holders of shares of Preference Stock shall have no pre- emptive rights to subscribe for or purchase any additional issues of shares of the capital stock of the Company of any class now or hereafter authorized or any bonds, debentures or other obligations or rights or options convertible into or exchangeable for or entitling the holder or owner to subscribe for or purchase any shares of capital stock, or any rights to exchange shares issued for shares to be issued. ARTICLE VIII Each director shall be a shareholder of the Company and any Director ceasing to be a shareholder shall thereupon immediately cease to be a Director. Signed on March 25, 1994 CONSUMERS POWER COMPANY (SEAL) By /s/Michael G. Morris --------------------------------------- Michael G. Morris President and Chief Executive Officer STATE OF MICHIGAN) ) SS. COUNTY OF JACKSON) On this 25th day of March 1994 before me appeared Michael G. Morris, to me personally known, who, being by me duly sworn, did say that he is President and Chief Executive Officer of Consumers Power Company, who executed the foregoing instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said officer acknowledged said instrument to be the free act and deed of said corporation. /s/Margaret Hillman ----------------------------- Margaret Hillman (SEAL) Notary Public for Jackson County, State of Michigan. My commission expires August 21, 1995. EX-3 3 CONSUMERS EXHIBIT 3(D) BY-LAWS Exhibit (3)(d) CONSUMERS ENERGY COMPANY BYLAWS ARTICLE I: LOCATION OF OFFICES Section 1 - Registered Office: The registered office of Consumers Energy Company, (the "Company") shall be at such place in the City of Jackson, County of Jackson, Michigan, or elsewhere in the State of Michigan, as the Board of Directors may from time to time designate. Section 2 - Other Offices: The Company may have and maintain other offices within or without the State of Michigan. ARTICLE II: CORPORATE SEAL Section 1 - Corporate Seal: The Company shall have a corporate seal bearing the name of the Company. The form of the corporate seal may be altered by the Board of Directors. ARTICLE III: FISCAL YEAR Section 1 - Fiscal Year: The fiscal year of the Company shall begin with the first day of January and end with the thirty-first day of December of each year. ARTICLE IV: SHAREHOLDERS' MEETINGS Section 1 - Annual Meetings: An annual meeting of the shareholders for election of Directors and for such other business as may come before the meeting shall be held at the registered office of the Company or at such other place within or without the State of Michigan, at 10:00 AM, Eastern Daylight Saving Time, or at such other time on the fourth Friday in April of each year or upon such other date as the Board of Directors may designate, but in no event shall such date be more than ninety (90) days after the fourth Friday in April. Section 2 - Special Meetings: Special meetings of the shareholders may be called by the Board of Directors or by the Chairman of the Board. Such meetings shall be held at the registered office of the Company or at such other place within or without the State of Michigan as the Board of Directors may designate. Section 3 - Notices: Except as otherwise provided by law, written notice of any meeting of the shareholders shall be given, either personally or by mail to each shareholder of record entitled to vote at such meeting, not less than ten (10) days nor more than sixty (60) days prior to the date of the meeting, at their last known address as the same appears on the stock records of the Company. Written notice shall be considered given when deposited, with postage thereon prepaid, in a post office or official depository under the control of the United States postal service. Such notice shall specify the time and place of holding the meeting, the purpose or purposes for which such meeting is called, and the record date fixed for the determination of shareholders entitled to notice of and to vote at such meeting. The Board of Directors shall fix a record date for determining shareholders entitled to notice of and to vote at a meeting of shareholders, which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of the meeting. Such record date shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date for purposes of the adjourned meeting. No notice of an adjourned meeting shall be necessary if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting only such business may be transacted as might have been transacted at the original meeting. If, after an adjournment, the Board of Directors shall fix a new record date for the adjourned meeting, a notice of the adjourned meeting shall be mailed, in conformity with the provisions of the first paragraph of this Section 3, to each shareholder of record on the new record date entitled to vote at the adjourned meeting. Section 4 - Quorum: Except as otherwise provided by law or by the Articles of Incorporation of the Company, the holders of the shares of stock of the Company entitled to cast a majority of the votes at a meeting shall constitute a quorum for the transaction of business at the meeting, but a lesser number may convene any meeting and, by a majority vote of the shares present at the meeting, may adjourn the same from time to time until a quorum shall be present. Section 5 - Voting: Shareholders may vote at all meetings in person or by proxy in writing, but all proxies shall be filed with the Secretary of the meeting before being voted upon. The voting powers of the shares of Preferred Stock, Class A Preferred Stock, Preference Stock and Common Stock shall be as provided by law or set forth in the Articles of Incorporation of the Company. Section 6 - Inspectors: In advance of any meeting of shareholders the Board of Directors shall appoint one or more inspectors to act at such meeting or any adjournment thereof. The inspectors shall have such powers and duties as are provided by law. ARTICLE V: DIRECTORS Section 1 - Number: The Board of Directors of the Company shall consist of not less than seven (7) nor more than seventeen (17) members, as fixed from time to time by resolution of the Board of Directors. Section 2 - Election: The Directors shall be elected annually at the annual meeting of the shareholders or at any adjournment thereof. Section 3 - Term of Office: Subject to the provisions of the Articles of Incorporation of the Company and unless otherwise provided by law, the Directors shall hold office from the date of their election until the next succeeding annual meeting and until their successors are elected and shall qualify. Section 4 - Vacancies: Any vacancy or vacancies in the Board of Directors arising from any cause may be filled by the affirmative vote of a majority of the Directors then in office although less than a quorum. An increase in the number of members shall be construed as creating a vacancy. ARTICLE VI: DIRECTORS' MEETINGS Section 1 - Organization Meeting: As soon as possible after their election, the Board of Directors shall meet and organize and may also transact other business. Section 2 - Other Meetings: Meetings of the Board of Directors may be held at any time upon call of the Secretary or an Assistant Secretary made at the direction of the Chairman of the Board, the President, a Vice Chairman, if any, or a Vice President. Section 3 - Place of Meeting: All meetings of Directors shall be held at such place within or without the State of Michigan as may be designated in the call therefor. Section 4 - Notice: A reasonable notice of all meetings, in writing or otherwise, shall be given to each Director or sent to the Director's residence or place of business; provided, however, that no notice shall be required for an organization meeting if held on the same day as the shareholders' meeting at which the Directors were elected. No notice of the holding of an adjourned meeting shall be necessary. Notice of all meetings shall specify the time and place of holding the meeting and unless otherwise stated any and all business may be transacted at any such meeting. Notice of the time, place and purpose of any meeting may be waived in writing either before or after the holding thereof. Section 5 - Quorum: At all meetings of the Board of Directors a majority of the Board then in office shall constitute a quorum but a majority of the Directors present may convene and adjourn any such meeting from time to time until a quorum shall be present; provided, that if the Board shall consist of ten (10) and not more than fifteen (15), then five (5) members shall constitute a quorum; and if the Board shall consist of more than fifteen (15), then seven (7) members shall constitute a quorum. Section 6 - Voting: All questions coming before any meeting of the Board of Directors for action shall be decided by a majority vote of the Directors present at such meeting, unless otherwise provided by law, the Articles of Incorporation of the Company or by these Bylaws. Section 7 - Participation by Communications Equipment: A Director or a member of a Committee designated by the Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 8 - Action Without Meeting: Any action required or permitted to be taken pursuant to authorization voted at a meeting of the Board of Directors or a Committee thereof, may be taken without a meeting if, before or after the action, all members of the Board or of the Committee consent thereto in writing. The written consents shall be filed with the minutes of the proceedings of the Board or Committee, and the consents shall have the same effect as a vote of the Board or Committee for all purposes. ARTICLE VII: EXECUTIVE AND OTHER COMMITTEES Section 1 - Number and Qualifications: By resolution passed by a majority of the whole Board, the Board of Directors may from time to time designate one or more of their number to constitute an Executive or any other Committee of the Board, as the Board of Directors may from time to time determine to be desirable, and may fix the number of and designate the Chairman of each such Committee. Except as otherwise provided by law, the powers of each such Committee shall be as defined in the resolution or resolutions of the Board of Directors relating to the authorizations of such Committee, and may include, if such resolution or resolutions so provide, the power and authority to declare a dividend or to authorize issuance of shares of stock of the Company. Section 2 - Appointment: The appointment of members of each such Committee, or other action respecting any Committee, may take place at any meeting of the Directors. Section 3 - Term of Office: The members of each Committee shall hold office at the pleasure of the Board of Directors. Section 4 - Vacancies: Any vacancy or vacancies in any such Committee arising from any cause shall be filled by resolution passed by a majority of the whole Board of Directors. By like vote the Board may designate one or more Directors to serve as alternate members of a Committee, who may replace an absent or disqualified member at a meeting of a Committee; provided, however, in the absence or disqualification of a member of a Committee, the members of the Committee present at a meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act in the place of the absent or disqualified member. Section 5 - Minutes: Except as provided in Section 2 of Article X hereof or as otherwise determined by the Board of Directors, each such Committee shall make a written report or recommendation following its meetings or keep minutes of all its meetings. Section 6 - Quorum: At all meetings of any duly authorized Committee of the Board of Directors, a majority of the members of such Committee shall constitute a quorum but a majority of the members present may convene and adjourn any such meeting from time to time until a quorum shall be present; provided, that with respect to any Committee of the Board other than the Executive Committee, if the membership of such Committee is four (4) or less, then two (2) members of such Committee shall constitute a quorum and one member may convene and adjourn any such meeting from time to time until a quorum shall be present. ARTICLE VIII: OFFICERS Section 1 - Election: The officers shall be chosen by the Board of Directors. The Company shall have a Chairman of the Board, a President, a Secretary and a Treasurer, and such other officers as the Board of Directors may from time to time determine, who shall have respectively such duties and authority as may be provided by these Bylaws or as may be provided by resolution of the Board of Directors not inconsistent herewith. Any two (2) or more of such offices may be held by the same person but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, by the Articles of Incorporation of the Company or by these Bylaws to be executed, acknowledged or verified by two (2) or more officers. Section 2 - Qualifications: The Chairman of the Board and Vice Chairman, if any, shall be chosen from among the Board of Directors, but the other officers need not be members of the Board. Section 3 - Vacancies: Any vacancy or vacancies among the officers arising from any cause shall be filled by the Board of Directors. In case of the absence of any officer of the Company or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may delegate, for the time being, the powers or duties, or any of them, of any officer to any other officer or to any Director. Section 4 - Term of Office: Each officer of the Company shall hold office until the officer's successor is chosen and qualified, or until the officer's resignation or removal. Any officer appointed by the Board of Directors may be removed at any time by the Board of Directors with or without cause. Section 5 - Compensation: The compensation of the officers shall be fixed by the Board of Directors. ARTICLE IX: AGENTS Section 1 - Resident Agent: The Company shall have and continuously maintain a resident agent, which may be either an individual resident in the State of Michigan whose business office is identical with the Company's registered office or a Michigan corporation or a foreign corporation authorized to transact business in Michigan and having a business office identical with the Company's registered office. The Board of Directors shall appoint the resident agent. Section 2 - Other Agents: The Board of Directors may appoint such other agents as may in their judgment be necessary for the proper conduct of the business of the Company. ARTICLE X: POWERS AND DUTIES Section 1 - Directors: The business and affairs of the Company shall be managed by the Board of Directors which shall have and exercise all of the powers and authority of the Company except as otherwise provided by law, by the Articles of Incorporation of the Company or by these Bylaws. Section 2 - Executive Committee: In the interim between meetings of the Board of Directors the Executive Committee shall have and exercise all the powers and authority of the Board of Directors except as otherwise provided by law. The Executive Committee shall meet from time to time on the call of the Chairman of the Board or the Chairman of the Committee. The Secretary shall keep minutes in sufficient detail to advise fully the Board of Directors of the actions taken by the Committee and shall submit copies of such minutes to the Board of Directors for its approval or other action at its next meeting. Section 3 - Chairman of the Board: The Chairman of the Board shall preside at all meetings of Directors and shareholders; shall perform and do all acts and things incident to the position of Chairman of the Board; and shall perform such other duties as may be assigned from time to time by the Board of Directors or the Executive Committee. Unless otherwise provided by the Board or the Executive Committee, the Chairman of the Board shall have full power and authority on behalf of the Company to execute any shareholders' consents and to attend and act and to vote in person or by proxy at any meetings of shareholders of any corporation in which the Company may own stock and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Company might have possessed and exercised if present. If the Chairman of the Board shall not exercise such powers, or in the absence or inability to act of the Chairman, the President may exercise such powers. In the absence or inability to act of the President, a Vice Chairman, if any, may exercise such powers. In the absence or inability to act of a Vice Chairman, any Vice President may exercise such powers. The Board of Directors or Executive Committee by resolution from time to time may confer like powers upon any other person or persons. Section 4 - President: The President shall be the chief executive officer of the Company and, subject to the supervision of the Board of Directors and of the Executive Committee, shall have general charge of the business and affairs of the Company; shall perform and do all acts and things incident to such position; and shall perform such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee or the Chairman of the Board. In the absence of the Chairman of the Board and a Vice Chairman, the President shall preside at meetings of Directors. In the absence of the Chairman of the Board, the President shall preside at meetings of shareholders. Section 5 - Vice Chairman: The Vice Chairman, if any, shall perform such of the duties of the Chairman of the Board or the President on behalf of the Company as may be respectively assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President. In the absence of the Chairman of the Board, the Vice Chairman shall preside at meetings of Directors. In the absence of the Chairman of the Board and the President, the Vice Chairman shall preside at meetings of shareholders. Section 6 - Vice Presidents: Vice Presidents, if any, shall perform such of the duties of the Chairman of the Board or the President or the Vice Chairman, if any, on behalf of the Company as may be respectively assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President or a Vice Chairman. The Board of Directors or Executive Committee may designate one or more of the Vice Presidents as Executive Vice President or Senior Vice President. Section 7 - Controller: Subject to the Board of Directors, the Executive Committee, the Chairman of the Board, the President and the Vice President having general charge of accounting, the Controller, if any, shall have charge of the supervision of the accounting system of the Company, including the preparation and filing of all tax returns and financial reports required by law to be made to any and all public authorities and officials; and shall perform such other duties as may be assigned, from time to time, by the Board of Directors, the Executive Committee, the Chairman of the Board, the President, a Vice Chairman, if any, or Vice President having general charge of accounting. Section 8 - Treasurer: It shall be the duty of the Treasurer to have the care and custody of all the funds and securities, including the investment thereof, of the Company which may come into the Treasurer's hands, and to endorse checks, drafts and other instruments for the payment of money for deposit or collection when necessary or proper and to deposit the same to the credit of the Company in such bank or banks or depository as the Treasurer may designate, and the Treasurer may endorse all commercial documents requiring endorsements for or on behalf of the Company. The Treasurer may sign all receipts and vouchers for the payments made to the Company; shall render an account of transactions to the Board of Directors or the Executive Committee as often as the Board or the Committee shall require; and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and a Vice Chairman, if any. Section 9 - Secretary: The Secretary shall act as custodian of and record the minutes of all meetings of the Board of Directors, of the Executive Committee, of the shareholders and of any Committees of the Board of Directors which keep formal minutes; shall attend to the giving and serving of all notices of the Company; shall prepare or cause to be prepared the list of shareholders required to be produced at any meeting; shall attest the seal of the Company upon all contracts and instruments executed under such seal and shall affix or cause to be affixed the seal of the Company thereto and to all certificates of shares of the capital stock; shall have charge of the stock records of the Company and such other books and papers as the Board of Directors, the Executive Committee, the Chairman of the Board, the President or a Vice Chairman, if any, may direct; and shall, in general, perform all the duties of Secretary, subject to the control of the Board of Directors, the Executive Committee, the Chairman of the Board, the President and a Vice Chairman, if any. Section 10 - General Counsel: The General Counsel, if any, shall have charge of all matters of a legal nature involving the Company. Section 11 - Assistant Controllers, Assistant Secretaries and Assistant Treasurers: An Assistant Controller, an Assistant Secretary or an Assistant Treasurer, if any, shall, in the absence or inability to act or at the request of the Controller, Secretary or Treasurer, respectively, perform the duties of the Controller or Secretary or Treasurer, respectively, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Chairman of the Board, the President or a Vice Chairman, if any. The performance of any such duty shall be conclusive evidence of their right to act. Section 12 - Principal Financial Officer and Principal Accounting Officer: The Board of Directors or the Executive Committee may from time to time designate officers of the Company to be the Principal Financial Officer and the Principal Accounting Officer of the Company. ARTICLE XI: STOCK Section 1 - Stock Certificates: The shares of stock of the Company shall be represented by certificates which shall be numbered and shall be entered on the stock records of the Company and registered as they are issued. Each certificate shall state on its face that the Company is formed under the laws of Michigan, the name of the person or persons to whom issued, the number and class of shares and the designation of the series the certificate represents, and the par value of each share represented by the certificate; shall be signed by the Chairman of the Board or a Vice Chairman or the President or one of the Vice Presidents and also may be signed by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary; and shall be sealed with the seal of the Company or a facsimile thereof. When such certificates are countersigned by a transfer agent or registered by a registrar, the signatures of any such Chairman of the Board, Vice Chairman, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. In case any officer, who shall have signed or whose facsimile signature shall have been placed on any such certificate, shall cease to be such officer of the Company before such certificate shall have been issued by the Company, such certificate may nevertheless be issued by the Company with the same effect as if the person, who signed such certificate or whose facsimile signature shall have been placed thereon, were such officer of the Company at the date of issue. Each certificate shall set forth on its face or back or state that the Company will furnish to a shareholder upon request and without charge a full statement of the designations, relative rights, preferences and limitations of the shares of stock of each class authorized to be issued and of each series so far as the same have been prescribed and the authority of the Board of Directors to designate and prescribe the relative rights, preferences and limitations of other series. Section 2 - Stock Records: The shares of stock of the Company shall be transferable on the stock records of the Company in person or by proxy duly authorized and upon surrender and cancellation of the old certificates therefor. The Board of Directors may fix a date preceding the date fixed for any meeting of the shareholders or any dividend payment date or the date for the allotment of rights or the date when any change, conversion or exchange of stock shall go into effect or the date for any other action, as the record date for the determination of the shareholders entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights in respect of any such change, conversion or exchange of stock or to take such other action, as the case may be, notwithstanding any transfer of shares on the records of the Company or otherwise after any such record date fixed as aforesaid. The record date so fixed by the Board shall not be more than sixty (60) nor less than ten (10) days before the date of the meeting of the shareholders, nor more than sixty (60) days before any other action. If the Board of Directors does not fix a date of record, as aforesaid, the record date shall be as provided by law. Section 3 - Stock - Preferred, Class A Preferred, Preference and Common: The Preferred Stock, Class A Preferred Stock, Preference Stock and Common Stock of the Company shall consist of shares having a par value of $100, no par value, $1 and $10 per share, respectively. The designations, relative rights, preferences, limitations and voting powers, or restrictions, or qualifications of the shares of Preferred Stock, Class A Preferred Stock, Preference Stock and Common Stock shall be as set forth in the Articles of Incorporation of the Company. Section 4 - Replacing Certificates: In case of the alleged loss, theft or destruction of any certificate of shares of stock and the submission of proper proof thereof, a new certificate may be issued in lieu thereof upon delivery to the Company by the owner or the owner's legal representative of a bond of indemnity against any claim that may be made against the Company on account of such alleged lost, stolen or destroyed certificate or such issuance of a new certificate. ARTICLE XII: AUTHORIZED SIGNATURES Section 1 - Authorized Signatures: All checks, drafts and other negotiable instruments issued by the Company shall be made in the name of the Company and shall be signed manually or signed by facsimile signature by such one of the officers of the Company or such other person as the Chairman of the Board may from time to time designate. ARTICLE XIII: INSURANCE Section 1 - Insurance: The Company may purchase and maintain liability insurance, to the full extent permitted by law, on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity. ARTICLE XIV: AMENDMENTS OF BYLAWS Section 1 - Amendments, How Effected: These Bylaws may be amended or repealed, or new Bylaws may be adopted, either by the majority vote of the votes cast by the shareholders entitled to vote thereon or by the majority vote of the Directors then in office at any meeting of the Directors. March 11, 1997 EX-10 4 CMS ENERGY EX 10(M) EMP. AGREE. W/ W.J.HAENER Exhibit (10)(m) EMPLOYMENT AGREEMENT AGREEMENT between CMS Gas Transmission and Storage Company, a Michigan corporation (the "Company"), and William J. Haener (the "Execu- tive") dated this 2nd day of April, 1996. Whereas the Company considers the maintenance of a vital management essential to protecting and enhancing the best interests of the Company and its shareholders. Whereas the Company has determined to encourage the continuing attention and dedication of the key members of its management without the distraction arising from the possibility of a change in control. Therefore, the parties hereto agree as follows: 1. Operation of Agreement. The "Effective Date" shall be the date on which a Change of Control (as defined in Section 2) shall occur. 2. Change of Control. As used in this Agreement, "Change of Control" shall be deemed to have taken place if a person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes the beneficial owner of shares having 35% or more of the total number of votes that may be cast in the election of Directors of CMS Energy Corporation. 3. Employment. The Company hereby agrees to continue to employ and engage the services of the Executive as its President and Chief Executive Officer for the period beginning on the Effective Date and ending on the earlier of the fifth anniversary of such date or the Normal Retirement Date of the Executive under the Consumers Power Company's Pension Plan (hereinafter "Employment Period"). The Executive agrees to serve the Company in such position, unless an event shall occur which is described in Section 6. 4. Duties. The Executive agrees during the Employment Period to devote his full business time to the business and affairs of the Company (except for (i) services on corporate, civic or charitable boards or committees, (ii) such reasonable time as shall be required for the investment of the Executive's assets, which do not significantly interfere with the performance of his responsibilities hereunder and (iii) periods of vacation and sick leave to which he is entitled) and to use his best efforts to promote the interests of the Company and to perform faithfully and efficiently the responsibilities of its President and Chief Executive Officer. 5. Compensation and Other Terms of Employment. (a) Base Salary. The Executive shall receive an annual base salary ("Base Salary") of not less than his annual salary immediately prior to the Effective Date (payable in equal semi-monthly installments) from the Company. The Base Salary shall be reviewed and may be increased at any time and from time to time in accordance with the Company's regular practices, and shall be reviewed at least annually by the Organization and Compensation Committee of its Board of Directors. (b) Incentive Compensation. As further compensation, the Executive will be eligible for awards ("Incentive Compensation") under the Company's Executive Incentive Compensation Plan in which he was participating immediately prior to the Effective Date. (c) Retirement, Savings and Stock Option Plans. In addition to the Base Salary and Incentive Compensation payable as hereinabove provided, the Executive shall be entitled to participate in savings, stock options and other incentive plans and programs available to executives of the Company or to opportunities provided under any such plans in which he was participating immediately preceding the Effective Date, whichever is greater. (d) Vacation and Employee Benefits. (i) The Executive shall be entitled to paid vacation and other employee benefits and perquisites, in accordance with the policies of the Company in effect for executive officers, or the vacation employee benefits and perquisites to which he was entitled immediately prior to the Effective Date, whichever is greater. 6. Termination. (a) Death. This Agreement shall terminate automatically upon the Executive's death. In the event of such termination, the Company shall pay to the Executive's estate all benefits and compensation accrued hereunder to the date of death, including a pro rata portion of incentive compensation. (b) Disability. In the event the Executive becomes unable by reason of physical or mental disability to render the services required hereunder and such disability continues for a continuous period of 6 months, the employment of the Executive hereunder shall terminate, unless the employment is extended by agreement of the Company and the Executive. Commencing at the date of termination of employment for disability, the Executive shall receive annually a sum equal to 50% of his Base Salary at the time of termination of employment, in monthly installments until his 62nd birthday, or his death if earlier. Disability payments hereunder shall be reduced by the amount of other Company-sponsored disability benefits paid to the Executive through insurance or otherwise. (c) Termination with Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" shall mean an act or acts of dishonesty, fraud, misappropriation or intentional material damage to the property or business of the Company or commission of a felony on the Executive's part. If the Executive's employment is terminated for Cause, the Company shall pay the Executive his full accrued Base Salary through the date of such termination at the rate in effect at the time of such termination, and the Company shall have no further obligations to the Executive under this Agreement. (d) Other Termination or Resignation of Executive. (i) The Company may terminate the Executive's employment without Cause. (ii) In the event that the Executive determines in his sole judgment that his position, authority, or responsibilities have been diminished as a result of the "Change of Control," the Executive may terminate his employment with the Company upon written notice given within 12 months after the Effective Date. (iii) In the event of a termination of employment under this subsection (d), the Executive shall receive a severance payment equal to twice his Base Salary at the time of termination of employment plus either twice his incentive compensation payable with respect to the last full calendar year prior to the termination of employment or, if no incentive compensation was awarded to the Executive with respect to the last full calendar year prior to the termination of employment, twice the standard incentive award, as defined in the Company's Executive Incentive Compensation Plan for the salary grade of the Executive for such year. The severance payment shall be paid in a lump sum payment, in cash, or as otherwise directed by the Executive. 7. No Obligation to Mitigate Damages. The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments and arrangements required to be made under this Agreement. 8. Indemnification. The Company shall include the Executive in its Director and Officer Liability Insurance policy, if any, during his Employment Period and for a period of not less than five years after the termination of the Executive's employment for any reason whatsoever. In addition to insurance and any other indemnification available to the Executive as an Officer, the Company shall indemnify, to the extent permitted by applicable law, the Executive for settlements, judgments and reasonable expenses in connection with activities arising from services rendered by the Executive as a Director or Officer of the Company or any affiliated company. 9. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, Attn: Secretary, at its principal executive offices. 10. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien or security interest upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution. 11. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Michigan. 12. Amendment. This Agreement may be amended or cancelled only by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 13. Successor to the Company. Except as may be otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. 14. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first above written. /s/ William J. Haener ----------------------------------------- William J. Haener CMS GAS TRANSMISSION AND STORAGE COMPANY By: /s/ William T. McCormick, Jr. ----------------------------------------- William T. McCormick, Jr. Chairman of the Board EX-10 5 CMS ENERGY EX 10(N) EMP. AGREE. W/ J.W.COOK Exhibit (10)(n) EMPLOYMENT AGREEMENT AGREEMENT between CMS Energy Corporation, a Michigan corporation, CMS Enterprises Company, a Michigan corporation (the "Companies"), and James W. Cook (the "Executive") dated this 4th day of April, 1996. Whereas the Companies consider the maintenance of a vital management essential to protecting and enhancing the best interests of the Companies and their shareholders. Whereas the Companies have determined to encourage the continuing attention and dedication of the key members of their management without the distraction arising from the possibility of a change in control. Therefore, the parties hereto agree as follows: 1. Operation of Agreement. The "Effective Date" shall be the date on which a Change of Control (as defined in Section 2) shall occur. 2. Change of Control. As used in this Agreement, "Change of Control" shall be deemed to have taken place if a person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes the beneficial owner of shares having 35% or more of the total number of votes that may be cast in the election of Directors of CMS Energy Corporation. 3. Employment. The Companies hereby agree to continue to employ and engage the services of the Executive as their Senior Vice President of the Companies for the period beginning on the Effective Date and ending on the earlier of the fifth anniversary of such date or the Normal Retirement Date of the Executive under the Consumers Power Company's Pension Plan (hereinafter "Employment Period"). The Executive agrees to serve the Companies in such position, unless an event shall occur which is described in Section 6. 4. Duties. The Executive agrees during the Employment Period to devote his full business time to the business and affairs of the Companies (except for (i) services on corporate, civic or charitable boards or committees, (ii) such reasonable time as shall be required for the investment of the Executive's assets, which do not significantly interfere with the performance of his responsibilities hereunder and (iii) periods of vacation and sick leave to which he is entitled) and to use his best efforts to promote the interests of the Companies and to perform faithfully and efficiently the responsibilities of Senior Vice President. 5. Compensation and Other Terms of Employment. (a) Base Salary. The Executive shall receive an annual base salary ("Base Salary") of not less than his annual salary immediately prior to the Effective Date (payable in equal semi-monthly installments) from the Companies. The Base Salary shall be reviewed and may be increased at any time and from time to time in accordance with the Companies' regular practices, and shall be reviewed at least annually by the Organization and Compensation Committee of its Board of Directors. (b) Incentive Compensation. As further compensation, the Executive will be eligible for awards ("Incentive Compensation") under the Companies' Executive Incentive Compensation Plan in which he was participating immediately prior to the Effective Date. (c) Retirement, Savings and Stock Option Plans. In addition to the Base Salary and Incentive Compensation payable as hereinabove provided, the Executive shall be entitled to participate in savings, stock options and other incentive plans and programs available to executives of the Companies or to opportunities provided under any such plans in which he was participating immediately preceding the Effective Date, whichever is greater. (d) Vacation and Employee Benefits. (i) The Executive shall be entitled to paid vacation and other employee benefits and perquisites, in accordance with the policies of the Companies in effect for executive officers, or the vacation employee benefits and perquisites to which he was entitled immediately prior to the Effective Date, whichever is greater. 6. Termination. (a) Death. This Agreement shall terminate automatically upon the Executive's death. In the event of such termination, the Companies shall pay to the Executive's estate all benefits and compensation accrued hereunder to the date of death, including a pro rata portion of incentive compensation. (b) Disability. In the event the Executive becomes unable by reason of physical or mental disability to render the services required hereunder and such disability continues for a continuous period of 6 months, the employment of the Executive hereunder shall terminate, unless the employment is extended by agreement of the Companies and the Executive. Commencing at the date of termination of employment for disability, the Executive shall receive annually a sum equal to 50% of his Base Salary at the time of termination of employment, in monthly installments until his 62nd birthday, or his death if earlier. Disability payments hereunder shall be reduced by the amount of other Companies-sponsored disability benefits paid to the Executive through insurance or otherwise. (c) Termination with Cause. The Companies may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" shall mean an act or acts of dishonesty, fraud, misappropriation or intentional material damage to the property or business of the Companies or commission of a felony on the Executive's part. If the Executive's employment is terminated for Cause, the Companies shall pay the Executive his full accrued Base Salary through the date of such termination at the rate in effect at the time of such termination, and the Companies shall have no further obligations to the Executive under this Agreement. (d) Other Termination or Resignation of Executive. (i) The Companies may terminate the Executive's employment without Cause. (ii) In the event that the Executive determines in his sole judgment that his position, authority, or responsibilities have been diminished as a result of the "Change of Control," the Executive may terminate his employment with the Companies upon written notice given within 12 months after the Effective Date. (iii) In the event of a termination of employment under this subsection (d), the Executive shall receive a severance payment equal to twice his Base Salary at the time of termination of employment plus either twice his incentive compensation payable with respect to the last full calendar year prior to the termination of employment or, if no incentive compensation was awarded to the Executive with respect to the last full calendar year prior to the termination of employment, twice the standard incentive award, as defined in the Companies' Executive Incentive Compensation Plan for the salary grade of the Executive for such year. The severance payment shall be paid in a lump sum payment, in cash, or as otherwise directed by the Executive. 7. No Obligation to Mitigate Damages. The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Companies' obligations to make the payments and arrangements required to be made under this Agreement. 8. Indemnification. The Companies shall include the Executive in their Director and Officer Liability Insurance policy, if any, during his Employment Period and for a period of not less than five years after the termination of the Executive's employment for any reason whatsoever. In addition to insurance and any other indemnification available to the Executive as an Officer, the Companies shall indemnify, to the extent permitted by applicable law, the Executive for settlements, judgments and reasonable expenses in connection with activities arising from services rendered by the Executive as a Director or Officer of the Companies or any affiliated company. 9. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Companies or, in the case of the Companies, Attn: Secretary, at their principal executive offices. 10. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien or security interest upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution. 11. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Michigan. 12. Amendment. This Agreement may be amended or cancelled only by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 13. Successor to the Companies. Except as may be otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Companies and any successor of the Companies. 14. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 15. The Employment Agreement effective May 16, 1989 between CMS Enterprises Company and the Executive is hereby canceled. IN WITNESS WHEREOF, the Companies and the Executive have executed this Agreement as of the date first above written. /s/ James W. Cook ----------------------------------- James W. Cook CMS ENERGY CORPORATION CMS ENTERPRISES COMPANY By: /s/William T. McCormick, Jr. By: /s/ William T. McCormick, Jr. -------------------------------- -------------------------------- William T. McCormick, Jr. William T. McCormick, Jr. Chairman of the Board Chairman of the Board and Chief Executive Officer EX-10 6 CONSUMERS EX 10(O) EMP. AGREE. W/ D.W.JOOS Exhibit (10)(o) EMPLOYMENT AGREEMENT AGREEMENT between Consumers Power Company, a Michigan corporation (the "Company"), and David W. Joos (the "Executive") dated this 19th day of March, 1996. Whereas the Company considers the maintenance of a vital management essential to protecting and enhancing the best interests of the Company and its shareholders. Whereas the Company has determined to encourage the continuing attention and dedication of the key members of its management without the distraction arising from the possibility of a change in control. Therefore, the parties hereto agree as follows: 1. Operation of Agreement. The "Effective Date" shall be the date on which a Change of Control (as defined in Section 2) shall occur. 2. Change of Control. As used in this Agreement, "Change of Control" shall be deemed to have taken place if a person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes the beneficial owner of shares having 35% or more of the total number of votes that may be cast in the election of Directors of CMS Energy Corporation. 3. Employment. The Company hereby agrees to continue to employ and engage the services of the Executive as its Executive Vice President and Chief Operating Officer-Electric of the Company for the period beginning on the Effective Date and ending on the earlier of the fifth anniversary of such date or the Normal Retirement Date of the Executive under the Company's Pension Plan (hereinafter "Employment Period"). The Executive agrees to serve the Company in such position, unless an event shall occur which is described in Section 6. 4. Duties. The Executive agrees during the Employment Period to devote his full business time to the business and affairs of the Company (except for (i) services on corporate, civic or charitable boards or committees, (ii) such reasonable time as shall be required for the investment of the Executive's assets, which do not significantly interfere with the performance of his responsibilities hereunder and (iii) periods of vacation and sick leave to which he is entitled) and to use his best efforts to promote the interests of the Company and to perform faithfully and efficiently the responsibilities of Executive Vice President and Chief Operating Officer-Electric. 5. Compensation and Other Terms of Employment. (a) Base Salary. The Executive shall receive an annual base salary ("Base Salary") of not less than his annual salary immediately prior to the Effective Date (payable in equal semi-monthly installments) from the Company. The Base Salary shall be reviewed and may be increased at any time and from time to time in accordance with the Company's regular practices, and shall be reviewed at least annually by the Organization and Compensation Committee of its Board of Directors. (b) Incentive Compensation. As further compensation, the Executive will be eligible for awards ("Incentive Compensation") under the Company's Executive Incentive Compensation Plan in which he was participating immediately prior to the Effective Date. (c) Retirement, Savings and Stock Option Plans. In addition to the Base Salary and Incentive Compensation payable as hereinabove provided, the Executive shall be entitled to participate in savings, stock options and other incentive plans and programs available to executives of the Company or to opportunities provided under any such plans in which he was participating immediately preceding the Effective Date, whichever is greater. (d) Vacation and Employee Benefits. (i) The Executive shall be entitled to paid vacation and other employee benefits and perquisites, in accordance with the policies of the Company in effect for executive officers, or the vacation employee benefits and perquisites to which he was entitled immediately prior to the Effective Date, whichever is greater. 6. Termination. (a) Death. This Agreement shall terminate automatically upon the Executive's death. In the event of such termination, the Company shall pay to the Executive's estate all benefits and compensation accrued hereunder to the date of death, including a pro rata portion of incentive compensation. (b) Disability. In the event the Executive becomes unable by reason of physical or mental disability to render the services required hereunder and such disability continues for a continuous period of 6 months, the employment of the Executive hereunder shall terminate, unless the employment is extended by agreement of the Company and the Executive. Commencing at the date of termination of employment for disability, the Executive shall receive annually a sum equal to 50% of his Base Salary at the time of termination of employment, in monthly installments until his 62nd birthday, or his death if earlier. Disability payments hereunder shall be reduced by the amount of other Company-sponsored disability benefits paid to the Executive through insurance or otherwise. (c) Termination with Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" shall mean an act or acts of dishonesty, fraud, misappropriation or intentional material damage to the property or business of the Company or commission of a felony on the Executive's part. If the Executive's employment is terminated for Cause, the Company shall pay the Executive his full accrued Base Salary through the date of such termination at the rate in effect at the time of such termination, and the Company shall have no further obligations to the Executive under this Agreement. (d) Other Termination or Resignation of Executive. (i) The Company may terminate the Executive's employment without Cause. (ii) In the event that the Executive determines in his sole judgment that his position, authority, or responsibilities have been diminished as a result of the "Change of Control," the Executive may terminate his employment with the Company upon written notice given within 12 months after the Effective Date. (iii) In the event of a termination of employment under this subsection (d), the Executive shall receive a severance payment equal to twice his Base Salary at the time of termination of employment plus either twice his incentive compensation payable with respect to the last full calendar year prior to the termination of employment or, if no incentive compensation was awarded to the Executive with respect to the last full calendar year prior to the termination of employment, twice the standard incentive award, as defined in the Company's Executive Incentive Compensation Plan for the salary grade of the Executive for such year. The severance payment shall be paid in a lump sum payment, in cash, or as otherwise directed by the Executive. 7. No Obligation to Mitigate Damages. The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments and arrangements required to be made under this Agreement. 8. Indemnification. The Company shall include the Executive in its Director and Officer Liability Insurance policy, if any, during his Employment Period and for a period of not less than five years after the termination of the Executive's employment for any reason whatsoever. In addition to insurance and any other indemnification available to the Executive as an Officer, the Company shall indemnify, to the extent permitted by applicable law, the Executive for settlements, judgments and reasonable expenses in connection with activities arising from services rendered by the Executive as a Director or Officer of the Company or any affiliated company. 9. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, Attn: Secretary, at its principal executive offices. 10. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien or security interest upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution. 11. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Michigan. 12. Amendment. This Agreement may be amended or cancelled only by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 13. Successor to the Company. Except as may be otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. 14. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first above written. /s/ David W. Joos ----------------------------------- David W. Joos CONSUMERS POWER COMPANY By: /s/ William T. McCormick, Jr. ----------------------------------- William T. McCormick, Jr. Chairman of the Board EX-12 7 CMS ENERGY EX 12 RATIO OF EARNINGS TO F. C. Exhibit (12) CMS ENERGY CORPORATION Ratio of Earnings to Fixed Charges (Millions of Dollars)
Years Ended December 31 1996 1995 1994 1993 1992 (b) Earnings as defined (a) Net income $ 240 $ 204 $ 179 $ 155 $(297) Income taxes 139 118 92 75 (146) Exclude equity basis subsidiaries (85) (57) (18) (6) 10 Fixed charges as defined, adjusted to exclude capitalized interest of $8, $8, $6, $5, and $3 for the years ended December 31, 1996, 1995, 1994, 1993, and 1992, respectively 296 280 237 245 228 ----- ----- ----- ----- ----- Earnings as defined $ 590 $ 545 $ 490 $ 469 $(205) ===== ===== ===== ===== ===== Fixed charges as defined (a) Interest on long-term debt $ 230 $ 224 $ 193 $ 204 $ 169 Estimated interest portion of lease rental 10 9 9 11 16 Other interest charges 29 27 18 24 35 Preferred securities dividends and distributions 54 42 36 17 16 ----- ----- ----- ----- ----- Fixed charges as defined $ 323 $ 302 $ 256 $ 256 $ 236 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.83 1.81 1.91 1.83 - ===== ===== ===== ===== ===== NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include a $520 million pretax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding these amounts.
EX-21 8 CMS ENERGY EX 21(A) SUBSIDIARIES Exhibit (21)(a) SUBSIDIARIES OF CMS ENERGY CORPORATION at December 31, 1996 Percent Voting Stock Owned by CMS Energy Incorporated -------------- ------------ Consumers Energy Company ("Consumers") 100 Michigan Michigan Gas Storage Company 0 Michigan (100% Owned by Consumers)* CMS Enterprises Company 100 Michigan *Subject to regulation by FERC EX-21 9 CONSUMERS EX 21(B) SUBSIDIARIES Exhibit (21)(b) SUBSIDIARIES OF CONSUMERS ENERGY COMPANY at December 31, 1996 Percent Voting Stock Owned by Consumers Energy Company Incorporated -------------- ------------- Michigan Gas Storage Company* 100 Michigan *Subject to regulation by FERC EX-23 10 CMS ENERGY EX 23 CONSENT Exhibit (23) ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into CMS Energy Corporation's previously filed Registration Statements No. 33-29681, No. 33-47629, No. 33-64044, No. 33-60007, No. 33- 61595, No. 33-62573, No. 333-01261, No. 333-16793 and No. 333-17289. Arthur Andersen LLP Detroit, Michigan, March 12, 1997. EX-24 11 CMS ENERGY AND CONSUMERS EX 24 POWER OF ATTRN. Exhibit 24 CMS ENERGY February 28, 1997 Mr. Alan M. Wright and Mr. Thomas A. McNish Fairlane Plaza South, Suite 1100 3300 Town Center Drive Dearborn, MI 48126 CMS Energy Corporation and Consumers Energy Company are required to file Annual Reports on Form 10-K for the year ended December 31, 1996 with the Securities and Exchange Commission within 90 days after the end of the year. We hereby make, constitute and appoint each of you our true and lawful attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission said Annual Reports with any necessary exhibits, and any amendments thereto that may be required. Very truly yours, /s/ William T. McCormick, Jr. /s/ Lois A. Lund - -------------------------------- -------------------------------- William T. McCormick, Jr. Lois A. Lund /s/ John M. Deutch /s/ Michael G. Morris - -------------------------------- -------------------------------- John M. Deutch Michael G. Morris /s/ James J. Duderstadt /s/ W. U. Parfet - -------------------------------- -------------------------------- James J. Duderstadt William U. Parfet /s/ K. R. Flaherty /s/ Percy A. Pierre - -------------------------------- -------------------------------- Kathleen R. Flaherty Percy A. Pierre /s/ Victor J. Fryling /s/ K. Whipple - -------------------------------- -------------------------------- Victor J. Fryling Kenneth Whipple /s/ Earl D. Holton /s/ John B. Yasinsky - -------------------------------- -------------------------------- Earl D. Holton John B. Yasinsky Fairlane Plaza South 3300 Town Center Drive Suite 1100 Dearborn, Michigan 48126 (313)436-9200 FAX (313)436-9225 EX-27 12 CMS ENERGY EX 27 SCHEDULE UT
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000811156 CMS ENERGY CORPORATION 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 4,428 1,855 1,014 1,318 0 8,615 1 2,045 (338) 1,702 100 356 1,892 333 950 0 370 0 103 39 2,764 8,615 4,333 139 3,656 3,809 524 (11) 527 251 276 36 240 103 0 661 2.45 0 EPS for CMS Energy Common Stock $2.45 EPS for Class G Common Stock $1.82
EX-27 13 CONSUMERS EX 27 SCHEDULE UT
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000201533 CONSUMERS ENERGY COMPANY 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 4,428 695 734 1,168 0 7,025 841 504 297 1,679 100 356 1,475 333 425 0 59 0 100 39 2,496 7,025 3,770 150 3,173 3,335 435 1 448 152 296 36 260 200 133 672 0 0
EX-99 14 CMS ENERGY EX 99 CONSUMERS GAS GROUP FINANCIALS 1 ARTHUR ANDERSEN LLP Report of Independent Public Accountants ---------------------------------------- To CMS Energy Corporation: We have audited the accompanying balance sheets of CONSUMERS GAS GROUP (representing a business unit of Consumers Energy Company ("Consumers") and its wholly-owned subsidiary, Michigan Gas Storage Company) as of December 31, 1996 and 1995, and the related statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the management of CMS Energy Corporation, the parent of Consumers. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Gas Group as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Detroit, Michigan, January 24, 1997. 2 Consumers Gas Group Management's Discussion and Analysis In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common Stock. This class of common stock reflects the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). Accordingly, this MD&A should be read along with the MD&A in the 1996 Annual Report of CMS Energy included and incorporated by reference herein. CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the businesses of CMS Energy, including the nature and issuance of Class G Common Stock, see the MD&A of CMS Energy. Earnings Net income for Consumers Gas Group for 1996 totaled $59 million, compared with $62 million for 1995. The decrease in 1996 net income reflects the reversal of a previously recorded gas contract contingency in 1995 and higher operating expenses during 1996. Partially offsetting these decreases were higher gas deliveries and revenues from value-added services and gas loaning activities during 1996. For further information, see CMS Energy's MD&A. 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 1996 and 1995 totaled $141 million and $180 million, respectively. The $39 million decrease primarily reflects changes in the timing of cash payments related to Consumers Gas Group's operations. Consumers Gas Group uses its operating cash mainly to maintain and expand its gas utility transmission and distribution systems and to retire portions of its long-term debt and pay dividends. Investing Activities: Cash used in investing activities totaled $145 million and $132 million for 1996 and 1995, respectively. The $13 million increase resulted from higher capital expenditures. Financing Activities: Cash provided by financing activities in 1996 and used by financing activities in 1995 totaled $8 million and $47 million, respectively. The $55 million increase reflects cash from the issuance of long-term notes, proceeds from a bank loan and a reduction in cash used to pay common stock dividends, partially offset by a reduction in contributions from CMS Energy stockholders. Other Investing and Financing Matters: Consumers has an agreement permitting the sale of certain accounts receivable for up to $500 million. At December 31, 1996, receivables sold totaled $318 million. Consumers Gas Group's attributed portion of these receivables sold totaled $137 million. For further information, see CMS Energy's MD&A. Results of Operations For Consumers Gas Group results of operations, see Gas Utility Results of Operations in CMS Energy's MD&A. Gas Issues For Consumers Gas Group's discussion of Gas Rate Proceedings, GCR Matters and Gas Environmental Matters, see Gas Utility Issues in CMS Energy's MD&A. Forward-Looking Information For cautionary statements relating to Consumers Gas Group's forward- looking information, see Forward-Looking Information in CMS Energy's MD&A. Capital Expenditures: CMS Energy estimates the following capital expenditures for Consumers Gas Group, including new lease commitments, over the next three years. These estimates are prepared for planning purposes and are subject to revision. In Millions Years Ended December 31 1997 1998 1999 Gas utility (a) $112 $100 $100 Michigan Gas Storage 3 3 3 ---- ---- ---- $115 $103 $103 ==== ==== ==== (a) Includes a portion of anticipated capital expenditures common to Consumers' gas and electric utility businesses. Consumers Gas Group expects that cash from operations and the ability to access debt markets will provide necessary working capital and liquidity to fund future capital expenditures, required debt payments, and other cash needs in the foreseeable future. For further information regarding Consumers Gas Group's forward-looking information, see the Gas Outlook discussion in CMS Energy's MD&A. 4 Statements of Income Consumers Gas Group
In Millions, Except Per Share Amounts Years Ended December 31 1996 1995 1994 Operating Revenue $1,282 $1,195 $1,151 ------ ------ ------ Operating Expenses Operation Cost of gas sold 750 674 662 Other 198 194 185 ------ ------ ------ Total operation 948 868 847 Maintenance 40 39 39 Depreciation, depletion and amortization 87 83 76 General taxes 54 54 54 ------ ------ ------ Total operating expenses 1,129 1,044 1,016 ------ ------ ------ Pretax Operating Income 153 151 135 ------ ------ ------ Other Income (Deductions) (6) - (2) ------ ------ ------ Fixed Charges Interest on long-term debt 30 30 29 Other interest 6 6 5 Capitalized interest (1) (1) - Preferred dividends 6 6 5 ------ ------ ------ Net fixed charges 41 41 39 ------ ------ ------ Income Before Income Taxes 106 110 94 Income Taxes 47 48 41 ------ ------ ------ Net Income $ 9 $ 62 $ 53 ====== ====== ====== Net Income Attributable to CMS Energy Shareholders through Retained Interest $ 45 $ 59 $ 53 ====== ====== ====== Net Income Attributable to Class G Shareholders $ 14 $ 3 $ - ====== ====== ====== Average Class G Common Shares Outstanding 8 8 - ====== ====== ====== Earnings Per Average Class G Common Share $ 1.82 $ .38 $ - ====== ====== ====== Dividends Declared Per Class G Common Share $ 1.15 $ .56 $ - ====== ====== ====== The accompanying notes are an integral part of these statements.
5 Statements of Cash Flows Consumers Gas Group
In Millions Years Ended December 31 1996 1995 1994 Cash Flows From Net income $ 59 $ 62 $ 53 Operating Adjustments to reconcile net income to net cash Activities provided by operating activities Depreciation, depletion and amortization 87 83 76 Capital lease and other amortization 4 5 4 Deferred income taxes and investment tax credit 13 14 4 Other 2 - 1 Changes in other assets and liabilities (Note 12) (24) 16 15 ------ ------ ------ Net cash provided by operating activities 141 180 153 ------ ------ ------ Cash Flows From Capital expenditures (excludes assets placed under Investing capital lease) (Note 12) (137) (124) (129) Activities Cost to retire property, net (9) (10) (8) Other 1 2 3 ------ ------ ------ Net cash used in investing activities (145) (132) (134) ------ ------ ------ Cash Flows From Payment of common stock dividends (37) (58) (46) Financing Retirement of bonds and other long-term debt (8) (6) (31) Activities Payment of capital lease obligations (4) (5) (4) Proceeds from bank loans 23 - 88 Proceeds from long-term note 22 - - Increase in notes payable, net 9 6 16 Contribution from CMS Energy stockholders 3 18 22 Repayment of bank loans - (2) (106) Issuance of preferred stock - - 42 ------ ------ ------ Net cash provided by (used in) financing activities 8 (47) (19) ------ ------ ------ Net Increase in Cash and Temporary Cash Investments 4 1 - Cash and temporary cash investments Beginning of year 5 4 4 ------ ------ ------ End of year $ 9 $ 5 $ 4 ====== ====== ====== The accompanying notes are an integral part of these statements.
6 Balance Sheets Consumers Gas Group
ASSETS In Millions December 31 1996 1995 Plant and Property Plant and property $2,203 $2,169 (At Cost) Less accumulated depreciation, depletion and amortization (Note 2) 1,133 1,179 ------ ------ 1,070 990 Construction work-in-progress 46 55 ------ ------ 1,116 1,045 ------ ------ Current Assets Cash and temporary cash investments at cost, which approximates market 9 5 Accounts receivable and accrued revenue, less allowances of $4 in 1996 and $2 in 1995 (Note 5) 97 99 Inventories at average cost Gas in underground storage 186 184 Materials and supplies 8 10 Trunkline settlement 25 30 Deferred income taxes (Note 4) 4 9 Prepayments and other 49 49 ------ ------ 378 386 ------ ------ Non-current Assets Postretirement benefits (Note 9) 153 161 Deferred income taxes (Note 4) 11 14 Trunkline settlement - 25 Other 59 59 ------ ------ 223 259 ------ ------ Total Assets $1,717 $1,690 ====== ======
7 Consumers Gas Group
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions December 31 1996 1995 Capitalization Common stockholders' equity (Note 6) Common stock $ 184 $ 184 Paid-in-capital 128 125 Retained earnings since December 31, 1992 52 30 ------ ------ 364 339 Preferred stock 78 78 Long-term debt 446 411 Non-current portion of capital leases (Note 10) 17 20 ------ ------ 905 848 ------ ------ Current Liabilities Current portion of long-term debt and capital leases 24 23 Notes payable 114 105 Accounts payable 85 79 Accrued taxes 61 66 Trunkline settlement 25 30 Accrued refunds 7 20 Accrued interest 7 7 Other 52 52 ------ ------ 375 382 ------ ------ Non-current Postretirement benefits (Note 9) 171 175 Liabilities Regulatory liabilities for income taxes, net (Notes 4 and 13) 169 162 Deferred investment tax credit 27 28 Trunkline settlement - 25 Other 70 70 ------ ------ 437 460 ------ ------ Commitments and Contingencies (Notes 3, 10 and 11) Total Stockholders' Investment and Liabilities $1,717 $1,690 ====== ====== The accompanying notes are an integral part of these statements.
8 Statements of Common Stockholders' Equity Consumers Gas Group
In Millions Other Common Paid-in Retained Stock Capital Earnings Total Balance at January 1, 1994 (a) $184 $ 85 $ 19 $288 Net income 53 53 Common stock dividends declared (46) (46) CMS Energy stockholders' contribution 22 22 ---- ---- ---- ---- Balance at December 31, 1994 (a) 184 107 26 317 Net income 62 62 Common stock dividends declared (58) (58) CMS Energy stockholders' contribution 18 18 ---- ---- ---- ---- Balance at December 31, 1995 (a) 184 125 30 339 Net income 59 59 Common stock dividends declared (37) (37) CMS Energy stockholders' contribution 3 3 ---- ---- ---- ---- Balance at December 31, 1996 (a) $184 $128 $ 52 $364 ==== ==== ==== ==== (a) Number of shares of Consumers' common stock outstanding was 84,108,789. Common stock allocated to the Consumers Gas Group is consistent with the allocation method discussed in Note 6. The accompanying notes are an integral part of these statements.
9 Consumers Gas Group Notes to Financial Statements 1: Corporate Structure CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. For further information regarding the business of CMS Energy, see the Notes to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. In 1995, CMS Energy issued a total of 7.62 million shares of Class G Common Stock. This new class of common stock reflects the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage (collectively, Consumers Gas Group). For further information regarding the nature and issuance of the Class G Common Stock, see Note 8 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. These financial statements and their related notes should be read along with the financial statements and notes contained in the 1996 Annual Report of CMS Energy that includes the Report of Independent Public Accountants, included and incorporated by reference herein. 2: Summary of Significant Accounting Policies and Other Matters Basis of Presentation: Consumers is a regulated utility. Accordingly, the majority of the accounting allocation policies described within these notes have a long-standing basis and have historically been used in proceedings conducted before the MPSC. The financial statements for Consumers Gas Group have been prepared based upon consistent methods that management believes are reasonable and appropriate to reflect its financial position, results of operations and cash flows. Where appropriate, the financial statements reflect the assets, liabilities, revenues and expenses directly related to Consumers Gas Group. However, in instances where common accounts (containing both electric and gas activities) were not readily attributable to a single business segment, management allocated to Consumers Gas Group's financial statements based on certain measures of business activities, such as gas revenues, salaries, other operation and maintenance expenditures, number of gas customers in relationship to total utility customers and/or functional use surveys. Management believes the attributions are reasonable. Although the financial statements of Consumers Gas Group separately report the assets, liabilities and stockholders' equity, legal title to such assets and the responsibility for such liabilities are not separately identifiable to a specific class of common stock. Therefore, the creditors of CMS Energy are unaffected by the implementation of Consumers Gas Group, because all assets of the corporation remain available to satisfy all liabilities. The holders of CMS Energy Common Stock and the Class G Common Stock will be subject to all risks associated with investments in CMS Energy. Holders of Class G Common Stock have no direct rights in the equity or assets of Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy. The financial statements of Consumers Gas Group incorporate Consumers' natural gas utility business and the related business of Michigan Gas Storage. The Consumers Gas Group and the remaining business segments of CMS Energy comprise all of the accounts included in the Consolidated Financial Statements of CMS Energy. The financial statements of Consumers Gas Group were prepared in accordance with generally accepted accounting principles on a consistent basis and include the use of management's estimates. Any future changes in accounting policy not mandated by appropriate authorities must be, in management's opinion, preferable to the policy in place and must be disclosed in accordance with generally accepted accounting principles. For presentation purposes, all material transactions between companies within Consumers Gas Group have been eliminated. Earnings Per Share and Dividends: Earnings per share for the year ended December 31, 1996, reflects the performance of Consumers Gas Group. Earnings per share reflects the performance of Consumers Gas Group since the initial issuance of the Class G Common Stock in 1995. The earnings (loss) attributable to Class G Common Stock and the related amounts per share are computed by considering the weighted average number of shares of Class G Common Stock outstanding. Earnings attributable to outstanding Class G Common Stock are equal to Consumers Gas Group's net income multiplied by a fraction; the numerator is the weighted average number of Outstanding Shares during the period, and the denominator is the weighted average number of Outstanding Shares and Retained Interest Shares during the period. The earnings attributable to Class G Common Stock on a per share basis, for the years ended December 31, 1996 and 1995, are based on 23.79 percent of the income of Consumers Gas Group and 23.45 percent of the income of Consumers Gas Group since the initial issuance, respectively. Earnings per share for Class G Common Stock is omitted from the statement of income, for the year ended December 31, 1994, since the Class G Common Stock was not part of the equity structure of CMS Energy. For purpose of analysis, following are pro forma data for the years ended December 31, 1995 and 1994 which give effect to the issuance and sale of 7.52 million shares of Class G Common Stock (representing 23.50 percent of the equity attributable to Consumers Gas Group) on January 1, 1994. In Millions, Except Per Share Amounts Actual Pro Forma Pro Forma Years Ended December 31 1996 1995 1994 Consumers Gas Group net income $ 59 $ 62 $ 53 Net Income attributable to CMS Energy Common Stock through Retained Interest $ 45 $ 47 $ 41 Net Income attributable to outstanding Class G Common Stock $ 14 $ 15 $ 12 Average shares outstanding of Class G Common Stock 7.727 7.536 7.520 Earnings per share attributable to outstanding Class G Common Stock $1.82 $1.93 $1.66 Holders of Class G Common Stock have no direct rights in the equity or assets of Consumers Gas Group, but rather have rights in the equity and assets of CMS Energy as a whole. In the sole discretion of the Board of Directors, dividends may be paid exclusively to the holders of Class G Common Stock, exclusively to the holders of CMS Energy Common Stock, or to the holders of both classes in equal or unequal amounts. Dividends on Class G Common Stock are paid at the discretion of the Board of Directors based primarily upon the earnings and financial condition of Consumers Gas Group, and to a lesser extent, CMS Energy as a whole. It is the Board of Directors' current intention that the declaration or payment of dividends with respect to the Class G Common Stock will not be reduced, suspended or eliminated as a result of factors arising out of or relating to the electric utility business or the non-utility businesses of CMS Energy unless such factors also require, in the Board of Directors' sole discretion, the omission of the declaration or reduction in payment of dividends on both the CMS Energy Common Stock and the Class G Common Stock. The portion of Consumers' common dividends attributed to Consumers Gas Group, for periods prior to the 1995 issuance of the Class G Common Stock, have been reflected in the financial statements. These dividend amounts were allocated based on the ratio of Consumers Gas Group's net income to Consumers' consolidated net income after dividends on preferred stock. This ratio was then applied to Consumers' total dividend payments for these periods. Dividends declared on the Class G Common Stock following the issuance are also reflected in the financial statements. In February and May 1996, CMS Energy paid dividends of $.28 per share on Class G Common Stock. In August and November of 1996, and February 1997, CMS Energy paid dividends of $.295 per share on Class G Common Stock. Related Party Transactions: Consumers Gas Group sold, stored and transported natural gas and provided other services to the MCV Partnership totaling approximately $13 million for 1996, 1995 and 1994. Consumers Gas Group purchases a portion of its gas from CMS NOMECO. The amounts of purchases for the years ended December 31, 1996, 1995 and 1994 totaled $24 million, $19 million and $1 million, respectively. Other: For significant accounting policies refer to the following Notes to Consolidated Financial Statements of CMS Energy: for Consumers Gas Group's gas inventory, maintenance, depreciation and depletion, revenue and fuel costs, and utility regulation, see Note 2; for income taxes, see Note 5; for executive incentive compensation, see Note 11; for pensions and other postretirement benefits, see Note 12; and for cash equivalents, see Note 17 included and incorporated by reference herein. 3: Rate Matters For information regarding rate matters directly affecting Consumers Gas Group, see the Gas Proceedings discussion in Note 4 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 4: Income Taxes Consumers Gas Group is included in the consolidated federal income tax return filed by CMS Energy (see Note 5 to the Consolidated Financial Statements of CMS Energy). The financial statement provision and actual cash tax payments have been reflected in Consumers Gas Group's financial statements in accordance with CMS Energy's tax allocation policy. The financial statement amounts reflect management's estimate of the separate taxable income of the segment, the effect of deferred tax accounting for temporary differences that arise and the amortization of ITC over the life of the related property included within the Consumers Gas Group. Tax settlements at Consumers Gas Group are consistent with settlements of CMS Energy's consolidated tax returns and are generally settled in the year, or in the year following the year in which such amounts are accrued. The significant components of income tax expense (benefit) for Consumers Gas Group consisted of: In Millions Years Ended December 31 1996 1995 1994 Current federal income taxes $34 $34 $37 Deferred income taxes 14 16 6 Deferred ITC, net (1) (2) (2) --- --- --- $47 $48 $41 === === === Operating $49 $48 $41 Other (2) - - --- --- --- $47 $48 $41 === === === The principal components of deferred tax assets (liabilities) recognized in the balance sheet for Consumers Gas Group are as follows. In Millions December 31 1996 1995 Property $(60) $(54) Postretirement benefits (Note 9) (57) (59) Employee benefit obligations (includes post- retirement benefits of $57 and $59) (Note 9) 69 70 Regulatory liability for income taxes 59 57 Other 4 9 ---- ---- $ 15 $ 23 ===== ===== Gross deferred tax liabilities $(226) $(227) Gross deferred tax assets 241 250 ----- ----- $ 15 $ 23 ===== ===== The actual income tax expense for Consumers Gas Group differs from the amount computed by applying the statutory federal tax rate to income before income taxes as follows. In Millions Years Ended December 31 1996 1995 1994 Net income before preferred dividends $ 65 $ 68 $ 58 Income tax expense 47 48 41 ---- ---- ---- 112 116 99 Statutory federal income tax rate x 35% x 35% x 35% ---- ---- ---- Expected income tax expense 39 41 35 Increase (decrease) in taxes from: Differences in book and tax depreciation not previously deferred 10 9 8 ITC amortization (2) (2) (2) ---- ---- ---- Actual income tax expense $ 47 $ 48 $ 41 ==== ==== ==== 5: Short-Term Financings Consumers' short-term financings are discussed in Note 6 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. Consumers generally manages its short-term financings on a centralized consolidated basis. The portion of receivables sold attributable to Consumers Gas Group at both December 31, 1996 and 1995, is estimated by management to be $137 million. 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. The allocation of short-term financings and related interest charges to Consumers Gas Group generally follows the ratio of gas utility assets to total Consumers' assets. Additionally, the carrying costs for Consumers' sales of certain of its accounts receivable under its trade receivable purchase and sale agreement generally are allocated to Consumers Gas Group based on the ratio of customer revenues contributed by Consumers' gas customers to total Consumers' revenue. However, as a result of the centralized management of short-term financing, the amounts allocated to Consumers Gas Group are further adjusted in both the seasonal gas inventory build-up period (second and third quarters) and the high seasonal gas sales period (first and fourth quarters) to more closely reflect the higher short-term financing requirements of the inventory build-up period and conversely the lower financing requirements during the higher sales periods. Management believes these allocations to be reasonable. 6: Capitalization Capital Stock and Long-Term Debt: Consumers Gas Group's capital stock and long-term debt, including debt resulting from the sale of Trust Originated Preferred Securities, have been allocated based on the ratio of gas utility assets (including common assets attributed to the gas utility segment) to total Consumers' assets. Management believes these measurements are reasonable. For information regarding the capital stock and long-term debt of CMS Energy and Consumers, see Notes 7 and 8 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 7: Financial Instruments The carrying amount of Consumers Gas Group's long-term debt was $446 million and $411 million and the fair value was $448 million and $417 million as of December 31, 1996 and 1995, respectively. For additional information regarding financial instruments, see Note 10 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 8: Executive Incentive Compensation For information regarding CMS Energy's Performance Incentive Stock Plan, restricted shares of Common Stock, stock options and stock appreciation rights, see Note 11 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. This plan allows for awards of Class G Common Stock, and has established criteria for certain plan awards. 9: Retirement Benefits Postretirement Benefit Plans Other Than Pensions: Consumers Gas Group's attributed portion of CMS Energy's net periodic cost for health and life insurance benefits totaled $15 million, $15 million and $17 million in 1996, 1995 and 1994, respectively. These allocations were based on the ratio of salaries and wages related to Consumers' gas operations to Consumers' total salaries and wages. Management believes these allocations are reasonable. Consumers Gas Group's attributed portion of CMS Energy's total recorded liability for postretirement benefit plans is estimated to be $163 million and $169 million at December 31, 1996 and 1995, respectively. These amounts were allocated based on policies Consumers has historically used in proceedings conducted before the MPSC. For further information regarding CMS Energy's postretirement benefit plans other than pensions, see Note 12 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. Supplemental Executive Retirement Plan: The attributed trust assets of Consumers Gas Group were $6 million at December 31, 1996 and 1995, and were classified as other non-current assets. These allocations were based on a ratio of salaries and wages related to Consumers' gas operations to Consumers' total salaries and wages. Management believes these allocations are reasonable. For further information, see Note 12 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. Consumers Gas Group's attributed portion of CMS Energy's net periodic pension cost totaled $4 million in 1996, and $3 million in 1995 and 1994. These allocations were based on the ratio of salaries and wages related to Consumers' gas operations to Consumers' total salaries and wages. Management believes these allocations are reasonable. Consumers Gas Group's attributed portion of CMS Energy's total recorded liability for the Pension Plan totaled $13 million at December 31, 1996 and $10 million at December 31, 1995 and was allocated to Consumers Gas Group based on the ratio of salaries and wages related to Consumers' gas operations to Consumers' total salaries and wages. Consumers Gas Group's estimated portion of CMS Energy's recorded liability for the SERP totaled $6 million at December 31, 1996 and $5 million at December 31, 1995 and was allocated to Consumers Gas Group based on the ratio of salaries and wages related to Consumers' gas operations to Consumers' total salaries and wages. Management believes these allocations are reasonable. For further information, see Note 12 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. Defined Contribution Plan: Consumers provides a defined contribution 401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which are at least 80 percent owned and have adopted the plan. Consumers' contributions to the plan are invested in CMS Energy Common Stock. For further information, see Note 12 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 10: Leases CMS Energy and its subsidiaries lease various assets, including vehicles, aircraft, construction equipment, computer equipment and buildings. Consumers Gas Group's attributed portion of CMS Energy's minimum rental commitments under non-cancelable leases at December 31, 1996, were: In Millions Capital Leases 1997 $ 6 1998 5 1999 4 2000 3 2001 3 2002 and thereafter 5 ---- Total minimum lease payments 26 Less imputed interest 5 ---- Present value of net minimum lease payments 21 Less current portion 4 ---- Non-current portion $ 17 ==== Consumers recovers these charges from customers and accordingly charges payments for its capital and operating leases to operating expense. There were no operating lease charges for Consumers Gas Group in 1996. Operating lease charges, including charges to clearing and other accounts, for the years ended December 31, 1995 and 1994 were $1 million. Capital lease expenses for Consumers Gas Group for the years ended December 31, 1996, 1995 and 1994 were $6 million, $7 million and $6 million, respectively. Consumers Gas Group's minimum rental commitments and lease expenses are generally allocated based on the specific use of the leased item. Common leases are allocated to Consumers Gas Group through functional use surveys, which management believes to be reasonable. 11: Commitments and Contingencies Capital Expenditures: Consumers Gas Group estimates capital expenditures, including new lease commitments, of $115 million for 1997 and $103 million for 1998 and 1999. These estimates include an attributed portion of Consumers' anticipated capital expenditures for common plant and equipment. For further information regarding commitments and contingencies directly affecting Consumers Gas Group (including those involving former manufactured gas plant sites), see the Environmental Matters, Commitments for Coal and Gas Supplies, and Other discussions in Note 14 to the Consolidated Financial Statements of CMS Energy included and incorporated by reference herein. 12: Supplemental Cash Flow Information For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Consumers Gas Group's other cash flow activities and non-cash investing and financing activities for the years ended December 31 were: In Millions 1996 1995 1994 Cash transactions Interest paid (net of amounts capitalized) $ 34 $ 35 $ 33 Income taxes paid (net of refunds) 33 25 31 Non-cash transactions Assets placed under capital lease $ 1 $ 2 $ 5 Capital leases refinanced - 9 - Changes in other assets and liabilities as shown on the Statements of Cash Flows at December 31 are described below: In Millions 1996 1995 1994 Sale of receivables, net $ - $ 26 $ (13) Accounts receivable 7 (39) 11 Accrued revenue (5) (35) 30 Inventories - 50 (6) Accounts payable 6 11 1 Accrued refunds (13) - - Other current assets and liabilities, net (5) (8) (1) Non-current deferred amounts, net (14) 11 (7) ----- ----- ---- $ (24) $ 16 $ 15 ===== ===== ==== 13: Effects of the Ratemaking Process The following regulatory assets (liabilities), which include both current and non-current amounts, are reflected in Consumers Gas Group's Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process. Virtually all of these costs are being recovered through current rates. In Millions December 31 1996 1995 Postretirement benefits (Note 9) $ 162 $ 169 Trunkline settlement 25 55 Manufactured gas plant sites 47 47 Other 3 5 ------ ------ Total regulatory assets $ 237 $ 276 ====== ====== Regulatory liabilities for income taxes $ (169) $ (162) ====== ====== 18 Quarterly Financial and Common Stock Information Consumers Gas Group
In Millions, Except Per Share Amounts 1996 (Unaudited) 1995 (Unaudited) Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Operating revenue $548 $209 $123 $402 $482 $197 $122 $394 Pretax operating income (loss) $91 $22 $(1) $41 $91 $17 $2 $41 Net income (loss) $48 $5 $(9) $15 $49 $3 $(8) $18 Earning (loss) per average common share $1.50 $.16 $(.28) $.44 - - $(.17) $.55 Dividends declared per common share $.28 $.28 $.295 $.295 - - $.28 $.28 Common stock prices (a) High $20 $19-3/8 $18-7/8 $19-1/4 - - $18-3/4 $18-7/8 Low $17-7/8 $17-1/2 $16-5/8 $17-3/8 - - $16-1/8 $17-5/8 (a) Based on New York Stock Exchange - Composite transactions.
EX-99 15 CONSUMERS EX 99 RESPONSE TO MPSC REQ. FOR INFORM. Exhibit (99)(b) STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter, on the Commission's own ) motion, to consider the restructuring of ) Case No. U-11290 the electric utility industry ) _____________________________________________) RESPONSE OF CONSUMERS ENERGY COMPANY TO COMMISSION REQUEST FOR INFORMATION March 7, 1997 -i- TABLE OF CONTENTS Page ---- I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. RESPONSE TO COMMISSION REQUEST . . . . . . . . . . . . . . . . 3 Question 1: A detailed calculation of anticipated stranded costs, including possible mitigation measures, and transition charges given the definition in the Staff Report. The utility should also provide information on any alternative method of calculating stranded cost that it has developed . . . . . . . . . . . . . . 3 A. Determination of Transition Costs . . . . . . . . . . . 3 1. Regulatory Assets . . . . . . . . . . . . . . . . 4 2. Nuclear Facilities . . . . . . . . . . . . . . . 7 3. Decommissioning of Hydroelectric and Pumped Storage Facilities . . . . . . . . . . . . . . . 8 4. Contract Capacity Charges . . . . . . . . . . . . 9 5. Employee-Related Restructuring Costs . . . . . . 11 6. Other Implementation Costs . . . . . . . . . . . 12 B. Determination of Transition Charges . . . . . . . . . . 13 C. Mitigation . . . . . . . . . . . . . . . . . . . . . . . 14 Question 2: The items the utility would expect to securitize if authorized to do so, and an analysis regarding the anticipated financial and rate effects . . . . . . . . . . . 17 Question 3: A description of how the utility would allocate direct access capacity, including procedures for bidding and aggregation. The utility should also indicate any appropriate alternatives to the phase-in schedule . . . . . . . . . . . . . . . . . . . . 21 A. Allocation . . . . . . . . . . . . . . . . . . . . . . . 21 B. Bidding . . . . . . . . . . . . . . . . . . . . . . . . 22 C. Aggregation . . . . . . . . . . . . . . . . . . . . . . 22 D. Alternatives to the Phase-In Schedule . . . . . . . . . 23 Question 4: Tariff sheets for direct access service, with supporting workpapers and applicable FERC tariffs . . . . . . . . . . . . . . . . . . 24 Question 5: A description, including tariff sheets, for the standby service that the utility would provide to direct access customers . . . . . . . 26 Question 6: A list of any new or additional charges that the utility does not currently assess that would be imposed under a direct access program . . . . . . . . . . 27 Question 7: A description of any transmission constraints or limitations on the ability to import power into the utility's system. This description should include: (a) the amount of electricity currently being imported into the system from Michigan sources and from outside the state; (b) the nature of the existing imports, e.g., wholesale transactions; (c) the nature and location of the constraints; (d) an estimate of the amount of direct access electricity that could be imported into the utility's system given existing constraints; and (e) methods of removing constraints and their estimated costs and effects . . . . . . . . . . . . . . . . . . . . . 29 Question 8: The status of any ongoing discussions regarding the development of an Independent System Operator . . . . . . . . . . . 31 Question 9: A description of the methods that the utility would propose to alleviate concerns regarding market power in a competitive market . . . . . . . . . . . . . . . 34 III. SUMMARY OF ESSENTIAL FEATURES OF RESTRUCTURING PLAN . . . . . 40 A. Retail Direct Access Schedule . . . . . . . . . . . . . . . 40 B. Allocation and Bidding . . . . . . . . . . . . . . . . . . 40 C. Transition Cost Recovery . . . . . . . . . . . . . . . . . 41 D. Rates, Terms and Conditions of Retail Direct Access Service . . . . . . . . . . . . . . . . . . . . . . 42 E. Rate Freeze . . . . . . . . . . . . . . . . . . . . . . . . 42 F. PSCR Suspension . . . . . . . . . . . . . . . . . . . . . . 42 G. Performance-Based Ratemaking Mechanism . . . . . . . . . . 44 H. Obligation To Serve . . . . . . . . . . . . . . . . . . . . 44 I. Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . 45 J. Creation of an Independent System Operator . . . . . . . . 46 IV. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . 46 Attachment 1 Attachment 2 Attachment 3 Attachment 4 Attachment 5 Attachment 6 Attachment 7 Attachment 8 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter, on the Commission's own ) motion, to consider the restructuring of ) Case No. U-11290 the electric utility industry ) _____________________________________________) RESPONSE OF CONSUMERS ENERGY COMPANY TO COMMISSION REQUEST FOR INFORMATION I. INTRODUCTION On December 20, 1996, the Commission initiated this proceeding to review a report on electric industry restructuring which had been prepared by the MPSC Staff ("Staff Report"). On January 21, 1997, Consumers Energy Company ("Consumers Energy"), along with many other parties, filed comments on the Staff Report. The Commission also held several public hearings at which additional comments were received. On February 5, 1997, the Commission issued an "Order Requesting Comments and Notice of Hearing" ("February 5 Order"). In that order, the Commission requested Consumers Energy and The Detroit Edison Company ("Detroit Edison") (and any other electric utilities who so desire) to make, by March 7, 1997, additional filings which would address in greater detail how the recommendations in the Staff Report could be implemented. The order includes a list of specific questions which the Commission requested the utilities to address. This is Consumers Energy's Response to the Commission's request. In preparing this Response, Consumers Energy has provided the Commission not only with information which is responsive to the questions asked, but also with a detailed program for the initial implementation of the Staff plan. As set forth in its January 21, 1997 Comments, Consumers Energy continues to be willing to voluntarily implement the retail direct access program set forth in this submission, subject to (i) the Commission approving the entirety of the plan set forth herein, and (ii) the Commission specifically approving the calculation of transition costs and the associated charges set forth below. In addition, because it is essential to gain legislative authorization of the restructuring plan, the Company's willingness to voluntarily implement this plan will cease as of December 31, 1997, unless appropriate utility restructuring legislation has been enacted by the Legislature and signed into law by that date. Upon completing its review of the March 7 filings and other parties comments, the Company hopes that the Commission will issue an order (1) endorsing the Staff plan as further developed in this Response, (2) recommending to the Legislature the enactment of legislation which is consistent with that plan, and (3) accepting the Company's offer of voluntary implementation. The Company emphasizes that since the issuance of the February 5 Order, it has done considerable analysis of the transition cost and securitization features of the Staff's proposed restructuring plan in an effort to be fully responsive to the Commission's inquiries. Consumers Energy now believes that securitization offers significantly greater customer benefits than were previously identified. Specifically, securitization offers over a $200 million annual savings to customers compared to the rates which customers would otherwise pay. This is discussed in greater detail below. -3- II. RESPONSE TO COMMISSION REQUESTS This portion of the Company's Response addresses the specific information requests made by the Commission in the February 5 Order. Question 1: A detailed calculation of anticipated stranded costs, including possible mitigation measures, and transition charges given the definition in the Staff Report. The utility should also provide information on any alternative method of calculating stranded cost that it has developed. A. Determination of Transition Costs The critical element of electric utility restructuring is the provision to regulated electric utilities of a reasonable opportunity to recover: (i) costs associated with investments and commitments that were made during the regulated era which will be above prevailing near term market prices in a competitive environment, and (ii) costs that are incurred to facilitate the transition from regulated market status to competitive market status. The Staff Report properly recognizes that: "[t]he opportunity to recover transition costs is necessary to assure a fair, smooth, and realizable restructuring of the electric industry. Without reasonable recovery of transition costs, significant adverse and unacceptable impacts on various interested parties will occur. In short, reasonable recovery of transition costs helps to assure financially healthy utilities and reliable electric service in the State." Staff Report, p. 13. The definition of transition costs adopted by the Staff in its report includes the following categories: 1. Regulatory assets approved for cost recovery by the Commission; 2. The net book capital costs of nuclear facilities; 3. The contract capacity charges included in long-term power purchase agreements, to the extent those charges have already been approved for cost recovery by the Commission, and to the extent those charges exceed the estimated near term market value of the associated capacity; 4. Employee-related restructuring costs; 5. Other costs related to the implementation of industry restructuring, such as the creation and implementation of new metering and billing systems, and the establishment of an independent system operator. In addition, Consumers Energy believes that the decommissioning costs associated with the Ludington Pumped Storage Plant and other hydro facilities should be added to the list. These facilities are licensed by the Federal Regulatory Energy Commission ("FERC"). Similar to federal law governing nuclear plants, the FERC requires hydro electric and pumped storage sites to be decommissioned at the end of their useful lives. Including these decommissioning costs in the category of transition costs is, in Consumers Energy's opinion, consistent with the Staff's approach to this issue. Consumers Energy believes the above categories of costs provide a reasonable means of analyzing and measuring transition costs. The bulk of these items represent costs that, pursuant to the current regulated industry structure, have already been subjected to regulatory scrutiny, and have been found to be properly recoverable from customers. Categories 4 and 5 represent costs that will have to be incurred in the future in order to move to the competitive industry structure envisioned by the Staff Report. Each of these categories are quantified and discussed below. Except where specifically noted, the costs identified in this response reflect only those costs which Consumers Energy will incur during the 1997-2007 time period; i.e., costs expected to be incurred beyond 2007 are not included in this analysis. 1. Regulatory Assets The individual items and the associated dollar amounts within this category are listed below. It should be noted that the dollar amounts listed are stated in nominal dollars, and are only the estimated generation-related portion of each item which will be stated on Consumers Energy's books as of December 31, 1997. -5- Table 1 Item $(million) A. The remaining Midland 3B amortization amount 86.6 first authorized in Case No. U-7830. B. The remaining SFAS 106 (other post 97.2 employment benefits) obligation, first authorized in Case No. U-10335. C. The remaining Demand Side Management 42.5 ("DSM") costs approved for recovery in Cases No. U-9346, U-10335 and U-10685. D. The remaining Department of Energy 19.5 assessment for decontamination and decommissioning of enrichment facilities most recently authorized in Case No. U-10445. E. Previously flowed through income tax 49.0 benefits (SFAS 109) first authorized in Case No. U-10083. F. The remaining Ludington Settlement 12.3 amortization amount approved for recovery in Case No. U-10685. G. Refunded debt costs approved for recovery in Case No. U-10685. 4.5 ______ Total--Regulatory Assets $311.6 Under current rates, these items would all be fully amortized on Consumers Energy's books before 2007, except for item B (SFAS 106), item E (SFAS 109) and item G (refunded debt). The recovery period for these three items under current rates extends to 2011, 2016, and 2010, respectively. It must be noted that the dollar amounts identified in Table 1 reflect the entire generation-related amount of these regulatory assets as of December 31, 1997. Given the Staff phase-in schedule, however, a substantial portion of these costs will be paid by non-retail access customers via bundled rates. Based upon the Staff phase-in schedule, the appropriate dollar amount recoverable through the transition charge is the present value amount associated with only the retail direct access load, or $70.3 million. See Attachment 1.(1) Consumers Energy does not believe extended discussion of each of these items is necessary, or was contemplated by the Commission's February 5 Order. These are all cost items that have previously been approved for recovery from customers by the Commission, and are currently included in rates, but which, in the absence of appropriate ratemaking treatment, would not be recovered from customers who engage in retail direct access. Indeed, the Commission has already formally determined that these types of costs are properly recoverable from customers who engage in retail direct access. See June 19, 1995 Order in Cases No. U- 10143/U-10176 and November 14, 1996 Order in Cases No. U-10685/U-10787/U- 10754. The Staff's recommendations that these items should be included as transition costs, and that retail direct access customers should continue to pay their share of these costs, is just and reasonable. - --------------------- (1)Attachment 1 shows the detailed calculations and assumptions which underlie the transition cost and securitization figures discussed in this Response. -7- 2. Nuclear Facilities The total net book cost of Consumers Energy's two nuclear units which are projected to be stated on the Company's books as of December 31, 1997 is $552,493,000. The detail corresponding to this total is as follows: Table 2 Category Palisades Big Rock Total (000) (000) (000) Gross Plant $735,856 $65,252 $801,108 Construction 32,111 2 32,113 Work in Progress Inventory 17,823 2,339 20,162 Accumulated (248,493) (52,397) (300,890) Depreciation Reserve _________ ________ _________ Net Plant $537,297 $15,196 $552,493 As noted above with respect to regulatory assets, part of the $552.493 million figure will be recovered from non-retail access customers over the phase-in period. Based upon the phase-in schedule recommended in the Staff Report, the proper amount recoverable via the transition charge is the present value amount associated with only the retail direct access load, or $220.1 million. See Attachment 1. Under current rates, Big Rock will be fully depreciated in 1998, while Palisades will be fully depreciated in 2007. As stated in the Staff Report, it is appropriate to consider the entire net book capital cost of these nuclear units (and the associated return) in the transition cost calculations because the near term market price of power in a competitive environment will not likely even offset the fuel and other operating and maintenance ("other O&M") costs associated with these units, let alone make a contribution toward recovery of the capital costs. The average per kilowatt-hour fuel/other O&M cost at Palisades is approximately 2.9 cents. There are also substantial continuing capital investment requirements associated with these units which are not reflected in the above figures. For example, the average annual capital expenditure at Palisades in 1994 and 1995 was $33 million. Under the approach recommended by the Staff, Consumers Energy will be at risk for the recovery of all future nuclear plant capital additions, as well as of ongoing fuel and other O&M expenses. It may be noted that this approach stands in contrast to that being followed in California, where the recently enacted legislation creates a procedure which allows for recovery of nuclear plant capital additions for a period extending through the end of the transition cost recovery period (i.e., December 31, 2001 under California's plan). See 1996 Cal. AB. 1890, Section 367. 3. Decommissioning of Hydroelectric and Pumped Storage Facilities Consumers Energy owns and operates eleven hydroelectric facilities, as well as a 51% ownership interest in the Ludington Pumped Storage Plant. As is the case with the Company's nuclear generating units, these units will have to be decommissioned at the end of their useful lives. The currently estimated costs of decommissioning these facilities are reflected in the depreciation rates which the Commission has approved, and are included in the Company's rates. Since these units were constructed to serve the Company's entire customer base, customers electing retail access should be required to pay their share of these decommissioning costs. Under current rates, the Ludington Plant is expected to be retired and decommissioned in 2028. The corresponding date for the eleven hydro plants is 2034. The appropriate amount to be reflected in the transition cost calculation for this item was determined based upon the present value of the revenues which would otherwise be collected in rates for decommissioning of these units in the absence of a retail access program. The appropriate amount is $16,174,000. See Attachment 1. 4. Contract Capacity Charges Consumers Energy has a substantial number of power purchase agreements with non-utility generators ("NUG's") pursuant to which it purchases nearly 1700 megawatts of capacity. All of the power so purchased has been and continues to be used to serve customers. All of these NUG's are qualifying facilities, as that term is defined in the Public Utility Regulatory Policies Act of 1978 ("PURPA"). As the Commission is, of course, aware, PURPA was the U.S. Congress' policy response to the claimed "energy crisis" of the 1970's. That act obligated electric public utilities to purchase power supplied by qualifying facilities at rates that reflected the purchasing utility's "avoided cost," as determined by state regulatory bodies. Pursuant to PURPA's mandate, and due to Consumers Energy's need for additional generating capacity at that time, the Company entered into these power purchase agreements beginning in 1983. Additional qualifying facility agreements were entered into in connection with a Commission-approved settlement of various disputes in 1993. Finally, in compliance with the directives of the Michigan legislature as set forth in 1989 PA 2, which obligated Consumers Energy to enter into contracts for 120 megawatts of capacity from "waste-to-energy" facilities, the Company signed additional power purchase agreements in 1993. See Attachment 2 for a list of NUG contracts and Commission orders in which cost recovery of contract capacity charges has been approved. The capacity and energy charges contained in these NUG contracts were determined according to methodologies which were approved by the Commission, and reflect estimates of Consumers Energy's avoided costs determined at the time the contracts were signed. The costs associated with these power purchase agreements have been approved for recovery through Consumers Energy's rates in orders issued from 1984 through 1996. In other states which are also in the process of restructuring the electric utility industry, it has uniformly been recognized that the costs associated with purchases from PURPA qualifying facilities pursuant to contracts entered into over the past 10-15 years will exceed the market price of power in a competitive marketplace, at least over the near term, and that such costs should be recoverable as a component of transition costs. The recently-enacted Pennsylvania legislation states that the Pennsylvania Commission "shall allow" recovery of "cost obligations under contracts with non-utility generating projects that have received a commission order. . . ." See 1995 Pa. Laws 138, Title 66, Chapter 28. The California legislation provides for recovery of "power purchase contract obligations", along with recovery of "costs associated with any buy-out, buy-down, or renegotiation" of those contracts. See 1996 Cal. AB. 1890. The Rhode Island legislation also provides for such recovery. See 1996 R.I. Pub. Laws, Chapter 316. The Staff Report similarly recognizes that the contract obligations of the purchasing utility which resulted from the implementation of the legislative directives contained in PURPA and 1989 PA 2 must be dealt with in any realistic restructuring plan. The recommendation of the Staff would leave the purchasing utility at risk for recovery of the energy charge (both fixed and variable) and for the estimated near term market value of the capacity in an open access competitive market. The remaining contract costs would be recoverable as part of total transition costs. Based upon the capital costs associated with the construction and maintenance of a gas peaking unit built to provide standby service in an open access environment, the near term market value for purposes of this calculation would approximate 0.5 -11- cents per kWh.(2) Based upon (i) this 0.5 cents per kWh figure, and (ii) the anticipated purchases from NUG contracts over the 1997-2007 period, the total present value amount of contract capacity costs in excess of this value is approximately $3,194.9 million. For the same reasons noted earlier with respect to regulatory assets and nuclear facilities, the present value amount of these costs associated with retail direct access load, based upon the Staff phase-in schedule, is $1,459 million. See Attachment 1. 5. Employee-Related Restructuring Costs The transition to a competitive generation market will require many changes in the way electric utilities conduct business. Many of these changes will undoubtedly affect the amount and nature of staffing requirements in the various segments of the utility's current business operations. The California legislation recognized that this would occur, and explicitly stated that costs associated with employee severance, retraining programs, early retirement programs, out placement programs and similar items should be included in recoverable transition costs. The Staff Report similarly recognized that such costs should be recoverable, and further recommended that some means of auditing and verifying such costs should be implemented. Consumers Energy currently estimates that such costs would approximate $50 million over the 1998-2002 time period. These costs should be added to the total transition costs - --------------------- (2)Consumers believes 0.5 cents/kWh is a reasonable near term assumption for the value of capacity based on the following reference points: * Current estimates for construction of new simple cycle gas turbine generation facilities range from $250-$350/kW. While fixed charge rate and load factor assumptions affect the cents/kWh rate which results from such facility costs, this range is consistent with 0.5 cents/kWh. * In other countries such as Great Britain and Argentina which have already deregulated generation, the value of capacity has settled at approximately 0.5 cents/kWh. -12- used to calculate the appropriate initial transition charge, and should be subject to periodic review and adjustment to the extent actual employee- related restructuring costs are different than this estimate. 6. Other Implementation Costs The implementation of any meaningful restructuring plan will require the expenditure of significant sums for new billing systems, new computer systems infrastructure to accommodate changes in metering equipment, the establishment of an independent system operator and other similar items. For example, the technology needed to gather and communicate the information necessary to allow large scale retail direct access includes the installation of communication equipment on customer meters, infrastructure investment needed to transmit the customer information gathered at the meter, and computer hardware/software investment necessary to process the information for use in preparing bills. In addition, a completely new billing system must ultimately be developed to accommodate unbundled pricing, and the preparation of bills containing multiple pricing structures from multiple suppliers of generation services and other services.(3) Additional investments will also be necessary to implement an automated power transactions scheduling system, along with the costs of developing and implementing an independent transmission system operator system. Consumers Energy currently estimates that such costs will be $150 million over the 1998-2002 time period. These costs should be added to the total transition costs used to calculate the appropriate transition charge, and should be subject to periodic review and adjustment to the extent actual costs are different than this estimate. - --------------------- (3)A general description of the activities necessary to develop and install the technology improvements needed to implement retail direct access, as well as a potential schedule for those activities, is provided as Attachment 3. -13- B. Determination of Transition Charges Based upon the above cost determinations, transition and implementation charges were developed which would be applicable only to those customers electing retail direct access service during the 1997-2007 time period. The basic assumptions underlying the calculation of the charge, and the details of the calculation are set forth on Attachment 1. In summary, this approach: (i) Reflects only those costs to be incurred (or amortized) over the 1998-2007 time period. The only exceptions to this are, as noted above, the SFAS 106, SFAS 109 and refunded debt regulatory assets, which, under current rates, would be amortized over periods extending to 2011, 2016, and 2010, respectively, and the Ludington and hydro plant decommissioning cost. (ii) Calculates a per kWh charge based upon the October 1996 sales forecast for the 1998-2007 time period. (iii) Reflects a $4.9 million reduction in total transition costs based upon the assumption that a portion of the payments made by Rate DA participants during 1998-2000 will allow recovery of a portion of total transition costs. (iv) Assumes the schedule for retail direct access set forth in the Staff Report is followed, and calculates the load associated with the customers opting for retail direct access pursuant to that schedule. (v) Uses the overall pre-tax rate of return approved in the most recent electric rate order of 10.63%, (see February 5, 1996 Order in Case No. U-10685), and a 7% discount rate to determine the present value of future revenues. (vi) Develops a levelized transition charge which would be applicable for the entire 1998-2007 time period, only for those customers eligible for retail direct access. Other customers are assumed to continue to pay bundled rates during this period. Similarly, the implementation charge (covering employee-related and other restructuring costs) would also apply only to retail access customers. (vii) Assumes that all nuclear decommissioning costs continue to be recovered through a separate charge applicable to all customers. The levelized transition charge (i.e., for recovery of the costs associated with regulatory assets, Ludington/hydro decommissioning, nuclear facilities and power purchase agreements) which results from this approach is 1.31 cents per kWh. The levelized implementation charge (i.e., for recovery of employee-related restructuring costs and other implementation costs) is 0.14 cents per kWh. The total charge is 1.45 cents per kWh. See Attachment 1. This is the charge that would apply in the absence of securitization. Because the above calculations are based upon a relatively long- term sales forecast, it is essential to periodically "true-up" the collection of these amounts to reflect actual sales levels. Neither utilities nor customers should be put at risk for factors such as the performance of the Michigan economy and weather over a ten year period. Thus, the charges should be adjusted on January 1, 2001 and January 1, 2004 to reflect what actual sales levels have been. There would be no true-ups for any other factors. C. Mitigation The February 5 Order asked the utilities to address to what degree transition cost mitigation measures are reflected in the Staff recommendation. There are numerous examples of such mitigation measures which are inherent in the Staff Report. These include the following: (A) During the transition period, the above-described calculation of transition costs effectively assumes that, for the load lost to third party power suppliers, the Company will be able to sell the displaced generation to some other buyer at a price at least equal to market value. The inability to do so would mean that the estimate of transition (or stranded) costs set forth above is significantly understated. Thus, there is a business risk associated with being able to negotiate transactions which allow those sales to take place. This also highlights the importance of the reciprocity condition which the Staff Report properly recommends. Without the ability to sell into other utilities' markets, Consumers Energy's generation would effectively be land-locked, and its transition costs would be substantially increased. (B) The utility assumes all risk associated with the recoverability of existing and future capital costs of its fossil and hydro electric generating units. The current net book value of these units on Consumers Energy's books is over $800 million (excluding CWIP and inventories). Average annual capital expenditures for these units during 1993-1995 was approximately $40 million. The rate freeze recommended by the Staff will prevent recovery of any capital additions during the transition period, and the Company will be solely at risk for the recovery of all capital, fuel and other O&M costs after the full phase-in of retail direct access. (C) The utility also assumes all risk associated with the recoverability of the fuel, and other O&M expenses associated with its fossil and hydro units. The rate freeze (and PSCR suspension) recommended by the Staff would prevent recovery of any increases in these costs during the transition period, and the Company would be fully at risk for recovery of all of these costs after the phase-in of direct access. (D) As was noted earlier, the utility assumes all risk associated with future capital additions for its nuclear units. The substantial regulatory requirements associated with the operation of these units makes this a particularly significant risk. (E) The utility also assumes all risk associated with the recoverability of nuclear fuel, and nuclear other O&M expenses for these units. The level of these costs recoverable through rates is frozen during the transition period, and is recoverable only to the extent the market permits recovery thereafter. (F) The above calculations cover only the period through December 31, 2007. This limitation also applies to the NUG agreements, even though the terms of all of those agreements extend well past 2007. For purposes of this Response, Consumers Energy has accepted the implicit conclusion in the Staff Report that market conditions beyond 2007 are difficult to predict, and that it is therefore appropriate to limit the calculation of NUG-related transition costs to the 1998-2007 time period. Given the long term nature of these power supply contracts, there are substantial contract costs that Consumers Energy will incur beyond 2007, however, and the recoverability of those costs will depend upon market conditions existing at that future time, or, to the extent market conditions do not permit such recovery, the ability to obtain recovery of any future stranded costs via some regulatory mechanism. The Company intends to return to the Commission for a resolution of NUG recovery issues at that time should it appear necessary. To attempt now to resolve questions about market conditions and economic conditions 10 years in the future would not be productive and would serve only to delay the availability of retail access. (G) The utility assumes certain market, contract and regulatory risks associated with the payment of energy charges pursuant to the NUG agreements, since these charges could prove to be above market prices in certain conditions. (H) It is also appropriate to consider the phase-in strategy included in the Staff Report as a mitigation measure. The Staff recommended, and Consumers Energy agrees, that the transition to full retail direct access should be phased in over a 6-7 year period. This greatly assists in mitigating transition costs in a variety of ways. First, it provides the utility with an opportunity to take the organizational and management steps necessary to operate in a deregulated, competitive environment. Second, and as mentioned previously, an acceleration of direct access would result in an increase in the transition cost charge described above. In addition, the phase-in of direct access permits the large expenditures necessary to accommodate the revised metering, billing and other computer systems to be spread over a longer period, thereby allowing those implementation activities to proceed in a more efficient and cost-effective manner. Electric restructuring in Michigan should not be allowed to fall victim to the "America ON-Line" syndrome. (I) Because the PSCR process will be suspended, the utility assumes the risk of variations in fuel prices, unit performance factors, availability of third-party supplied power, and other matters, to the extent they deviate from what is reflected in the frozen rate. (J) As stated in the following section, earnings of the investment trust which exceed what is necessary to make payments to the NUG's would be distributed to customers, thereby mitigating transition costs. (K) The amounts bid during the phase-in period for the ability to participate in the retail access program will be credited against other restructuring implementation costs, thereby mitigating those costs. (L) The "true-up" procedures for transition costs described above will, to the extent actual sales growth exceeds what is projected, serve to reduce transition costs payable by customers. (M) It is also appropriate to recall that, with respect to the MCV power purchase agreement, Consumers Energy has previously incurred write-offs and other losses exceeding $700 million, which represent savings to customers. (N) A further potential mitigation element would be any stranded costs recovered as a result of proceedings at the Federal Energy Regulatory Commission. Such a proceeding is currently pending at the FERC concerning the Alma municipalization proposal. See FERC Docket No. SC97-4-000. Amounts recovered in this manner would serve to reduce the transition costs otherwise authorized by this Commission. -17- Question 2: The items the utility would expect to securitize if authorized to do so, and an analysis regarding the anticipated financial and rate effects. Consumers Energy agrees with the Staff Report recommendation that the securitization of transition charge revenues should be seriously explored. This approach offers a potentially valuable tool in an electric utility restructuring package. Securitization would permit the recovery of transition costs, while doing so in a manner which provides rate benefits to current customers. This approach can thereby provide significant benefits to customers and all interested parties. While the Legislature must ultimately authorize this securitization approach, the Commission has an essential role to play. Consumers Energy urges the Commission to explicitly endorse this feature of the Staff Report as an important element to be included in restructuring legislation and to adopt the calculations and charges which are set forth in this Response. While the Company's analysis of the securitization option is still continuing(4), at this time it expects that the following items and associated dollar amounts would provide the basis for the revenue stream to be securitized:(5) - --------------------- (4)It should be noted that the Company's presentation in this Response regarding securitization assumes that the proceeds derived from the sale of the bonds are not taxable to the utility. If this assumption proves to be incorrect, the benefits associated with securitization would not be realized. The Company anticipates that this issue will be resolved in the near future as the securitization mechanism is implemented in other states. In the event this issue is resolved adversely, the manner of transition cost recovery would have to be reconsidered. (5)It should be noted that, at this time, Consumers Energy does not propose to securitize any amounts related to employee restructuring or other implementation costs. -18- Table 3--(All figures in $ million) Additional Amounts Transition For Customer Total Amount Costs Rate Reduction To Be Securitized (A) Nuclear facilities $ 70.3 $ 241.3 $ 311.6 (B) Generation-related 220.1 332.4 552.5 regulatory assets (C) Ludington/hydro 16.2 8.0 24.2 decommissioning (D) Contract capacity 1,459.5 1,735.4 3,194.9 costs associated with NUG agreements (E) Transition costs (4.9) (.5) (5.4) recovered via Rate DA regulatory charges approved by MPSC _________ _________ _________ Total $1,761.2 $2,316.6 $4,077.8 The revenue requirement associated with the items listed in Table 3 would be removed from the utility's existing rates, and would be replaced with a securitization charge. For purposes of calculating the expected customer benefits from securitization, Consumers Energy has assumed that the bonds issued have a term of 15 years, an interest rate of 7.4%, and that the amounts collected by the utility for bond debt service are not taxable for Michigan Single Business Tax purposes. Using these assumptions, the resulting securitization charge is 1.12 cents per kWh. When the implementation charge (employee-related restructuring and other implementation costs) of 0.14 cents per kWh is added, the total restructuring charge under this approach is 1.26 cents per kWh. See Attachment 1 for details of this calculation. As noted previously, it would be essential to periodically "true-up" the collection of these amounts to reflect actual sales levels. The customer savings expected from this approach are substantial. As set forth below in Section III in greater detail, securitization provides an immediate savings to customers in excess of $200 million relative to rates that would otherwise be in effect in the absence of securitization. See Section III. The issuance of the securitization bonds would generate substantial funds which would be utilized over a reasonable period of time, consistent with prudent financial management considerations, in the following manner: (A) The proceeds from the securitization of nuclear facilities and regulatory assets would be used to reduce Consumers Energy's debt and equity in a proportion similar to that reflected in its current capital structure. (B) The proceeds from the securitization of the present value of the contract capacity charges would be handled as follows: -- The funds would be deposited in a third party managed investment trust fund -- Any earnings of the investment trust in excess of the amount needed to satisfy the approved amounts payable to the PPA suppliers will be distributed to customers. A reasonable estimate of this excess earnings amount ranges from $75 million to $150 million. -- Any remaining balance in the investment trust fund at 2007 would also be distributed to customers. -- Buyouts, buydowns, financial restructuring or renegotiation of NUG power purchase agreements would be funded from the investment trust subject to the consent of the trustee. -20- Table 4 Summary of Transition Costs, Securitization Amounts, and Surcharges (million) Item Without With Securitization Securitization 1. Generation-related $ 70.3 $ 311.6 regulatory assets 2. Nuclear capital costs 220.1 552.5 3. Ludington/hydro 16.2 24.2 decommissioning 4. Power purchase agreement 1,459.5 3,194.9 costs 5. Rate DA charge offset (4.9) (5.4) _________ _________ 6. Total $1,761.2 $ 4077.8 7. Transition Charge 1.31 cents per kWh 8. Securitization Charge 1.12 cents per kWh 9. Employee-related costs $ 50.0 $ 50.0 10. Other implementation $ 150.0 $ 150.0 costs 11. Total implementation 0.14 cents per kWh 0.14 cents per kWh charge 12. Total charge 1.45 cents per kWh 1.26 cents per kWh -21- Question 3: A description of how the utility would allocate direct access capacity, including procedures for bidding and aggregation. The utility should also indicate any appropriate alternatives to the phase-in schedule. A. Allocation To ensure that all customers have an opportunity to participate in retail direct access, Consumers Energy would first determine the blocks of direct access capacity available to residential, secondary and primary customer class based upon the percentage of annual energy consumption for each class. This would result in the residential, secondary and primary customer classes being allocated 49,000 kW, 32,000 kW and 69,000 kW of each 150 MW block of direct access capacity, respectively. Bidding procedures would then be followed within each customer class to allocate the available capacity to individual customers (or aggregators). The following table sets forth how Consumers Energy would phase in the retail direct access program: Table 5 RETAIL DIRECT ACCESS SCHEDULE (All figures in kW of Demand) RESIDENTIAL SECONDARY PRIMARY 7/97 49,000 32,000 69,000 1/98 98,000 64,000 138,000 1/99 147,000 96,000 207,000 1/2000 196,000 128,000 276,000 1/01 245,000 160,000 No Limits 1/02 294,000 192,000 No Limits 1/03 343,000* 224,000 No Limits 1/04 No Limits No Limits No Limits * Based upon an average demand of 4 kW per residential customer, This equates to approximately 85,750 customers. -22- B. Bidding To initiate the bidding procedure, the Company would conduct an auction three months prior to commencement of service. A participant in the auction process would submit a sealed bid indicating the number of 200 kW blocks of available retail access capacity allowances within each class it desires to purchase, and the amount it is willing to pay for each such 200 kW block. The highest bidders per block of capacity will be given first priority to that block. To ensure an adequate number of participants in the program, no single bidder would be awarded more than 10,000 kW from each of the three classes (i.e., primary, secondary and residential). The bid amounts would be in addition to all other applicable charges, and would be payable within thirty days. All fees collected would be credited to the recovery of other restructuring implementation costs previously discussed in response to Question 1. Successful bidders would be able to sell or otherwise transfer their allowances to other eligible parties. C. Aggregation All customers with annual maximum demands of less than 1,000 kW and whose usage is not measured with demand recording meters would be required to procure their power through an aggregator. The aggregator could be any entity, such as a marketer, broker, customer, or distribution utility, which is certificated by the Michigan Public Service Commission.(6) The certification process would ensure that aggregators have the ability to meet their obligations. During the phase-in period, the aggregator will be able to solicit customers via the bidding process. Aggregators would be required to contract for a minimum level of 1,000 kW but could not exceed the quantity of load allowances secured in the bidding process. Aggregators may increase the amount of load they serve in subsequent bid proceedings by successfully bidding for additional allowances, or acquiring additional allowances from other parties participating in the program. Aggregators would be required to independently schedule deliveries to each customer class of retail direct access customer (residential, secondary, and primary). D. Alternatives to the Phase-In Schedule The Commission noted in a footnote in the February 5 Order (p. 3) that the Michigan Electric Cooperative Association had claimed that the 2.5% blocks of capacity may not be feasible for some small utilities. Consumer Energy believes that some flexibility to address unusual situations of very small utilities may be appropriate, provided that the January 1, 2001 and January 1, 2004 dates for full retail direct access are not extended, and provided that the reciprocity condition is in force. That is, to the extent that a small utility wishes to sell to a customer located in another utility's service territory, no claims of special circumstances on its own system should serve to delay open access. - --------------------- (6)Legislation would be appropriate to establish the certification requirements which would be administered by the Commission. -24- Question 4: Tariff sheets for direct access service, with supporting workpapers and applicable FERC tariffs. Attachment 4 to this Response is a set of tariffs that could be used to initiate the retail direct access program in 1997. While they are largely self-explanatory, there are several points deserving special comment: (1) The rates and charges included in the tariffs assume the approval by this Commission and by the Federal Energy Regulatory Commission of the appropriate classification of transmission and distribution facilities in the manner set forth in Consumers Energy's application in Case No. U-11283. The Company notes that, on February 28, 1997, the Commission issued an order setting that matter for hearing. (2) The cost of supplying electricity can fluctuate dramatically over the course of a year, month, and day. The price at which a supplier is willing to sell power could be significantly different at midnight on an April evening than it will be at 3 PM in the afternoon of a 100 degree day in July. Current metering and billing techniques, coupled with standard ratemaking practices, results in most customers being billed on an average rate basis. The meter on a house or place of business records only the total amount of kWh consumed, and not the time of use. Customers are therefore largely indifferent to time of use pricing considerations because they pay the same unit price 24 hours a day, 365 days a year. The implementation of any meaningful retail direct access program, however, is ultimately dependent upon the availability to the customer, the generation supplier and the transmission/distribution utility of instantaneous or real time usage and generation supply information. The metering and communications technology necessary to provide such real time information is not presently in place for the vast majority of utility customers, and it is a formidable task to undertake the installation of the required technology for 1.4 million customers. Attachment 3 describes Consumers Energy's plan for the installation of the necessary technology. In order to allow for the immediate phase-in of retail direct access for all customer classes, however, Consumers Energy has developed an interim "approximation" program that would utilize real time information from a statistically significant sample of customers. This program assumes that customers electing retail direct access, but not yet equipped with the necessary metering technology would have load patterns consistent with this sample. Please refer to Attachment 4, Rule F5.4.(7) The reliance on sampling techniques would be reduced and hopefully eliminated by the year 2004 by the phased installation of new technology for all customers. Of course, Aggregators or individual customers who do not wish to be billed based upon the load pattern sampling technique during the phase-in period may pay to have the appropriate metering and communications technology installed earlier. (3) The rates and charges in Attachment 4 are based upon the transmission and utilization principles imposed by FERC. Certain of these principles, however, do not easily translate from the wholesale environment to the retail environment. For example, FERC pricing for transmission reservation is based on each customer's utilization of the transmission system during the one system peak hour of the month. Over 1.4 million of Consumers Energy's customers are not equipped with the type of metering necessary to determine system utilization at any single point in time. Thus, FERC pricing practices cannot be directly applied. Another example of this situation is that the FERC OATT tariff contains a $3,035 monthly customer charge. Direct assessment of such a charge in a retail direct access transaction would obviously adversely affect the economics of many such transactions. These items are merely examples of the types of issues which arise as the FERC tariff is used as the basis for retail direct access transactions. In the attached tariffs, the Company has attempted to capture as many of the FERC pricing policies and practices as is reasonably possible, while still recognizing the differences between wholesale service and retail service. (4) As the Commission is aware, FERC has directed that rates, terms and conditions of service for a retail direct access program would also be filed with the FERC for its review and approval. Consumers Energy will comply. - --------------------- (7)Consumers Energy notes its belief that it is important that all utilities should offer a comparable program, rather than one more restrictive. -26- Question 5: A description, including tariff sheets, for the standby service that the utility would provide to direct access customers. The direct access service tariff sheets discussed above in Response to Question 4 include a new Standby Service Tariff for use by retail direct access customers. See Attachment 4. This incorporates the provisions on length and availability of service recommended in the MPSC Staff Report. It must be noted that standby service will, from the outset of retail direct access, be available from sources other than Consumers Energy. Thus, customers will be free to choose from multiple sources of standby service. In order to assure a minimum available supply of standby service for an initial two year period, however, as well as a predictable price for that service during that time, Consumers Energy has accepted the Staff's recommendation that the utility should provide a regulated standby service for that period, but not beyond December 31, 2000. As the Staff explained, this will provide an opportunity for the standby generation market to further develop, and for parties to construct additional standby generating capacity. Consumers Energy has set the cost of the proposed standby service based upon the approximate cost of a new green field gas- fired peaking generator. The Company also proposes to close the existing standby tariff provisions, Rule D-7, Rate B-1 and Rate CG, to new standby business as part of these proceedings. Existing customers receiving standby service on these rates would be allowed to continue on these rates until January 1, 2001 at which time they can purchase standby service from sources other than the Company or from the Company at market-based rates. Commencing January 1, 2001, standby service will be provided to all customers at market-based rates. -27- Question 6: A list of any new or additional charges that the utility does not currently assess that would be imposed under a direct access program. The implementation of a retail direct access program in which all classes of customers are eligible to purchase generation from alternative suppliers is a dramatic change in the traditional relationship between utilities and electricity customers. This change will undoubtedly cause many changes in the types of services offered and charges collected by the utility, many of which cannot currently be specifically identified. Consumers Energy believes that there will likely be a continually changing menu of services offered by distribution utilities and other entities, depending upon what the market expects and is willing to pay for. As a general rule, services which are offered by multiple providers should be priced in accordance with the market demand for those services. Examples of additional services arising from the implementation of direct access are: (i) billing services to third parties; (ii) supplier switching services; (iii) credit and collection services provided for third parties; (iv) third party performance bonds or deposits. Undoubtedly additional examples will arise over time. Revisions to certain utility practices and charges will also clearly be necessary as part of the transition to a restructured industry. Some examples of such revisions are the following: (A) Customer contribution requirements--Since many customers will no longer purchase generation services from the distribution utility, the level of investment the utility is willing to make to extend service to new customers without an offsetting contribution from the customer will change. (B) Bill payment schedules--The unbundling of utility charges and the inclusion of third party charges on bills may necessitate changes in payment schedules and associated charges. (C) Late payment and non-payment practices--Inclusion of third party charges on bills will also require changes in late payment/non- payment practices and charges. (D) Miscellaneous billing practices--Additional changes to existing billing practice rules will undoubtedly be necessary. Consumers Energy continues to examine these issues. -29- Question 7: A description of any transmission constraints or limitations on the ability to import power into the utility's system. This description should include: (a) the amount of electricity currently being imported into the system from Michigan sources and from outside the state; (b) the nature of the existing imports, e.g., wholesale transactions; (c) the nature and location of the constraints; (d) an estimate of the amount of direct access electricity that could be imported into the utility's system given existing constraints; and (e) methods of removing constraints and their estimated costs and effects. A detailed discussion of the matters raised in Question 7 is contained in Attachment 5. As evidenced by both the Staff discussion of transmission issues and Consumers Energy's detailed answers, the issue of transmission constraints and interconnection capacity is highly complex. It is critical that the issues be both understood and resolved if Michigan is to advance to a competitive electric industry without causing a negative impact on the reliability of today's system. Transmission capacity and interconnection capacity are also critical to assuring a robust power supply market which is not subject to delivery constraints. Michigan's unique geography is only partially responsible for the difficulties in assessing the availability of transmission capacity. The physical properties of electricity bear the brunt of the responsibility. The following is a summary of simplified concepts important to understanding the issues raised in question 7. 1. Transmission is affected by what generators are on line, at what capacity, and where the load is located. 2. Importing electricity at more than one interconnection at the same time affects the transmission system differently than importation at only one interconnection point. 3. The elimination of transmission constraints at one point does not necessarily eliminate transmission problems as a whole, and it may create constraints at other points. 4. There is sufficient ATC in the near term (through 2000) to accommodate the phase-in of retail access in Michigan. Long term solutions will require additional transformers, extra capacitors, new substations, and/or new interconnections in Michigan, Indiana, Ohio and/or Ontario. These possible projects are also detailed in Attachment 5. 5. Additional generation located within Michigan or the designation of certain generating facilities as "must run" units could also be part of the solution for the future. 6. The Staff Report recommends that Consumers Energy and Detroit Edison be required to provide standby (if requested by the customer) at regulated rates for two years for any customer, but not beyond December 31, 2000. Consumers Energy supports this recommendation since it effectively eliminates concerns about transmission constraint issues for the near term. 7. As discussed further in response to Question # 8, Consumers Energy supports the development of an independent system operator. If properly structured, an ISO will assure that the transmission system is utilized to its fullest capacity on a fair and open access basis. 8. Consumers Energy will make good faith efforts to upgrade its transmission system when required to alleviate transmission constraints, providing that recovery of such expenditures is assured in addition to the CPI-1% adjustment mechanism which applies to energy delivery services. Consumers Energy recommends that transmission issues be recognized as issues that should be dealt with throughout the transition period. The resolution of transmission issues on a long term basis must be intertwined with the resolution of ISO/market exchange and market power issues. -31- Question 8: The status of any ongoing discussions regarding the development of an Independent System Operator. Transmission related issues encompass not only reliability issues, but also issues related to the provision of open access by a transmission owner, when that owner is a vertically integrated utility. Consumers Energy believes that an Independent System Operator ("ISO") can help resolve both types of problems. There is no universal definition of an independent system operator. This can readily be demonstrated by a comparison of the various ISO proposals around the country. The Midwest ISO under discussion does not include generation control responsibilities. The proposed Pennsylvania-New Jersey-Maryland ("PJM") ISO contemplates the management of a competitive energy market, whereas the proposed California ISO will be separate from a power exchange. The Texas ISO will assist control areas with coordination, whereas the PJM ISO and the California ISO will operate a single control area. Some ISOs will simply coordinate operating schedules provided by individual load-serving entities, while others will perform the schedule and dispatch of generation for their members. The actual functions of an ISO are up to each ISO to determine, providing the ISO meets the 11 basic principles set forth by FERC which were described in the Staff Report. Consumers Energy is concerned about the ability of transmission managers to maintain the reliability of the system in light of the rapidly increasing types and amounts of power transfers that will be taking place in the future. Today's transmission system was not designed for the functions it will be asked to perform in a retail access environment. This problem has become a serious concern for the North American Electric Reliability Council ("NERC"). NERC is responsible for establishing the operating and planning standards necessary for the electric utility industry to maintain the reliability of the power system at its current high level. Specific NERC activities currently underway are detailed in Attachment 6. In light of direction from FERC in Order 888 to revise the existing Michigan Electric Power Coordinating Center ("MEPCC"), Consumers Energy and Detroit Edison undertook a series of discussions which included, among other things, the possible expansion of the MEPCC to a Michigan ISO. The advantages of a Michigan ISO would be the ability to utilize the capabilities of the current MEPCC for Consumers Energy-Detroit Edison transmission business functions, generation control and power security monitoring. Because these functions are performed by the MEPCC today, the time required to implement a Michigan ISO would be much shorter than that required for a regional ISO. If these discussions are resumed, Consumers recommends that the MPSC Electric Staff play a role in the formulation of a statewide ISO. Because of the broad interest in a regional ISO, Consumers Energy has joined the initiative to form a Midwest ISO. There are currently 24 members of the Midwest ISO. See Attachment 7. While there is much work to be done on the Midwest ISO, there is general consensus on several key elements, including operations, planning and dispute resolution. The Midwest ISO would assume responsibility for all transmission service business currently being conducted by Consumers Energy ( and other transmission owners). The membership would "buy" all of its transmission service from the ISO. The revenues obtained for this service would be allocated back to the transmission owners. The responsibility for system reliability would also be transferred from Consumers Energy to the ISO. Control area functions such as automatic generation control and transaction schedule implementation would not be performed by the ISO, and would be functions retained by the utility. A dispute resolution procedure along the lines of that proposed for the ECAR Regional Transmission Group is a part of the current version of the Midwest ISO Operating Agreement being considered. The proposed governance of the Midwest ISO is still under discussion. Current plans call for a 12 member board with three representatives from transmission owners. Non-owners would elect the remaining nine representatives. No more than two members may represent an identifiable market participant groups. There is ongoing debate about the necessary procedures to change the Operating Agreement. The major unresolved issue is transmission pricing. There are several different proposals under discussion ranging from zonal pricing (priced at the embedded cost in the buyer's zone) to a single ISO-wide rate set at the average cost of all transmission in the system. Various task forces within the ISO are trying to merge the proposals into one proposal acceptable to all members. Because Michigan is physically located at a geographic extreme of the ISO, pricing is extremely important to Consumers Energy. In all likelihood, the ability or inability to agree on a pricing methodology will be the deciding factor in whether or not the Midwest ISO becomes a reality. To date, the Midwest ISO is comprised only of transmission owners. In addition to Consumers Energy, Detroit Edison, AEP/Michigan and the Michigan Public Power Agency are also members from Michigan. The Midwest ISO continues to have ongoing meetings with various stakeholders, including customers, marketers, brokers and regulators from the affected states. Provided that the Midwest ISO can resolve outstanding issues, an application must be filed, and approved by the FERC. The most optimistic estimate is that the Midwest ISO could be operational in 2000. -34- Question 9: A description of the methods that the utility would propose to alleviate concerns regarding market power in a competitive market. Although the question appears to assume that utilities operating in Michigan will have market power in an open access environment, Consumers Energy cautions the Commission against prematurely jumping to that conclusion. As is evident from proceedings which have been held at the FERC on the subject of market power, it can be a fairly complex subject. As will be discussed below, however, Consumers Energy believes a conclusion can be drawn at this time that, given (i) the phase-in schedule set forth in the Staff Report, (ii) the availability of power import capability, (iii) the assurance of a regulated standby service, and (iv) the number of potential power suppliers, market power is clearly not a problem for at least the initial several years of the retail access program under discussion. Additional analyses may prove to be necessary in the future to determine the extent to which market power will be a legitimate concern. It should first be noted that concerns about market power being possessed by Michigan electric utilities should be largely alleviated by the fact that, under the Staff plan, the utility will retain the obligation to provide generation service at frozen rates through December 31, 2000 for primary customers, and through December 31, 2003 for secondary customers. See Section III of this Response. Thus, since no customer will be required to make market-based purchases of generation prior to those dates, and all customers may, if they wish, continue receiving generation service from the local utility at prescribed prices, customers are protected from the exercise of market power, assuming, arguendo, that some market participants may possess it. As discussed in response to question 7 regarding transmission constraints, there is not currently an unlimited amount of import capability into Michigan or into Consumers Energy's service territory. Notwithstanding the existing limitations, however, this situation does not give rise to any material market power concerns because of the retail access phase-in schedule contained in the Staff Report. Relative to the amount of import capability that does currently exist, the amount of customer load eligible for retail access in 1997-2000 is not sufficient to create any market power concerns. For Consumers Energy, the amount of customer load eligible for retail access is approximately 150 MW in 1997, 300 MW in 1998, 450 MW in 1999, and 600 MW in the year 2000. These amounts of customer load that will be able to "shop" for power should be compared to over 2000 MW of on-peak transmission capacity which is available to bring power into Consumers Energy's service territory. Thus, the relative amounts of import capability and customer load shopping for generation suppliers indicates no material market power problem can exist. With respect to the limited periods during the year when transmission constraints may exist, market power concerns are nevertheless alleviated by the regulated standby obligation recommended in the Staff Report. That is, the Staff recommends, and Consumers Energy has accepted, a requirement that the host utility provide a standby generation service for the first two years of the retail access program. Since this standby service will be available at a regulated rate, any limitations on import capability which might exist are resolved. This two year period provides an adequate opportunity for the generation market to further develop, for additional transmission capability to be developed, and for additional in- state generation capacity to be brought into or returned to service. Finally, the number of potential power suppliers which could sell to customers in Michigan provides adequate assurance that market power could not be exercised by individual market participants. There are numerous potential suppliers of generation services already present in Michigan, including generation owned by retail customers. Over 30 customers just in Consumers Energy's service territory own varying amounts of generating capacity. In addition, customers having the ability to choose power suppliers will be able to reach well beyond the Consumers Energy service territory and the existing MECS control area. This wide market area is the result of a strong extra high voltage transmission network that can physically reach generation sources anywhere in the eastern interconnection. Thus, direct access customers will have a wide number of power suppliers available to them, resulting in a very competitive power market environment. As evidence of this capability, Consumers Energy has, over the years, actively purchased power from not only first tier utilities (i.e., companies with whom Consumers Energy is directly interconnected), but also from second tier utilities (i.e., companies with whom Consumers Energy is one system removed). These include CINergy, Ontario Hydro, Centerior, Central Illinois Public Service, Louisville Gas and Electric, and Commonwealth Edison. This past experience gives an indication that, under most conditions, the market available to direct access customers is quite broad and diverse. Notwithstanding transmission constraints which may have existed at system peak conditions in the past, system operators have been able to maintain customer service reliability. As the industry is restructured, customers will have options available to them to maintain their desired level of service reliability, even at times when transmission constraints may limit power supply alternatives. It will be important, however, for customers, (or their aggregators or other representatives), to accept responsibility for transactions that were previously handled by the local utility. As discussed in the September 1995 NERC Report, Reliability Assessment, 1995-2004, customers who choose to be supplied from other than their local supplier will need to become more knowledgeable about power supplies and transmission systems, including overall supply reliability, services and information that were previously bundled in their local provider's electricity rates. The NERC report states: "In the new competitive environment: 1. Buyers must assess for themselves the reliability or 'firmness' of electricity services purchased from competing suppliers by evaluating the validity of their claims." Direct access customers will need to assure their own power supply and transmission service reliability through the contracts they sign with power suppliers and transmission providers. Additional Methods of Mitigating Market Power As explained above, Consumers Energy does not believe that, in the initial years of the retail access program envisioned by the Staff, market power is a material concern. While the situation that will exist beyond that time is dependent upon many different factors, the following are some of the options that suppliers, transmission providers and customers will have available to mitigate future concerns regarding market power in a competitive environment. A. Transmission Expansion -- While transmission limitations may limit the size of the power market in which customers can effectively shop for firm power, FERC Order No. 888 requires transmission providers to expand or upgrade their transmission systems to accommodate service requests, assuming that the requester is willing to compensate the provider for upgrade costs. Thus, customers and transmission providers can effectively increase the size of the market through the expansion and maintenance of reasonable and cost effective transmission capability. Consumers Energy will continue to plan and operate its transmission network for the benefit of all customer classes. It will make every effort to offer cost effective expansion and upgrade alternatives when requested, and will actively pursue implementation of necessary upgrades. B. Independent System Operator ("ISO") -- FERC stated in the Open Access Rule that the creation of organizations such as ISO's will assist in the mitigation of market power. To this end, Consumers Energy is participating in the Midwest ISO discussions. See response to Question 8 above. These discussions, which have 24 participants in the ECAR and MAIN regions of NERC, may lead to an independently managed and operated regional transmission system that complies with FERC's ISO principles. Consumers Energy will provide non-discriminatory, comparable transmission service to all customers, and will continue to pursue a regional or state ISO, or some similar organization that meets FERC's ISO principles, as an appropriate means of achieving non-discriminatory, comparable transmission service to all customers. C. Interruptible and Direct Controlled Load Management -- An option available to direct access customers to manage the potential impact of power supply interruptions or transmission congestion, or as an alternative to back-up or stand-by service, is for the customer to install equipment to lower energy use when their primary and/or back-up power supply is not available. Such devices can be a cost effective alternative for certain customers. Interruptible and direct controlled load management services are already available to customers who want them. Indeed, Consumers Energy expects that it and others will offer such services, as the market for them develops. Many vendors exist who will work with customers in developing individual load control programs. D. Michigan Power Exchange -- The creation of an independent power exchange where direct access customers could purchase power, could provide a medium for matching energy users and energy suppliers, thereby further mitigating any perceived market power. Such a power exchange would provide yet another supply option for customers. Consumers Energy expects that such exchanges will develop in a competitive environment. E. Non-utility Developers -- As noted in the Staff Report, multiple power suppliers can enter into the market relatively easily and the resulting competition will work to assure reasonable prices and adequate supplies for customers. Certainly the activity of non-utility developers in Michigan over the past 10 years supports this conclusion. The active involvement of non-utility developers in Michigan has demonstrated that these suppliers are a viable alternative for future power supplies. F. Self-generation Option -- Large customers have the option of constructing their own generating facility, either for partial service or full service of their load. A number of customers have found this to be cost effective, particularly when they can take advantage of co-generation in a manufacturing process having significant process steam demands. This ability to install self-generation clearly mitigates any market power which might be possessed by other generation providers in Michigan. -40- III. SUMMARY OF ESSENTIAL FEATURES OF RESTRUCTURING PLAN So that there is no doubt about the restructuring plan that Consumers Energy believes the Commission should endorse, this section of this Response sets forth, in summary fashion, the essential elements of the plan the Company is willing to voluntarily implement. This discussion includes a description of certain elements of the restructuring plan that were identified in the Staff Report but were not addressed in the preceding sections. A. Retail Direct Access Schedule Retail direct access would be phased-in for Consumers Energy on the following schedule: RETAIL DIRECT ACCESS SCHEDULE (All figures in kW of Demand) RESIDENTIAL SECONDARY PRIMARY 7/97 49,000 32,000 69,000 1/98 98,000 64,000 138,000 1/99 147,000 96,000 207,000 1/2000 196,000 128,000 276,000 1/01 245,000 160,000 No Limits 1/02 294,000 192,000 No Limits 1/03 343,000* 224,000 No Limits 1/04 No Limits No Limits No Limits * Based upon an average demand of 4 kW per residential customer, This equates to approximately 85,750 customers. Retail direct access for other Michigan utilities would be phased in on a comparable schedule, as described in the Staff Report. B. Allocation and Bidding The available retail direct access load would be made available to customer classes and individual customers as described previously in this Response. In summary, the capacity would be distributed among primary customers, secondary customers and residential customers based upon the current ratio of class usage to total system usage. Bidding programs would then be conducted to allocate the available capacity among individual customers and aggregators. C. Transition Cost Recovery Consistent with the Staff's recommendations, the Commission should conclude that Consumers Energy's transition costs are as set forth in the Response to Question 1. This approach permits recovery of the generation-related portion of regulatory assets, the net book value of nuclear facilities, Ludington/hydro decommissioning costs, and a portion of the contract charges associated with purchases from non-utility generators. As explained above, this approach results in a 1.31 cents per kWh transition charge, which would only be applicable to those customers electing retail direct access, and only for the 1997-2007 time period. To the extent the securitization option is available in the manner described above, the revenue requirement associated with the securitized assets would be removed from the Company's bundled rates, and a securitization charge of 1.12 cents per kWh would be applicable to all customers for the 15 year term of the securitization bonds. The Commission should also find that the recovery of costs associated with the implementation of industry restructuring should be accomplished in the manner described above in response to Questions 1 and 2. Thus, the costs of employee-related restructuring activities, revised metering and billing systems and equipment, and the associated infrastructure, and implementation of an independent system operator should also be recovered from customers as part of transition costs. Based upon the best information available at this time, Consumers Energy estimates that these costs will add 0.14 cents per kWh to both the transition charge and the securitization charge indicated above. D. Rates, Terms and Conditions of Retail Direct Access Service Rates, terms and conditions for retail direct access service, including standby service for direct access customers, and reflecting the assumptions made herein, are set forth in Attachment 4. Recognition of the jurisdictional role claimed by the FERC is necessary in connection with these tariffs. E. Rate Freeze The Staff Report indicates that the implementation of retail direct access should be accompanied by a freeze on base electric rates (i.e., the non-PSCR component of rates), subject to certain exceptions. This freeze would be effective until January 1, 2001 for commercial and industrial customers taking service at primary voltage levels (the date on which such customers are all eligible for retail direct access), and until January 1, 2004 for all other customers (when all other customers are eligible for retail direct access). The Staff also indicated that certain exceptions to this freeze would be appropriate. Consumers Energy believes that these should include the following: (a) increases resulting from the operation of the performance-based rate mechanism for transmission and distribution rates (see below); (b) increases resulting from changes in accounting requirements, state or federal laws or regulations which affect the cost of providing service by at least $2 million annually; (c) increases resulting from transmission system upgrades or expansions required to alleviate transmission constraints; (d) changes in projected nuclear decommissioning costs; and (e) miscellaneous changes in rules and non- price related rate provisions such as extension policies, billing practices, late payment provisions, and other such policies. F. PSCR Suspension The Staff report also indicates that the power supply cost recovery ("PSCR") clause should be suspended during the transition period (and ultimately eliminated entirely). This recommendation should be implemented for Consumers Energy by adjusting for the levelized phased-in capacity charge increases for NUG purchases which have previously been approved by the Commission, and an adjustment to reflect the normalization of generating plant outage schedules. In addition, there are two PSCR reconciliation cases pending at the Commission for Consumers Energy for 1994 and 1995, which reflect under-recoveries of $15.3 million and $13.7 million, respectively. In addition, the 1996 reconciliation and the projected 1997 reconciliation amounts should also be reflected. The impact of these PSCR-related items is to increase customers rates by 0.32 cents per kWh. The system average rate would increase from 7.02 cents per kWh to 7.34 cents per kWh. See Attachment 8. It should be noted that this calculation does not reflect the significant impact a dissolution of the Michigan Electric Coordinated Systems ("MECS") arrangement between Consumers Energy and Detroit Edison could have on PSCR costs. Therefore, a further adjustment may also be necessary for this reason.(8) If the securitization approach becomes an available option in the manner described previously in this Response, this PSCR-related increase could be more than offset by the benefits associated with securitization. The immediate annual customer savings associated with securitization are approximately $226 million, as shown on Attachment 8. This reflects a reduction in the 7.34 cents per kWh average rate to 6.68 cents per kWh, or approximately a 9% rate reduction. Consumers Energy believes these savings should be used first to correct cross-subsidization issues within and between customer rate classes, with any remaining amount spread to all customer classes. - --------------------- (8)A dispute between the two companies concerning the future of MECS is currently under review by the FERC. FERC Docket Nos. OA97-258-000 and ER97-1168-000, and OA97-472-000 and ER97-1023-000. Detroit Edison is seeking dissolution of MECS, effective as early as April 30, 1997. -44- G. Performance-Based Ratemaking Mechanism The Staff Report contains an excellent discussion of a performance-based approach to the regulation of transmission and distribution services. Because of the importance of maintaining reliable, high quality service, it will clearly be necessary to make substantial expenditures to continue to operate and maintain the Company's transmission and distribution system. The indexing approach recommended in the Staff Report recognizes that such expenditures will be necessary and that it would be desirable to develop non-traditional incentives which will encourage the utility to deliver high quality service at a reasonable cost. As part of its endorsement of the Staff Report, the Commission should explicitly approve performance-based ratemaking proposals which: (a) apply to non-generation rates, (b) provide adequate incentives for the maintenance of transmission/distribution service quality and reliability, and (c) provide for annual increases in non-generation rates which do not exceed the percentage increase in the Consumers Price Index ("CPI"), less one percent. H. Obligation To Serve The restructuring of the electric industry requires that the electric utility's obligation to provide service be substantially redefined. The Commission should adopt the following principles: (1) Except as otherwise stated below, the generation of electricity will no longer be regulated as a public utility function or service. The provision of electric generation service will be a matter of contract between a retail customer and a generation supplier (or aggregator). (2) A company supplying transmission and distribution services will, subject to technical and operational constraints, have an obligation to provide transmission and -45 distribution services to all retail customers within its service territory at rates and on terms and conditions authorized by the appropriate regulatory authority.(9) (3) Through December 31, 2000 for retail customers served at primary voltage levels, and through December 31, 2003 for retail customers served at secondary voltage levels, existing electric public utilities will have the obligation to provide generation service. (4) After the dates stated in paragraph 3, a company supplying transmission and distribution services will have the obligation to procure generation services, to the extent sufficient generation supplies are available, for retail customers who fail to make alternative arrangements for generation service and who request the company to procure such generation supply. This obligation does not, however, require the company to build generating capacity or to enter into long term power purchase agreements. The pricing for such service will be market-based (i.e., current market price plus an appropriate adder). (5) Through December 31, 2000, a company supplying transmission and distribution services will have an obligation to provide standby generation service to retail direct access customers. As of January 1, 2001, this obligation is terminated, and the provision of standby service will be a matter of contract between a retail customer and a generation supplier. I. Reciprocity Reciprocity is another critical element of the Staff restructuring plan. Without strong reciprocity requirements, there can be no fair, competitive generation market, and, as noted previously, stranded/transition costs would be dramatically increased. Because the arguments in favor of reciprocity have been put before the Commission in other proceedings, Consumers Energy will not repeat those arguments in this Response. The Commission should, however, endorse the following principles: (1) No electric utility operating in Michigan should be permitted to utilize the transmission and distribution system of another Michigan utility to make retail sales unless the utility wishing to make the sale provides comparable direct access to retail customers located within its service territory. - --------------------- (9)To the extent transmission system expansions or upgrades are necessary, prompt and reasonable rate recognition of the associated investment is critical. -46- (2) No generation supplier that also provides retail distribution services, or that has an affiliate that provides retail distribution services, should be permitted to utilize the transmission and distribution system of a Michigan utility to make retail sales unless the supplier or its affiliate provides a comparable retail direct access service. If the transaction involves an intermediary (such as a marketer or broker), the reciprocity obligation could be satisfied by either the regional transmission/distribution affiliate of the intermediary, or by the owner of the generation source or its regional transmission/distribution affiliate. (3) A "comparable" retail direct access service is one which (i) provides for retail direct access in an amount of retail customer load which is equivalent to that provided by the transmission and distribution company, (ii) specifies rates, terms and conditions that are equivalent to those offered by the transmission and distribution company, and that have been approved by all applicable regulatory authorities for use in retail direct access transactions. (4) "Sham" transactions should not be permitted to avoid the reciprocity condition. J. Creation of an Independent System Operator Consumers Energy and other Michigan transmission-owning utilities should proceed with the development of an ISO. IV. CONCLUSION As noted in Consumers Energy's January 21 Comments, the Company believes that the industry restructuring framework set forth in the Staff Report is a reasoned approach which is fair to all stakeholders. The additional information provided in this Response should provide the Commission with the necessary data to satisfy itself that the recommendations contained in the Staff Report are indeed in the public interest. Consumers Energy encourages the Commission to take the steps necessary to allow these recommendations to be implemented. Contrary to the apparent contentions of other parties(10), Consumers Energy does not believe that throwing this process into further hearings is likely to prove to be a satisfactory - --------------------- (10)See e.g., the Joint Request For Contested Case Hearings filed by the Attorney General, ABATE and the Residential Ratepayer Consortium on February 21, 1997. -47- means of implementing industry restructuring. The Commission has properly been proceeding thus far in a manner which allows all parties to comment upon each aspect of the restructuring proposal, and to that end, has already held public hearings and received written comments on the Staff Report. Following the filing of this Response, the Commission has scheduled additional public hearings and has provided an additional opportunity for written comments on the information contained in this Response. As of April 7, 1997 (when the written comments of other interested persons are due), no one will be able to credibly complain that they have not had a fair opportunity to express their views on the issues raised by the Staff Report. To allow this process to become bogged down in potentially extraordinarily extended additional hearings at this time would, in the opinion of Consumers Energy, be a significant mistake. It would make it virtually impossible for the Commission to influence or be of any assistance to the Legislature in 1997 as it begins its consideration of utility restructuring. Indeed, during (and because of) the pendency of the requested contested case hearings, the Commission's ability to influence the public debate over utility restructuring at all would be minimal. Commencing hearings would also postpone any possibility of implementing any portion of the Staff plan in 1997, and probably for an extended period thereafter. The Commission should be very reluctant to initiate hearings that are sure to be lengthy, contentious, and in the end, unlikely to produce materially different information than the Commission already possesses. As stated in the Introduction of this Response, Consumers Energy believes that the Commission can and should take strong, productive action in response to the information provided in this Response and by other interested parties. Upon completing its analysis of the information it has solicited, Consumers Energy believes the Commission should (i) issue an order endorsing the restructuring plan set forth in the Staff Report, as that plan has been further developed in this Response, (ii) include in that order a recommendation to the Legislature that it enact legislation which is consistent with that plan, and (iii) accept the Company's offer of voluntary implementation. Consumers Energy stands ready to proceed with the initial implementation of the MPSC Staff restructuring plan, subject to the Commission taking the steps outlined above, and subject to the Commission approving the entirety of the implementation plan which is described in this Response. In addition, because of the importance of gaining legislative authorization of the restructuring plan, the Company's willingness to voluntarily implement this plan would cease as of December 31, 1997, unless satisfactory utility restructuring legislation has been enacted by that date. While there may well be alternative routes to achieving utility industry restructuring besides what is described in the Staff Report and in this Response, Consumers Energy doubts that there are any that offer as great a likelihood of successful and expeditious implementation. Respectfully submitted, CONSUMERS ENERGY COMPANY Dated: March 7, 1997 By /s/ David W. Joos ---------------------------------- David W. Joos Executive Vice President and Chief Operating Officer - Electric /s/ Jon Robinson - ------------------------------- David A. Mikelonis Jon R. Robinson 212 West Michigan Avenue Jackson, MI 49201 Attorneys for Consumers Energy Company -----END PRIVACY-ENHANCED MESSAGE-----