<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ---------- ----------------------------------- ------------------
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9261
1-5611 CONSUMERS POWER COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-1030
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
CMS Energy Corporation, $.01 par value, shares
outstanding at April 30, 1994 - 85,808,418
Consumers Power Company, $10 par value, shares outstanding
and privately held by CMS Energy Corporation at April 30, 1994 - 84,108,789
<PAGE>
<PAGE> 2
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended March 31, 1994
This combined Form 10-Q is separately filed by CMS Energy Corporation and
Consumers Power Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Power Company makes no
representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
----
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I:
CMS Energy Corporation
Report of Independent Public Accountants . . . . . . . . . 6
Consolidated Statements of Income . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows. . . . . . . . . . . 8
Consolidated Balance Sheets. . . . . . . . . . . . . . . . 9
Consolidated Statements of Common Stockholders' Equity. . 11
Condensed Notes to Consolidated Financial Statements. . . 12
Management's Discussion and Analysis. . . . . . . . . . . 23
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . 36
Consolidated Statements of Income . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows . . . . . . . . . . 38
Consolidated Balance Sheets . . . . . . . . . . . . . . . 39
Consolidated Statements of Common Stockholder's Equity. . 41
Condensed Notes to Consolidated Financial Statements. . . 42
Management's Discussion and Analysis. . . . . . . . . . . 53
PART II:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 63
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 65
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
<PAGE>
<PAGE> 3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . Association of Businesses Advocating Tariff
Equity
ALJ . . . . . . . . . . . . . Administrative Law Judge
Articles. . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . The Michigan Attorney General
bcf . . . . . . . . . . . . . Billion cubic feet
Clean Air Act . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Energy. . . . . . . . . . CMS Energy Corporation
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 MGL
CMS Midland . . . . . . . . . CMS Midland Inc., a subsidiary of MGL
Consumers . . . . . . . . . . Consumers Power Company
Court of Appeals. . . . . . . Michigan Court of Appeals
Detroit Edison. . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . Michigan Department of Natural Resources
DOE . . . . . . . . . . . . . U. S. Department of Energy
DSM . . . . . . . . . . . . . Demand-side management
EMF . . . . . . . . . . . . . Electric and magnetic fields
Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
EPA . . . . . . . . . . . . . Environmental Protection Agency
FASB. . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . Gas cost recovery
GPSLP . . . . . . . . . . . . Genesee Power Station Limited Partnership
GTN . . . . . . . . . . . . . $250 million CMS Energy General Term Notes,
Series A
kWh . . . . . . . . . . . . . Kilowatt-hour
mcf . . . . . . . . . . . . . Thousand cubic feet
MCV . . . . . . . . . . . . . Midland Cogeneration Venture
MCV Bonds . . . . . . . . . . Collectively, senior secured lease
obligation bonds and subordinated secured
lease obligation bonds issued in connection
with the leveraged-lease financing of the
MCV Facility, and tax-exempt PCRBs
MCV Facility. . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the MCV
Partnership
MCV Partnership . . . . . . . Midland Cogeneration Venture Limited
Partnership
MGL . . . . . . . . . . . . . Midland Group Ltd., a subsidiary of
Consumers
Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
MMCG. . . . . . . . . . . . . Michigan Municipal Cooperative Group
MOAPA . . . . . . . . . . . . MOAPA Energy Limited Partnership, a wholly
owned affiliate of CMS Generation
MPSC. . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . Megawatts
NOMECO. . . . . . . . . . . . NOMECO Oil & Gas Co., a wholly owned
subsidiary of Enterprises
Notes . . . . . . . . . . . . Collectively,
Series A . . . . . . . . . . Series A Senior Deferred Coupon Notes of
CMS Energy due October 1, 1997
Series B . . . . . . . . . . Series B Senior Deferred Coupon Notes of
CMS Energy due October 1, 1999
NRC . . . . . . . . . . . . . Nuclear Regulatory Commission
O&M . . . . . . . . . . . . . Other operation and maintenance expense
<PAGE>
Order 636 . . . . . . . . . . Orders affecting interstate gas pipelines,
including Order 636A and 636B issued by the
FERC in 1992, known also as the
Restructuring Rule
Palisades . . . . . . . . . . Palisades nuclear plant, owned by Consumers
PPA . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a
35-year term commencing in March 1990
PSCR. . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935
Revised Settlement Proposal . The request for approval of a settlement
proposal to resolve MCV cost recovery
issues, PURPA issues and court remand as
filed with the MPSC on July 7, 1992 and
amended on September 8, 1992
SEC . . . . . . . . . . . . . Securities and Exchange Commission
Secured Credit Facility . . . $220 million secured Revolving Credit
Facility dated November 30, 1992
SERP. . . . . . . . . . . . . Supplemental Executive Retirement Plan
Settlement Order. . . . . . . MPSC Order issued March 31, 1993 in MPSC
Case Nos. U-10127, U-8871 and others, and
the rehearing order issued May 26, 1993
SFAS. . . . . . . . . . . . . Statement of Financial Accounting Standards
Superfund . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Trunkline . . . . . . . . . . Trunkline Gas Company
<PAGE>
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(This page intentionally left blank)
<PAGE>
<PAGE> 6
ARTHUR ANDERSEN & CO.
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS
ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of March
31, 1994 and 1993, and the related consolidated statements of income,
common stockholders' equity and cash flows for the three-month and twelve-
month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of CMS Energy Corporation and
subsidiaries as of December 31, 1993, and the related consolidated
statements of income, common stockholders' equity and cash flows for the
year then ended (not presented herein), and, in our report dated January
28, 1994, we expressed an unqualified opinion on those statements. In our
opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1993, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen & Co.
Detroit, Michigan,
May 10, 1994.
<PAGE>
<PAGE> 7
<TABLE>
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1994 1993 1994 1993
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 545 $ 490 $2,132 $1,874
Gas utility 528 495 1,194 1,151
Oil and gas exploration and production 18 19 76 73
Independent power production 8 5 23 5
Natural gas pipeline, storage and marketing 42 36 148 111
Other 1 1 4 6
-----------------------------------------------
Total operating revenue 1,142 1,046 3,577 3,220
-----------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 79 70 303 295
Purchased power - related parties 122 107 481 464
Purchased and interchange power 42 25 165 108
Cost of gas sold 372 349 824 778
Other 144 122 591 556
-----------------------------------------------
Total operation 759 673 2,364 2,201
Maintenance 43 45 205 199
Depreciation, depletion and amortization 103 100 368 349
General taxes 62 60 195 186
-----------------------------------------------
Total operating expenses 967 878 3,132 2,935
-----------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 88 81 293 172
Gas utility 84 73 158 121
Oil and gas exploration and production 2 4 1 10
Independent power production 2 3 4 (5)
Natural gas pipeline, storage and marketing 3 2 8 7
Other (4) 5 (19) (20)
-----------------------------------------------
Total pretax operating income 175 168 445 285
-----------------------------------------------
INCOME TAXES 48 43 96 40
-----------------------------------------------
NET OPERATING INCOME 127 125 349 245
-----------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 3 4 14 15
Accretion expense (Note 2) (9) (9) (37) (9)
Loss on MCV power purchases - settlement (Note 2) - - - (520)
Income from contractual arrangements (MCV Bonds) - 8 24 34
Other income taxes, net 3 5 14 173
Other, net 5 (2) 22 3
-----------------------------------------------
Total other income (deductions) 2 6 37 (304)
-----------------------------------------------
FIXED CHARGES
Interest on long-term debt 46 51 199 181
Other interest 3 6 21 28
Capitalized interest (1) (1) (6) (3)
Preferred dividends 3 3 11 11
-----------------------------------------------
Net fixed charges 51 59 225 217
-----------------------------------------------
NET INCOME (LOSS) $ 78 $ 72 $ 161 $ (276)
===============================================
AVERAGE COMMON SHARES OUTSTANDING 85 80 83 80
===============================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE $ .92 $ .90 $ 1.95 $(3.45)
===============================================
DIVIDENDS DECLARED PER COMMON SHARE $ .18 $ .12 $ .66 $ .48
===============================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 8
<TABLE>
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 78 $ 72 $ 161 $(276)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and lease amortization 108 95 353 340
Nuclear decommissioning 12 14 53 51
Debt discount amortization 9 9 36 19
Deferred income taxes and investment tax credit 17 21 52 (178)
Accretion expense (Note 2) 9 9 37 9
Accretion income - abandoned Midland project (3) (4) (14) (15)
MCV power purchases - settlement (Note 2) (22) (27) (78) (27)
Loss on MCV power purchases - settlement (Note 2) - - - 520
Other (7) (5) (11) (1)
Changes in other assets and liabilities 179 150 (60) 99
------ ------------------------- -------------
Net cash provided by operating activities 380 334 529 541
------ ------------------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (114) (97) (564) (502)
Investments in partnerships and unconsolidated subsidiaries (23) - (131) (12)
Investments in nuclear decommissioning trust funds (12) (14) (53) (51)
Cost to retire property, net (7) (6) (33) (16)
Deferred demand-side management costs - (11) (39) (37)
Sale of subsidiary - - (14) -
Other - - (5) (2)
Reduction of investments in MCV Bonds - - 322 10
Proceeds from sale of property - - 1 11
Proceeds from Bechtel settlement - - - 46
------ ------------------------- -------------
Net cash used in investing activities (156) (128) (516) (553)
------ ------------------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred stock 193 - 193 -
Proceeds from bank loans, notes and bonds 39 53 662 645
Issuance of common stock 13 - 145 -
Decrease in notes payable, net (259) (194) (21) (517)
Retirement of bonds (Note 7) (109) (51) (703) (63)
Repayment of bank loans (54) - (246) (3)
Payment of capital lease obligations (16) (8) (34) (37)
Payment of common stock dividends (15) (10) (54) (38)
Retirement of common stock and preferred stock (1) - (4) -
------ ------------------------- -------------
Net cash used in financing activities (209) (210) (62) (13)
------ ------------------------- -------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 15 (4) (49) (25)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 55 123 119 144
------ ------------------------- -------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 70 $ 119 $ 70 $ 119
====== ========================= =============
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 9
<TABLE>
CMS Energy Corporation
Consolidated Balance Sheets
<CAPTION>
March 31 March 31
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT AND PROPERTY (At Cost)
Electric $5,407 $5,347 $5,091
Gas 1,885 1,862 1,760
Oil and gas properties (full-cost method) 858 845 783
Other 309 294 243
----------------------------------
8,459 8,348 7,877
Less accumulated depreciation, depletion and amortization 4,105 4,022 3,845
----------------------------------
4,354 4,326 4,032
Construction work-in-progress 248 257 286
----------------------------------
4,602 4,583 4,318
----------------------------------
INVESTMENTS
First Midland Limited Partnership (Note 2) 214 213 209
Independent power production 118 115 38
Midland Cogeneration Venture Limited Partnership (Note 2) 67 67 69
Other 43 26 26
----------------------------------
442 421 342
----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market (Note 2) 70 55 119
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 7) 129 149 176
Inventories at average cost
Gas in underground storage 62 228 39
Materials and supplies 78 74 76
Generating plant fuel stock 22 41 28
Trunkline settlement (Note 3) 30 31 31
Deferred income taxes 13 17 -
Investment in MCV Bonds - - 322
Prepayments and other 169 188 154
----------------------------------
573 783 945
----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 498 491 471
Nuclear decommissioning trust funds (Note 4) 179 165 125
Abandoned Midland project (Note 3) 158 162 172
Trunkline settlement (Note 3) 78 86 108
Other 295 273 162
----------------------------------
1,208 1,177 1,038
----------------------------------
TOTAL ASSETS $6,825 $6,964 $6,643
==================================
</TABLE>
<PAGE>
<PAGE> 10
<TABLE>
<CAPTION>
March 31 March 31
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION (Note 7)
Common stockholders' equity $1,042 $ 966 $ 789
Preferred stock of subsidiary 356 163 163
Long-term debt 2,376 2,405 2,730
Non-current portion of capital leases 122 115 90
----------------------------------
3,896 3,649 3,772
----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 284 368 132
Accounts payable 153 171 184
Accounts payable - related parties 49 46 58
Notes payable - 259 21
Accrued taxes 182 233 183
MCV power purchases - settlement (Note 2) 82 82 81
Accrued refunds 33 28 101
Accrued interest 26 40 59
Deferred income taxes - - 32
Other 172 189 166
----------------------------------
981 1,416 1,017
----------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 557 540 518
Deferred income taxes 518 509 357
MCV power purchases - settlement (Note 2) 378 391 421
Deferred investment tax credits 188 191 198
Trunkline settlement (Note 3) 78 86 108
Regulatory liabilities for income taxes, net 13 6 67
Other 216 176 185
----------------------------------
1,948 1,899 1,854
----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,825 $6,964 $6,643
==================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 11
<TABLE>
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
-------------------- -------------------- -------------
OTHER PAID-IN CAPITAL
At beginning of period 1,672 1,539 1,539 1,537
Common stock reacquired (1) - (4) -
Common stock issued 13 - 145 -
Common stock reissued - - 4 2
-------------------- -------------------- -------------
At end of period 1,684 1,539 1,684 1,539
-------------------- -------------------- -------------
REVALUATION CAPITAL (Note 6)
At beginning of period - - - -
SFAS 115 - unrealized gain, net of tax 1 - 1 -
-------------------- -------------------- -------------
At end of period 1 - 1 -
-------------------- -------------------- -------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (707) (813) (751) (437)
Net income (loss) 78 72 161 (276)
Common stock dividends declared (15) (10) (54) (38)
-------------------- -------------------- -------------
At end of period (644) (751) (644) (751)
-------------------- -------------------- -------------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,042 $ 789 $1,042 $ 789
==================== ==================== =============
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 12
CMS Energy Corporation
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 1993 Form 10-K of CMS Energy Corporation that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure and Basis of Presentation
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving most of
the Lower Peninsula of Michigan, is the principal subsidiary of
CMS Energy. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest of which is
the automotive industry. Enterprises is engaged in several non-utility
energy-related businesses including: 1) oil and gas exploration and
production, 2) development and operation of independent power production
facilities, 3) gas marketing services to utility, commercial and
industrial customers, and 4) transmission and storage of natural gas.
CMS Energy 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 and includes these results in operating
revenue. For the three and 12 month periods ended March 31, 1994, equity
earnings were $6 million and $17 million, respectively and $6 million for
each of the three and 12 month periods ended March 31, 1993.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company
for 15- and 20-year periods, respectively. At March 31, 1994, Consumers,
through its subsidiaries, held the following assets related to the MCV:
1) CMS Midland owned a 49 percent general partnership interest in the MCV
Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor
interest in the MCV Facility.
Power Purchases from the MCV Partnership
Consumers' obligation to purchase contract capacity from the MCV
Partnership under the PPA follows:
1995 and
Year 1992 1993 1994 thereafter
- ---- ---- ----- ----- ----------
MW 915 1,023 1,132 1,240
Prior to 1993, the MPSC only allowed Consumers to recover costs of power
purchased from the MCV Partnership based on delivered energy for up to 840
MW at rates less than Consumers paid. In March 1993, the MPSC approved,
with modifications, the Revised Settlement Proposal which had been co-
sponsored by Consumers, the MPSC staff and 10 small power and cogeneration
developers. These parties accepted the Settlement Order and the MCV
Partnership confirmed that it did not object to the modifications. ABATE
and the Attorney General have filed claims of appeal of the Settlement
Order with the Court of Appeals.
The Settlement Order determined the cost of power purchased from the MCV
Partnership that Consumers can recover from its electric retail customers
and significantly reduced the amount of future underrecoveries for these
power costs. Effective January 1993, the Settlement Order allowed
Consumers to recover substantially all of the payments for its ongoing
purchase of 915 MW of contract capacity from the MCV Partnership.
Capacity and energy purchases from the MCV Partnership above the 915 MW
level can be competitively bid into Consumers' next solicitation for power
or, if necessary, utilized for current power needs with a prudency review
and a pricing recovery determination in annual PSCR cases. In either
instance, the MPSC would determine the levels of recovery from customers
for the power purchased. The Settlement Order also provides Consumers the
right to remarket the remaining capacity to third parties.
The PPA requires Consumers to pay to the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge based primarily on Consumers' average
cost of coal consumed. Consumers is scheduling deliveries of energy from
the MCV Partnership whenever it has energy available up to hourly
availability limits, or "caps," for the 915 MW of capacity authorized for
recovery in the Settlement Order. Consumers can recover an average 3.62
cents per kWh capacity charge and the prescribed energy charges associated
with the scheduled deliveries within the caps, whether or not those
deliveries are scheduled on an economic basis. Through December 1997,
there is no cap applied during on-peak hours to Consumers' recovery for
the purchase of capacity made available within the 915 MW authorized.
Recovery for purchases during off-peak hours is capped at 82 percent in
1994 and 1995, 84 percent in 1996 and 1997, increasing to 88.7 percent in
1998 and thereafter at which time the 88.7 percent cap is applicable
during all hours. For all economic energy deliveries above the caps to
915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment
in addition to the corresponding energy charge.
In December 1992, Consumers recognized an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power costs
under the PPA as a result of the Settlement Order. This loss included
management's best estimates regarding 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. Except for adjustments to the above
loss to reflect the after-tax time value of money through accretion
expense, no additional losses are expected unless actual future experience
materially differs from management's estimates. The after-tax expense for
the time value of money for the loss is estimated to be approximately $24
million in 1994, and various lower levels thereafter, including $22
million in 1995 and $20 million in 1996. Although the settlement loss was
recorded in 1992, Consumers' continues to experience cash underrecoveries
associated with the Settlement Order. These after-tax cash
underrecoveries, including fixed energy charges, totaled $15 million for
the first quarter of 1994. Consumers believes there is and will be a
market for the resale of capacity purchases from the MCV Partnership above
the MPSC-authorized level. However, if Consumers is unable to sell any
capacity above the current MPSC-authorized level, future additional after-
tax losses and after-tax cash underrecoveries could be incurred.
Consumers' estimates of its 1994 and future after-tax cash underrecoveries
and possible additional losses for the next five years if none of the
additional capacity is sold are as follows:
After-tax, In Millions
1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------
Expected cash underrecoveries $56 $65 $62 $61 $ 8
Possible additional underrecoveries
and losses (a) $14 $20 $20 $22 $72
===========================================================================
(a) If unable to sell any capacity above the MPSC's authorized level
As of December 31, 1993, and March 31, 1994, the after-tax, present value
of the Settlement Order liability totaled $307 million and $299 million,
respectively. The reduction in the Settlement Order liability reflects
after-tax cash underrecoveries related to capacity totaling $14 million,
partially offset by after-tax accretion expense of $6 million.
The PPA, while requiring payment of a fixed energy charge, contains a
"regulatory out" provision which permits Consumers to reduce the fixed
energy charges payable to the MCV Partnership throughout the entire
contract term if Consumers is not able to recover these amounts from its
customers. In connection with the MPSC's approval of the Revised
Settlement Proposal, Consumers and the MCV Partnership are engaged in
arbitration proceedings under the PPA to determine whether Consumers is
entitled to exercise its regulatory out regarding fixed energy charges on
the portion of available MCV capacity above the current MPSC-authorized
levels. An arbitrator acceptable to both parties has been selected. If
the arbitrator determines that Consumers cannot exercise its regulatory
out, Consumers would be required to make these fixed energy payments to
the MCV Partnership even though Consumers may not be recovering these
costs. The arbitration proceedings will also determine who is entitled to
the fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to settlement. Although Consumers
believes its position on arbitration is sound and intends to aggressively
pursue its right to exercise the regulatory out, management cannot predict
the outcome of the arbitration proceedings or any possible settlement of
the matter. Accordingly, losses were recorded prior to 1993 for all fixed
energy amounts at issue in the arbitration. As of March 31, 1994,
approximately $22 million has been escrowed by Consumers and is included
in Consumers' temporary cash investments. In December 1993, Consumers
made an irrevocable offer to pay through September 15, 2007, fixed energy
charges to the MCV Partnership on all kWh delivered by the MCV Partnership
to Consumers from the contract capacity in excess of 915 MW, which
represents a portion of the fixed energy charges in dispute. Consumers
made the offer to facilitate the sale of its remaining $309 million
investment in the MCV Bonds which was completed in 1993.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings. It
alleges breach of contract, breach of fiduciary duty and negligent or
fraudulent misrepresentation relating to the MCV Partnership's failure to
object to the Settlement Order in light of Consumers' interpretation of
the Settlement Order, which is the subject of an arbitration between the
MCV Partnership and Consumers. The action alleges damages in excess of $1
billion and seeks injunctive relief relative to Consumers' payments of the
fixed energy charges. CMS Energy and Consumers believe that at all times
they and CMS Holdings have conducted themselves properly and that the
action is without merit. They also believe that a significant portion of
the alleged damages represent fixed energy charges in dispute in the
arbitration. CMS Energy and Consumers have requested that the lawsuit be
dismissed for lack of jurisdiction and have commenced a lawsuit in
Midland, Michigan, to address these issues. In addition, CMS Holdings has
filed a lawsuit in the circuit court of Jackson, Michigan, seeking
reimbursement of approximately $8 million of certain tax indemnification
payments made to its partners in the FMLP and owed to CMS Holdings. CMS
Energy and Consumers are unable to predict the outcome of these actions.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct.
PSCR Matters: Consistent with the terms of the 1993 Settlement Order,
Consumers withdrew its appeals of various MPSC orders issued in connection
with several PSCR cases. Consumers also agreed not to appeal any MCV-
related issues raised in future orders for these plan cases and related
reconciliations to the extent those issues are resolved by the Settlement
Order. In March 1994, the MPSC issued an order in the PSCR reconciliation
case for 1992 confirming Consumers' recovery for the purchase of 840 MW
from the MCV in accordance with the MPSC plan case order and allowing
recovery for the purchase of power above 840 MW based on replacement power
costs.
3: Rate Matters
Electric Rate Case
On May 10, 1994, the MPSC issued an order, granting Consumers a $58
million annual increase in its retail electric rates effective May 11,
1994. The order provides Consumers with higher revenues associated with
increased expenditures primarily related to capital additions, operation
and maintenance, higher depreciation and postretirement benefits computed
under SFAS 106, Employers' Accounting for Postretirement Benefits Other
than Pensions and the continuation of certain demand-side management
programs at reduced levels. The MPSC order generally supported Consumers'
rate design proposal and reduced the level of subsidization of residential
customers by commercial and industrial customers. Residential customers
were assigned $40 million or 70 percent of the rate increase.
As finally revised, Consumers requested an electric rate increase of $118
million for 1994 and an incremental increase of $27 million in 1995. The
MPSC's order did not provide Consumers with an additional rate increase in
1995, but does allow Consumers to file a separate rate increase request
for 1995. The order also differed from Consumers' requested increase as
it included a lower return on common equity, a lower level of working
capital, provides for a lower equity ratio for Consumers' projected
capital structure and reflects a $15 million decrease for lower property
taxes due to a recent reduction in state tax rates; and $9 million for
reduced demand-side management program expenditures and miscellaneous
costs which will not be incurred. Consumers is studying the order and has
30 days from May 10, 1994, to file an appeal or request a rehearing with
the MPSC regarding this order.
Abandoned Midland Project: In 1984, Consumers abandoned construction of
its unfinished nuclear power plant located in Midland, Michigan, and
subsequently took a series of write-downs. In 1991, the MPSC issued
orders permitting recovery of a portion of the plant and Consumers began
collecting $35 million pretax annually for the next 10 years. Several
parties, including the Attorney General, have filed claims of appeal with
the Court of Appeals regarding MPSC orders issued in 1991 that specified
the recovery of abandoned investment.
Electric Demand-side Management: As a result of settlement discussions
regarding demand-side management and an MPSC order in 1991, Consumers
agreed to spend $65 million over two years on demand-side management
programs. Based on the MPSC's determination of Consumers' effectiveness
in implementing these programs, Consumers' future rate of return on common
equity may be adjusted either upward by up to 1 percent or downward by up
to 2 percent. This adjustment, if implemented, would be applied to
Consumers' retail electric tariff rates and be in effect for one year
following reconciliation hearings with the MPSC during 1994. The
estimated revenue effects of the potential adjustment range from an $11
million increase to a $22 million decrease. In March 1994, Consumers
filed its demand-side management reconciliation case with the MPSC that
requests a 1 percent increase on its return on common equity based on
having achieved all of the agreed-upon objectives.
In October 1993, Consumers completed the customer participation portion of
these programs. In May 1994, as part of Consumers' electric rate case,
the MPSC issued an order that allowed Consumers to recover demand-side
management expenditures which exceeded the $65 million level. The order
also authorized Consumers to continue certain programs in 1994 through
1996. Consumers is deferring program costs and amortizing the costs over
the period these costs are being recovered from its customers in
accordance with an accounting order issued by the MPSC in September 1992.
The unamortized balance of deferred costs at March 31, 1994, was $69
million.
PSCR Issues
Consumers began a planned refueling and maintenance outage at Palisades in
June 1993. Following several required, unanticipated repairs that
extended the outage, the plant returned to service in early November. In
addition, in mid-February 1994, Palisades was temporarily taken out of
service to repair valve leakage and conduct other needed inspections and
repairs. Recovery of replacement power costs incurred by Consumers during
these outages will be reviewed by the MPSC during the 1993 and 1994 PSCR
reconciliations of actual costs and revenues to determine the prudency of
actions taken during the outages. Any finding of delay due to imprudence
could result in disallowances of a portion of replacement power costs.
Net replacement power costs during the outages were approximately $180,000
per day above the cost of fuel incurred when the plant is operating. See
Note 4 for information regarding the NRC's review of Palisades'
performance.
GCR Issues
The MPSC, in a February 1993 order, provided that the price payable to
certain intrastate gas producers by Consumers be reduced prospectively.
In a related case, Consumers was not allowed to recover approximately $13
million of costs incurred prior to February 8, 1993. Consumers previously
had accrued a loss sufficient for this issue. Future disallowances are
not anticipated, unless the remaining appeals filed by the intrastate
producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings
concerning Trunkline liquified natural gas costs. The settlement
represents significant gas cost savings for Consumers and its customers in
future years. As part of the settlement, Consumers will not incur any
transition costs from Trunkline as a result of FERC Order 636. In
November 1992, Consumers had recorded a liability and regulatory asset for
the principal amount of payments to Trunkline over a five-year period. In
May 1993, the MPSC approved a separate settlement agreement that provides
Consumers with full recovery of these costs over a five-year period. At
March 31, 1994, Consumers' remaining liability and regulatory asset was
$108 million.
Other
Certain of Consumers' direct gas suppliers have contract prices tied to
the price Consumers pays Trunkline for its gas. In September 1993,
Consumers commenced gas purchases from Trunkline under a continuation of
prior sales agreements. The current contract covers gas deliveries
through October 1994 and is at a reduced price compared to prior gas
sales. Four domestic and four Canadian direct gas suppliers have claimed
that the reduced Trunkline gas cost is not a proper reference price under
their contracts with Consumers and that their contracts are terminable
after a 12-month period. Consumers disputed these claims and, in March
1994, reached a settlement with the four domestic suppliers regarding the
price Consumers is required to pay for gas.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
4: Commitments and Contingencies
Ludington Pumped Storage Plant Litigation
In 1986, the Attorney General filed a lawsuit on behalf of the State of
Michigan in the Circuit Court of Ingham County, seeking damages from
Consumers and Detroit Edison for alleged injuries to fishery resources
because of the operation of the Ludington Pumped Storage Plant. The state
sought $148 million (including $16 million of interest) for past injuries
and $89,000 per day for future injuries, with the latter amount to be
adjusted upon installation of "adequate" fish barriers and other changed
conditions.
In 1987, the Attorney General filed a second lawsuit alleging that
Consumers and Detroit Edison have breached a bottomlands lease agreement
with the state and asked that the lease be declared void. This complaint
was consolidated with the suit described in the preceding paragraph. In
1990, both of the lawsuits were dismissed on the basis of federal
preemption. In 1993, the Court of Appeals overturned the dismissal, as to
damages, effectively allowing the state to continue its damages lawsuit
against Consumers and Detroit Edison, but generally affirmed the lower
court's ruling as to the breach of lease claim. The Court of Appeals'
ruling also limited any potential damages to those occurring no earlier
than 1983. Consumers, Detroit Edison and the Attorney General have filed
an application for leave to appeal with the Michigan Supreme Court.
Consumers and Detroit Edison are seeking to have the trial court's
dismissal of the damages claim affirmed.
Each year since 1989, Consumers and Detroit Edison have complied with FERC
orders by installing a seasonal barrier net from April to October at the
Ludington plant site. The FERC is now considering whether the barrier net
(along with other actions by Consumers, including contributions to state
fish-stocking programs) would be a satisfactory permanent solution.
Environmental Matters
Consumers is a so-called "Potentially Responsible Party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on
information currently known by management, Consumers believes that it is
unlikely that its liability at any of the known Superfund sites,
individually or in total, will have a material adverse effect on its
financial position or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites to define the nature and extent of
contamination at these sites and to determine which of several possible
remedial action alternatives, including no action, may be required under
the Environmental Response Act. The DNR has approved two of three plans
for remedial investigation/feasibility studies submitted by Consumers and
is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study completed by Consumers in the first quarter of 1994 indicated that
the expenditures for remedial action at this site are likely to be
minimal. However, Consumers did not believe that a single site was
representative of all of the sites. Data available to Consumers and its
continued internal studies have resulted in an estimate of remedial action
for all 23 sites of between $40 million and $140 million. These estimates
are based on undiscounted 1994 costs. As of March 31, 1994, Consumers has
accrued $40 million, representing the minimum amount in the range. Any
significant change in estimating assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial costs for the sites.
Consumers believes that remedial costs will be recovered in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part of a gas rate
case. In that proceeding, the MPSC determined that prudent investigation
and remedial costs could be deferred and amortized over 10-year periods
and prudent unamortized costs can be included for recovery in the
utility's rate cases. The MPSC stated that the length of the period may
be reviewed from time to time, but any revisions would be prospective.
The order further provided that the prudency review would include a review
of the utility's attempts to obtain reimbursement from others. The MPSC
has also approved similar deferred accounting requests by two other
Michigan utilities relative to investigation and remediation costs.
Accordingly, Consumers has recorded a regulatory asset for the same amount
as the accrued liability for anticipated recovery of these investigation
and remedial clean-up costs.
Included in the 1990 amendments to the federal Clean Air Act are
provisions that limit emissions of sulfur dioxide and nitrogen oxides and
require enhanced emissions monitoring. All of Consumers' coal-fueled
electric generating units burn low-sulfur coal and are presently operating
at or near the sulfur dioxide emission limits which will be effective in
2000. Beginning in 1995, certain coal-fueled generating units will
receive emissions allowances (all of Consumers' coal units will receive
allowances beginning in 2000). Based on projected emissions from these
units, Consumers expects to have excess allowances which may be sold or
saved for future use.
The Clean Air Act's provisions require Consumers to make capital
expenditures estimated to total $74 million through 1999 for completed,
in-process and possible modifications at coal-fired units based on
existing and proposed regulations. Management believes that Consumers'
annual operating costs will not be materially affected.
The EPA has asked a number of utilities in the Great Lakes area to
voluntarily retire certain equipment containing specific levels of
polychlorinated biphenyls. While Consumers believes that it is largely in
compliance with the EPA's petition, it has agreed to a 10-year retirement
period for equipment included in the EPA's request. Consumers does not
anticipate any additional costs will be incurred as a result of this
agreement.
In 1993, Consumers experienced increases in complaints relating to so-
called stray voltage. Claimants contend that stray voltage results when
small electrical currents present in grounded electric systems are
diverted from their intended path. 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. A complaint seeking
certification as a class action suit was filed against Consumers in a
local county circuit court in 1993. The complaint alleged the existence
of a purported class that incurred damages of up to $1 billion, primarily
to certain livestock owned by the purported class, as a result of stray
voltage from electricity being supplied by Consumers. Consumers believes
the allegations to be without merit and in March 1994, the circuit judge
hearing the complaint refused to grant class action status to the suit.
In April 1994, the plaintiffs in this action appealed the matter to the
Court of Appeals. A number of individuals who would have been part of the
class action have refiled their claims as separate lawsuits.
Palisades Plant
In April 1993, the NRC approved the design of the dry spent fuel storage
casks now being used by Consumers at Palisades. In May 1993, the Attorney
General and certain other parties commenced litigation to block Consumers'
use of the storage casks, alleging that the NRC had failed to comply
adequately with the National Environmental Policy Act. As of mid-February
1994, the courts have declined to prevent such use and have refused to
issue temporary restraining orders or stays. Several appeals relating to
this matter are now pending at the U.S. Sixth Circuit Court of Appeals.
Consumers loaded two dry storage casks with spent nuclear fuel in 1993 and
expects to load additional casks in 1994 prior to Palisades' 1995
refueling. If Consumers is unable to continue to use the casks as
planned, significant costs, including replacement power costs during any
resulting plant shutdown, could be incurred. In March 1994, Consumers
agreed to a request from the NRC to complete certain tests and analysis
regarding Consumers' cask storage site at Palisades, including the effects
of an earthquake on the surrounding soil and the support pad on which the
casks are placed. These tests and analysis have been completed and
conclude that the storage system is adequate. A summary of the results is
being reviewed by the NRC staff. Consumers cannot predict the response of
the NRC staff.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 3). The results of an NRC review of
Consumers' performance at Palisades published shortly thereafter showed a
decline in performance ratings for the plant. Management believes that an
increased emphasis on internal assessments will improve performance at
Palisades. In order to provide NRC senior management with a more in-depth
assessment of plant performance, the NRC has completed a diagnostic
evaluation inspection at Palisades. The inspection evaluated all aspects
of nuclear plant operation and management. Final results of the
evaluation are expected to be available at the end of May 1994. The final
outcome of this evaluation, including any increase in regulatory oversight
or changes in operation and maintenance requirements at the plant beyond
those already planned, cannot be predicted. Similar reviews conducted at
nuclear plants of other utilities in recent years have in some cases
resulted in increased regulatory oversight or required actions to improve
plant conditions, resulting in increased capital expenditures.
Nuclear Decommissioning
Consumers collects estimated costs to decommission (decontamination and
dismantlement) its two nuclear plants through a monthly surcharge to
electric customers which currently totals approximately $45 million
annually. Consumers currently estimates decommissioning costs of $208
million and $399 million, in 1993 dollars, for the Big Rock Point and
Palisades nuclear plants, respectively. Amounts collected from electric
retail customers and deposited in trusts and earnings on the trusts are
estimated to accumulate approximately $425 million and $1.2 billion for
decommissioning Big Rock and Palisades, respectively. The trust funds
will be used for decommissioning Big Rock Point and Palisades at the end
of their respective license periods in 2000 and 2007. Consumers believes
the amounts being collected are adequate to meet its currently estimated
decommissioning costs and current NRC requirements. Consumers expects to
file updated decommissioning estimates with the MPSC on or before
March 31, 1995. At March 31, 1994, Consumers had collected and deposited
$179 million in trust for future decommissioning.
Capital Expenditures
CMS Energy estimates capital expenditures, including investments in
unconsolidated subsidiaries, demand-side management and new lease
commitments, of $731 million for 1994, $742 million for 1995 and $691
million for 1996.
Public Utility Holding Company Act Exemption
CMS Energy is exempt from registration under PUHCA. However, the Attorney
General and the MMCG have asked the SEC to revoke CMS Energy's exemption
from registration under PUHCA. In 1992, the MPSC filed a statement with
the SEC recommending that CMS Energy's current exemption be revoked and a
new exemption be issued conditioned upon certain reporting and operating
requirements. If CMS Energy were to lose its current exemption, it would
become more heavily regulated by the SEC; Consumers could ultimately be
forced to divest either its electric or gas utility business; and
CMS Energy would be restricted from conducting businesses that are not
functionally related to the conduct of its utility business as determined
by the SEC. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA.
Other
In addition to the matters disclosed in these notes, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental
agencies, arising from the ordinary course of business involving personal
injury and property damage, contractual matters, environmental issues,
federal and state taxes, rates, licensing and other matters.
The ultimate effect of the proceedings discussed in this note is not
expected to have a material impact on CMS Energy's financial position or
results of operations.
5: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
- --------------------------------------------------------------------------
1994 1993 1994 1993
Cash transactions
Interest paid (net of
amounts capitalized) $ 52 $ 64 $181 $223
Income taxes paid
(net of refunds) - 18 14 37
Non-cash transactions
Nuclear fuel placed under
capital lease $ 2 $ 1 $ 30 $ 8
Other assets placed under
capital leases 1 12 19 47
Capital leases refinanced - 42 - 42
Assumption of debt - - - 15
==========================================================================
6: Financial Instruments
On January 1, 1994, CMS Energy adopted SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, requiring accounting for
investments in debt securities to be held to maturity at amortized cost;
otherwise debt and marketable equity securities would be recorded at fair
value, with any unrealized gains or losses included in earnings if the
security is for trading purposes or as a separate component of
stockholders' equity if the security is available for sale. CMS Energy
has nuclear decommissioning and SERP trusts classified as available for
sale securities with an amortized cost of $199 million and a fair market
value of $200 million. An unrealized gain on available for sale
securities of $1 million, net of taxes, is included in common
stockholders' equity for three and 12 months ended March 31, 1994. CMS
Energy also has certain equity investments classified as trading
securities with a carrying cost of $12 million and a fair market value of
$16 million. An unrealized gain on trading securities of $3 million, net
of taxes, is included in other income for three and 12 months ended March
31, 1994.
7: Capitalization and Other
CMS Energy
As of March 31, 1994, $48 million was outstanding under CMS Energy's
Secured Credit Facility with a weighted average interest rate of 5.8
percent. In January 1994, CMS Energy filed a shelf registration statement
with the SEC permitting the issuance and sale of up to $250 million of
GTNs. The net proceeds will be used to reduce the amount of Notes
outstanding and for general corporate purposes. As of April 30, 1994, CMS
Energy had issued approximately $2 million of GTNs with interest rates
ranging from 6.75 to 7.50 percent.
Consumers
Debt
Consumers has authorization from the FERC to issue or guarantee up to $900
million of short-term debt through December 31, 1994. Consumers has a
$470 million facility that is used to finance seasonal working capital
requirements and unsecured, committed lines of credit aggregating $165
million. As of March 31, 1994, Consumers had no amounts outstanding under
these facilities.
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, Articles and the need for regulatory approvals in compliance
with appropriate state and federal law. In February 1994, Consumers
redeemed two issues of first mortgage bonds totaling approximately $91
million. These redemptions completed Consumers' commitment to the MPSC,
under the 1993 authorization to issue first mortgage bonds, to refinance
certain long-term debt. Further, in March 1994, Consumers redeemed first
mortgage bonds totaling $10 million.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. As of March 31, 1994, receivables sold under the agreement
totaled $335 million as compared to $285 million at December 31, 1993. As
of April 30, 1994, Consumers had reduced the level of receivables sold to
$243 million.
In March 1994, Consumers issued and sold 8 million shares of Consumers'
$2.08 Class A Preferred Stock (cumulative, without par value) with a
stated annual dividend of 8.32 percent. Net proceeds to Consumers were
approximately $194 million. The stock is redeemable at the option of
Consumers, on or after April 1, 1999, at a redemption price of $25 per
share plus accrued dividends.
As of December 31, 1992, Consumers effected a quasi-reorganization, an
elective accounting procedure in which Consumers' accumulated deficit of
$574 million was eliminated against other paid-in capital. This action
had no effect on CMS Energy's consolidated financial statements. As a
result of the quasi-reorganization and subsequent accumulated earnings,
Consumers resumed paying common stock dividends in 1993, including $16
million in common stock dividends, attributable to 1993 earnings, during
the first quarter of 1994. In April 1994, Consumers declared a $66
million common dividend, attributable to current year earnings, to be paid
in May 1994.
In January 1994, Consumers amended its nuclear fuel lease to include fuel
previously owned at Big Rock Point and further increased the maximum
amount of nuclear fuel that could be leased to $80 million. As of March
31, 1994, approximately $67 million was under lease.
In November 1992, the FASB issued SFAS 112, Employers' Accounting for
Postemployment Benefits, which Consumers adopted January 1, 1994.
Consumers pays for several postemployment benefits, the most significant
being workers compensation. Because Consumers' postemployment benefit
plans do not vest or accumulate, the standard did not materially impact
Consumers' financial position or results of operations.
NOMECO
In November 1993, NOMECO amended the terms of its revolving credit
agreement and increased the amount to $110 million. At March 31, 1994,
$82 million of revolving credit debt was outstanding at a weighted average
interest rate of 4.8 percent.
Enterprises
As of March 31, 1994, MOAPA had $22 million of Clark County, Nevada, tax-
exempt bonds outstanding with an interest rate of 2.55 percent. These
bonds are backed by a letter of credit and the reimbursement obligations
thereunder are guaranteed by CMS Energy. CMS Generation has notified the
trustee that it is management's current intent to redeem this debt by June
1, 1994; therefore the letter of credit will not be extended past the
current expiration date. The trustee will arrange for the required notice
of redemption to the bondholders. The bonds are included in current
maturities on the balance sheet and will be redeemed with the funds held
in a trust account. These funds are invested in certificates of deposits
and included in other current assets. The bonds were issued in 1990 for
the purpose of providing partial funding for the development of a proposed
tires-to-energy solid waste disposal and resource recovery facility.
<PAGE>
<PAGE> 23
CMS Energy Corporation
Management's Discussion and Analysis (MD&A)
This MD&A should be read along with the MD&A in the 1993 Form 10-K of CMS
Energy.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving most of
the Lower Peninsula of Michigan, is the principal subsidiary of
CMS Energy. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest of which is
the automotive industry. Enterprises is engaged in several non-utility
energy-related businesses including: 1) oil and gas exploration and
production, 2) development and operation of independent power production
facilities, 3) gas marketing services to utility, commercial and
industrial customers, and 4) storage and transmission of natural gas.
Consolidated Earnings for the quarters ended March 31, 1994 and 1993
Consolidated net income totaled $78 million for the first quarter of 1994,
compared to net income of $72 million for the corresponding first quarter
of 1993. The increased net income reflects increased electric utility
sales, gas utility deliveries and increased earnings from the growth of
non-utility businesses.
Consolidated Earnings for the 12 months ended March 31, 1994 and 1993
Consolidated net income totaled $161 million for the 12 months ended March
31, 1994, compared to a net loss of $276 million for the 12 months ended
March 31, 1993. The increased net income reflects the impact of the
Settlement Order related to the cost recovery for power purchases from the
MCV Partnership, the benefit of increased electric utility sales and gas
deliveries, and additional earnings from the growth of non-utility
businesses.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from
its principal subsidiaries. CMS Energy's consolidated operating cash
requirements are met by its operating and financing activities. CMS
Energy's consolidated cash from operations was derived mainly from
Consumers' sale and transportation of natural gas and its sale and
transmission of electricity, and from NOMECO's sale of oil and natural
gas. Consolidated cash from operations for the first three months of 1994
primarily reflects the benefits of Consumers' record-setting electric
sales and significantly higher gas deliveries, due in large part to colder
weather.
Financing Activities
As a result of the 1992 quasi-reorganization (see Note 7 of the Condensed
Notes to the Consolidated Financial Statements), and subsequent
accumulated earnings, Consumers resumed paying common stock dividends
during 1993, including $16 million in common stock dividends, attributable
to 1993 earnings, during the first quarter of 1994. In April 1994,
Consumers declared a $66 million common dividend, attributable to current
year earnings, to be paid in May 1994.
In January 1994, CMS Energy filed a shelf registration statement with the
SEC permitting the issuance and sale of up to $250 million of GTNs. The
net proceeds will be used to reduce the amount of Notes outstanding and
for general corporate purposes. As of April 30, 1994, CMS Energy had
issued approximately $2 million of GTNs with interest rates ranging from
6.75 to 7.50 percent.
During February and March 1994, Consumers continued to reduce its future
interest charges by retiring approximately $101 million of high-cost first
mortgage bonds. Also in March 1994, Consumers issued and sold 8 million
shares of Class A preferred stock (cumulative, without par value) with a
stated annual dividend rate of 8.32 percent. Net proceeds of $194 million
from the sale are targeted for general corporate purposes, including debt
retirement and improvements to Consumers' distribution systems.
Investing Activities
Capital expenditures (excluding assets placed under capital lease),
deferred demand-side management costs and investments in unconsolidated
subsidiaries totaled $137 million for the first quarter of 1994 as
compared to $108 million for the first quarter of 1993. These amounts
represent capital investments in CMS Energy's electric and gas utility
segments and continued expansion of the non-utility business segments.
CMS Energy's expenditures for the first quarter of 1994 for its utility
and non-utility business segments were $83 million and $54 million,
respectively.
Outlook
CMS Energy estimates that capital expenditures, including investments in
unconsolidated subsidiaries, demand-side management and new lease
commitments, will total approximately $2.2 billion over the next three
years. Cash generated by operations is expected to satisfy a substantial
portion of capital expenditures. Additionally, CMS Energy will continue to
evaluate capital markets in 1994 as a potential source of financing its
subsidiaries' investing activities.
In Millions
Years Ended December 31 1994 1995 1996
- -------------------------------------------------------------------------
Electric and gas utility $486 $513 $448
Oil and gas exploration and production 117 90 100
Independent power production 90 99 98
Natural gas pipeline, storage and marketing 38 40 45
--------------------------
$731 $742 $691
========================================================================
Consumers' short-term sources of credit include unsecured, committed lines
of credit totaling $165 million and a $470 million working capital
facility. As of March 31, 1994, Consumers has no amounts outstanding
under these facilities. Consumers has FERC authorization to issue or
guarantee up to $900 million in short-term debt through December 31, 1994.
Consumers uses short-term borrowings to finance working capital, seasonal
fuel inventory and to pay for capital expenditures between long-term
financings. Consumers has an agreement permitting the sales of certain
accounts receivable for up to $500 million. As of March 31, 1994,
receivables sold totaled $335 million as compared to $285 million at
December 31, 1993. During April 1994, Consumers reduced the level of
receivables sold to $243 million.
Electric Utility Operations
Comparative Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1994 and
1993: During the first quarter of 1994, electric pretax operating income
increased $7 million from the 1993 level. This increase primarily
reflects higher electric system sales from both economic growth and the
impact of colder weather on heating equipment. The increased sales growth
is supported by Michigan's year-over-year improvement in employment and
economic conditions. The increases related to economy and weather are
partially offset by increased expenditures for system reliability
improvements.
Electric Pretax Operating Income for the 12 months ended March 31, 1994
and 1993: The $121 million improvement in 1994 pretax operating income
compared to 1993 primarily is the result of an increase of $112 million
relating to the resolution of the recoverability of MCV power purchase
costs under the PPA and increased electric system sales of $54 million,
partially offset by higher costs related to system reliability
improvements.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:<PAGE>
In Millions
Quarter 12 months
ended ended
------- ---------
1994 1994
Over Over
(Under) (Under)
1993 1993
- --------------------------------------------------------------------------
Sales growth $ 11 $ 41
Weather 3 13
Resolution of MCV power cost issues - 112
Other regulatory issues - 5
O&M, general taxes and depreciation (a) (7) (50)
--------------------
Total change $ 7 $121
==========================================================================
(a) Largely caused by Consumers' system reliability improvement program.
Electric Sales: Electric system sales during the first quarter of 1994
totaled 8.3 billion kWh, a 5.5 percent increase from 1993 levels. In
1994, residential and commercial sales increased 4.6 percent and 2.0
percent, respectively, while industrial sales increased 6.6 percent.
Michigan's motor vehicle industry has benefited from General Motors'
decisions to expand truck and car production in Michigan assembly plants.
Electric system sales during the 12 months ended March 31, 1994 totaled
32.1 billion kWh, a 4.4 percent increase from 1993 levels. In 1994,
residential and commercial sales increased 4.3 percent and 3.2 percent
respectively, while industrial sales increased 6.5 percent. Growth in the
industrial sector was the strongest in the auto-related segments of
fabricated and primary-metals and transportation equipment.
The following table quantifies electric sales by customer type for the
periods ended March 31:
Electric Sales Millions of kWh
Quarter ended 12 months ended
1994 1993 1994 1993
- -----------------------------------------------------------------------------
Residential 2,839 2,713 10,192 9,774
Commercial 2,198 2,155 8,952 8,676
Industrial 2,862 2,684 11,719 11,008
Sales for resale 381 297 1,226 1,266
------------------------------------
System sales (a) 8,280 7,849 32,089 30,724
=============================================================================
(a) Excludes intersystem exchanges of power with other utilities through
joint dispatching for the economic benefit of customers.
Power Costs: Power costs for the three-month period ending March 31, 1994
totaled $243 million, a $41 million increase from the corresponding 1993
period. This increase primarily reflects greater power purchases from
outside sources to meet increased sales demand and to supplement decreased
generation at Palisades due to an outage. Power costs for the 12-month
period ending March 31, 1994 totaled $949 million, an $82 million increase
from the corresponding 1993 period essentially for the same reasons as the
quarter-over-quarter variance.
Electric Utility Rates
Power Purchases from the MCV Partnership: Consumers is obligated to
purchase 1,132 MW in 1994 and 1,240 MW in 1995 and thereafter, of contract
capacity from the MCV Partnership. In 1993, the MPSC issued the
Settlement Order that allows Consumers to recover substantially all
payments for 915 MW of contract capacity purchased from the MCV
Partnership. The market for the remaining 325 MW of contract capacity was
assessed at the end of 1992. This assessment, along with certain
estimates by Consumers, and other factors required by the Settlement
Order, resulted in Consumers recognizing an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power
purchases from the MCV Partnership. Except for adjustments to reflect the
time value of money through accretion expense, no additional losses are
expected unless actual future experience materially differs from
management's estimates. ABATE and the Attorney General have filed claims
of appeal of the Settlement Order with the Court of Appeals. Although the
settlement loss was recorded in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-
tax cash underrecoveries totaled $15 million for the first quarter of
1994, and are estimated to total $41 million for the remaining nine months
of the year. Consumers estimates that its after-tax cash underrecoveries
will total $56 million in 1994, increasing slightly for 1995 through 1997,
and then decreasing to $8 million in 1998. Possible additional losses for
the next five years if Consumers is unable to sell any capacity above the
MPSC's authorized level could be $14 million in 1994, increasing slightly
for 1995 through 1997, and then increasing to $72 million in 1998.
The PPA contains a "regulatory out" provision, permitting Consumers to
reduce the fixed energy charges payable to the MCV Partnership if
Consumers is not able to recover these amounts from its customers.
Consumers and the MCV Partnership are currently engaged in arbitration to
determine whether Consumers is entitled to exercise its rights under the
regulatory out provision. Consumers is escrowing the fixed energy amounts
in dispute until resolution of the arbitration is achieved.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings, alleging
breach of contract, breach of fiduciary duty and negligent or fraudulent
misrepresentation relating to the MCV Partnership's failure to object to
the Settlement Order in light of Consumers' interpretation of the
Settlement Order. The action alleges damages in excess of $1 billion and
seeks injunctive relief relative to Consumers' payments of the fixed
energy charges. CMS Energy and Consumers believe that at all times they
and CMS Holdings have conducted themselves properly and that the action is
without merit. They also believe that a significant portion of the
alleged damages represent fixed energy charges in dispute in the
arbitration. CMS Energy and Consumers have requested that the lawsuit be
dismissed for lack of jurisdiction and have commenced a lawsuit in
Midland, Michigan, to address these issues. In addition, CMS Holdings has
filed a lawsuit in a local circuit court seeking reimbursement of
approximately $8 million of certain tax indemnification payments made to
its partners in the FMLP and owed to CMS Holdings. CMS Energy and
Consumers are unable to predict the outcome of these actions.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct. For further
information regarding power purchases from the MCV Partnership, see Note
2.
PSCR Issues: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. In mid-February 1994, Palisades was
temporarily taken out of service to repair valve leakage and conduct other
needed inspections and repairs. Recovery of replacement power costs and
the prudency of actions taken during the outages will be reviewed by the
MPSC during the 1993 and 1994 PSCR reconciliations of actual costs and
revenues. For more information on the potential impact of the outages,
see Note 3.
Electric Rate Case: On May 10, 1994, the MPSC issued an order, granting
Consumers a $58 million annual increase in its retail electric rates
effective May 11, 1994. The order provides Consumers with higher revenues
associated with increased expenditures primarily related to capital
additions, operation and maintenance, higher depreciation and
postretirement benefits computed under SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions and the continuation of
certain demand-side management programs at reduced levels. The MPSC order
generally supported Consumers' rate design proposal and reduced the level
of subsidization of residential customers by commercial and industrial
customers. Consumers is studying the order and has 30 days from May 10,
1994, to file an appeal or request a rehearing with the MPSC regarding
this order. For further information, see Note 3.
Electric Conservation Efforts
In 1993, Consumers completed the customer participation portion of several
demand-side management programs designed to encourage the efficient use of
energy. Based on the MPSC's determination of Consumers' effectiveness in
implementing these programs, Consumers' future rate of return on electric
common equity may be adjusted for one year either upward by up to 1
percent or downward by up to 2 percent. In March 1994, Consumers filed
its demand-side management reconciliation case with the MPSC that requests
a 1 percent increase on its return on common equity based on having
achieved all of the agreed-upon objectives. In May 1994, as part of
Consumers' electric rate case, the MPSC issued an order that authorized
Consumers to continue certain demand-side management programs at reduced
levels. For further information, see Note 3.
Electric Capital Expenditures
CMS Energy estimates capital expenditures, including deferred demand-side
management costs and new lease commitments, related to its electric
utility operations of $324 million for 1994, $376 million for 1995 and
$317 million for 1996.
Electric Environmental Matters
The 1990 amendment of the federal Clean Air Act significantly increased
the environmental constraints that utilities will operate under in the
future. While the Clean Air Act's provisions will require Consumers to
make certain capital expenditures in order to comply with the amendments
for nitrogen oxide reductions, Consumers' generating units are presently
operating at or near the sulfur dioxide emission limits which will be
effective in the year 2000. Therefore, management believes that
Consumers' annual operating costs will not be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur
costs at a number of sites, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or
former ownership interests may also be considered liable for site
investigations and remedial actions. Consumers believes costs incurred
for both investigation and required remedial actions will be recovered in
rates.
Consumers is a so-called "Potentially Responsible Party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Electric Outlook
A recent NRC review of Consumers' performance at Palisades showed a
decline in performance. Management believes that an increased emphasis on
internal assessments will improve performance at Palisades. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC has completed a diagnostic evaluation inspection at
Palisades. The inspection evaluated all aspects of nuclear plant
operation and management. Final results of the evaluation are expected to
be available at the end of May 1994. The final outcome of this
evaluation, including any increase in regulatory oversight or changes in
operation and maintenance requirements at the plant beyond those already
planned, cannot be predicted. Similar reviews conducted at nuclear plants
of other utilities in recent years have in some cases resulted in
increased regulatory oversight or required actions to improve plant
conditions, resulting in increased capital expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the DOE will begin accepting any spent nuclear fuel by the
originally scheduled date in 1998. Consumers is using NRC-approved dry
casks, which are steel and concrete vaults, for temporary on-site storage.
Several appeals relating to NRC approval of the casks are now pending at
the U.S. Sixth Circuit Court of Appeals. If Consumers is unable to
continue to use the casks as planned, significant costs, including
replacement power costs during any resulting plant shutdown, could be
incurred. In March 1994, Consumers agreed to a request from the NRC to
complete certain tests and analysis regarding Consumers' cask storage
site, including the effects of an earthquake on the surrounding soil and
the support pad on which the casks are placed. These tests and analysis
have been completed and conclude that the storage system is adequate. A
summary of the results is being reviewed by the NRC staff. Consumers
cannot predict the response of the NRC staff.
Consumers has experienced recent increases in complaints relating
primarily to the effect of so-called stray voltage on certain livestock.
A complaint seeking certification as a class action suit was filed in 1993
against Consumers alleging significant damages, primarily related to
certain livestock. Consumers believes the allegations to be without
merit and in March 1994, the circuit judge hearing the complaint refused
to grant class action status to the suit. This decision is being appealed
by the plaintiffs and a number of individuals who would have been part of
the class action have refiled their claims as separate lawsuits (see Note
4).
Some of Consumers' larger industrial customers are exploring the
possibility of constructing and operating their own on-site generating
facilities. Consumers is actively working with these customers to develop
rate and service alternatives designed to compete with self-generation
options. Although Consumers' electric rates are competitive with other
regional utilities, Consumers has on file with the FERC two open access
interconnection tariffs which could have the effect of increasing
competition for wholesale customers. As part of its current electric rate
case, Consumers has requested that the MPSC reduce the level of rate
subsidization of residential customers by commercial and industrial
customers so as to further improve rate competitiveness for its largest
customers.
In April 1994, the MPSC approved a framework for a five-year experimental
retail wheeling program for Consumers and Detroit Edison. Under the
experiment, up to 60 MW of Consumers' additional load requirements could
be met by retail wheeling. Rates to be used for the experiment have yet
to be determined and a final MPSC order on the program is not expected
until mid-1995. Consumers is continuing to study the MPSC order, but does
not expect this experiment to have a material impact on its financial
position or results of operations.
Gas Utility Operations
Comparative Results of Operations
Gas Pretax Operating Income for the quarters ended March 31, 1994 and
1993: During the first quarter of 1994 the record level cold temperatures
during January and February resulted in gas pretax operating income
increasing $11 million from the 1993 level. This increase reflects higher
gas deliveries (both sales and transportation volumes), partially offset
by higher costs related to system reliability improvements.
Gas Pretax Operating Income for the 12 months ended March 31, 1994 and
1993: The $37 million improvement in 1994 pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and more favorable regulatory recovery of gas
costs.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Quarter 12 months
ended ended
------- ---------
1994 1994
Over Over
(Under) (Under)
1993 1993
- --------------------------------------------------------------------------
Sales growth $ 2 $ 9
Weather 15 16
Regulatory recovery of gas cost - 7
O&M, general taxes and depreciation (6) 5
-------------------
$11 $37
==========================================================================
Gas Deliveries: Gas sales and gas transported during the first quarter of
1994 totaled 176.0 bcf, a 12.9 percent increase from 1993 levels due
largely to record cold winter weather. For the 12 months ended March 31,
1994 gas sales and gas transported totaled 427.9 bcf, a 7.6 percent
increase from the corresponding 1993 level.
The following table quantifies gas deliveries by customer type for the
periods ended March 31:
Gas Deliveries Bcf
Quarter ended 12 months ended
1994 1993 1994 1993
- -----------------------------------------------------------------------------
Residential 86.3 77.0 184.1 172.0
Commercial 28.8 25.5 59.3 54.9
Industrial 7.2 6.2 14.9 13.6
Other .1 .1 .2 .2
------------------------------------
Gas sales 122.4 108.8 258.5 240.7
Transportation deliveries 25.3 23.0 72.8 68.4
Transportation for MCV 20.3 17.7 76.0 62.9
Off-system transportation service 8.0 6.5 20.6 25.6
------------------------------------
Total deliveries 176.0 156.0 427.9 397.6
=============================================================================
Cost of Gas Sold: The cost of gas sold for the first quarter of 1994
increased $16 million from the 1993 level; while the increase comparing
the 12 months ended March 31 periods is $12 million. These increases
reflect higher growth and weather related sales volumes partially offset
by lower costs per mcf. The lower costs per mcf are due to more favorable
gas contracts with interstate suppliers, resulting from the impact of FERC
Order 636, and the expiration of high cost contracts with certain Michigan
gas producers.
Gas Utility Rates
Consumers currently plans to file a request in 1994 with the MPSC to,
among other things, incorporate cost increases, including costs for
postretirement benefits computed under SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, into its gas rates. The rate
adjustment to be requested has not been determined. A final order should
be received approximately nine to 12 months after the request is filed.
Certain of Consumers' direct gas suppliers have contract prices tied to
the price Consumers pays Trunkline for its gas. The Trunkline contract
covers gas deliveries through October 1994 and is at a price that was
reduced in September 1993. Four domestic and four Canadian direct gas
suppliers have claimed that the reduced Trunkline gas cost is not a proper
reference price under their contracts with Consumers and that their
contracts are terminable after a 12-month period. Consumers disputed
these claims and in March 1994, reached a settlement with the four
domestic suppliers regarding the price Consumers is required to pay for
gas.
In 1992, the FERC issued Order 636, which makes a number of significant
changes to the structure of the services provided by interstate natural
gas pipelines. This order was implemented during the 1993-94 winter
heating season. Consumers is a significant purchaser of gas from an
interstate pipeline (Trunkline) and is a major transportation customer of
a number of pipelines. Management believes that Consumers will recover
any transition costs it may incur and such restructuring will not have a
significant impact on its financial position or results of operations.
In July 1993, Michigan Gas Storage submitted a notice of rate change with
the FERC to revise its operation and maintenance expenses for 1993 and
update plant costs to reflect the addition of approximately $27 million of
new plant additions in 1993 and began collecting the revised rates subject
to refund and a hearing in February 1994. Settlement conferences were
held during the first quarter of 1994. In April 1994, Michigan Gas
Storage filed with the FERC a stipulation and agreement in full settlement
of this proceeding. Michigan Gas Storage believes the settlement is
unopposed and that it will be approved by the FERC in mid-1994. For
further information regarding gas utility rates, see Note 3.
Gas Capital Expenditures
CMS Energy estimates capital expenditures, including new lease
commitments, related to its gas utility operations of $106 million for
1994, $100 million for 1995 and $94 million for 1996.
Gas Environmental Matters
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites to define the nature and extent of
contamination at these sites and to determine which of several possible
remedial action alternatives, including no action, may be required under
the Environmental Response Act. The DNR has approved two of three plans
for remedial investigation/feasibility studies submitted by Consumers and
is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study completed by Consumers in the first quarter of 1994 indicated that
the expenditures for remedial action at this site are likely to be
minimal. However, Consumers did not believe that a single site was
representative of all of the sites. Data available to Consumers and its
continued internal studies have resulted in an estimate of remedial action
for all 23 sites of between $40 million and $120 million. These estimates
are based on undiscounted 1994 costs. As of March 31, 1994, Consumers has
accrued $40 million, representing the minimum amount in the range. Any
significant change in estimating assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial costs for the sites.
Consumers believes that remedial costs will be recovered in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part a gas rate case.
In that proceeding, the MPSC determined that prudent investigation and
remedial costs could be deferred and amortized over 10-year periods and
prudent unamortized costs can be included for recovery in the utility's
rate cases. The MPSC stated that the length of the period may be reviewed
from time to time, but any revisions would be prospective. The order
further provided that the prudency review would include a review of the
utility's attempts to obtain reimbursement from others. The MPSC has also
approved similar deferred accounting requests by two other Michigan
utilities relative to investigation and remediation costs. Accordingly,
Consumers has recorded a regulatory asset for the same amount as the
accrued liability for anticipated recovery of these investigation and
remedial clean-up costs.
Oil and Gas Exploration and Production
Pretax Operating Income
Pretax operating income for three months ended March 31, 1994 decreased $2
million from the same period in 1993, primarily reflecting lower average
market prices and volumes for oil, partially offset by higher average
market prices for gas. Pretax operating income for the 12 months ended
March 31, 1994 decreased $9 million from the 12 months ended March 31,
1993, reflecting lower average market prices for oil and $10 million of
international write-offs for the 12 months ended March 31, 1994 compared
to $4 million for the 12 months ended March 31, 1993, partially offset by
higher gas and oil sales volumes and higher average market prices for gas.
Gas and oil sales volumes increased 4 and 15 percent, respectively, and
average market prices for gas increased 9 percent from the 12 months ended
March 31, 1993 levels.
Capital Expenditures
Capital expenditures for the three months ended March 31, 1994 increased
$10 million over three months ended March 31, 1993, primarily related to
NOMECO's pipeline and road construction and development drilling in
Ecuador. CMS Energy currently plans to invest $307 million over the next
three years in its oil and gas exploration and production operations.
These anticipated capital expenditures primarily reflect continued
development of Ecuador oil and Michigan Antrim Shale gas and reserve
acquisitions. International focus will remain on Latin America and the
Pacific Rim region.
Independent Power Production
Pretax Operating Income
Pretax operating income for the three months ended March 31, 1994
decreased $1 million from 1993, reflecting increased operating costs,
partially offset by additional equity earnings by the CMS Generation
subsidiaries due to the addition of new electric generating capacity.
Pretax operating income increased $9 million for the 12 months ended March
1994 as compared to the 12 months ended March 1993 reflecting improved
equity earnings, the commencement in 1993 of a capacity bonus on delivered
electric capacity and earnings from the addition of new electric
generating capacity.
Capital Expenditures
CMS Energy continued expansion of its independent power production segment
during the first quarter of 1994. In January, CMS Generation announced
that S.T./CMS Electric Co. has a definitive agreement with the Tamil Nadu
State Electric Board in India to supply 250 MW of electric capacity and
energy from a lignite-fired plant to be built in Neyveli, India.
Construction of the $420 million plant is scheduled to begin in 1994 with
commercial operation scheduled in 1997. CMS Generation will be the
project manager and plant operator and will hold a 40 percent ownership
interest. CMS Generation expects to invest approximately $40 million in
this project.
In March 1994, GPSLP, an unconsolidated affiliate of CMS Generation,
obtained financing for the Genesee Power Station principally with the
issuance and sale of $72 million of Michigan Strategic Fund Solid Waste
Disposal Revenue Refunding Bonds (Genesee Power Station Project) Series
1994. CMS Generation has a 50 percent ownership interest in GPSLP. In
April 1994, construction began on the 35 MW waste wood-fueled power plant
near Flint, Michigan. Completion of the project is scheduled for Spring
1996 with an estimated cost of $94 million. CMS Generation expects to
invest approximately $11 million in this project.
In May 1994, CMS Generation announced it had acquired a 25 percent
ownership interest in a 235 MW mixed fuel independent power generation
project to be built in Jegurupadu, Andhra Pradesh, India. CMS Generation
will provide project management services and will be the operator of the
plant. The Andhra Pradesh State Electric Board has signed a 30 year
contract for the purchase of the plant's entire electric output.
Construction of the natural gas and naptha-fueled combined-cycle project
is expected to begin in late-1994, with completion scheduled by the end of
1996. The project is estimated to cost $265 million.
CMS Energy currently plans to invest $287 million relating to its
independent power production operations over the next three years,
primarily in domestic and international subsidiaries and partnerships.
Natural Gas Pipeline, Storage and Marketing
Pretax Operating Income
Pretax operating income increased $1 million for the three months and 12
months ended March 31, 1994 over the same periods for 1993, reflecting
earnings growth from existing and new gas pipeline and storage projects.
Capital Expenditures
CMS Energy continued its expansion of its natural gas pipeline, storage
and marketing segment during the first quarter of 1994. In the first
quarter of 1994 CMS Gas Transmission acquired a 50 percent ownership
interest in Moss Bluff Gas Storage Systems, an existing 5 bcf high
deliverability salt cavern storage facility on the Gulf Coast of Texas for
$18 million. CMS Gas Transmission has also agreed to develop an
additional 4 bcf salt cavern at Moss Bluff which is expected to be in
service by the beginning of the winter of 1995-1996. CMS Gas Transmission
expects to invest approximately $18 million in this additional 4 bcf
storage facility.
In April 1994, CMS Gas Transmission entered into an agreement in principle
to develop a North American natural gas market center in southeastern
Michigan. The Grands Lacs Market Center will provide a major exchange and
storage point for natural gas buyers and sellers throughout the midwest
and northeast United States and Canada.
CMS Energy currently plans to invest $123 million over the next three
years relating to its non-utility gas operations, continuing to pursue
development of natural gas storage, gas gathering and pipeline operations
both domestically and internationally.
Other
Other Income: The $341 million improvement in Other Income when comparing
the 12 months ended March 31, 1994 to the corresponding 1993 period
reflects the impact of the Settlement Order related to power purchases
from the MCV Partnership. The 12 months ended March 31, 1993 included a
$343 million charge related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS
Energy were to lose its current exemption, it would become more heavily
regulated by the SEC; Consumers could ultimately be forced to divest
either its electric or gas utility business; and CMS Energy would be
restricted from conducting businesses that are not functionally related to
the conduct of its utility business as determined by the SEC. CMS Energy
is opposing this request and believes it will maintain its current
exemption from registration under PUHCA.
<PAGE>
<PAGE> 35
(This page intentionally left blank)
<PAGE>
<PAGE> 36
ARTHUR ANDERSEN & CO.
Report of Independent Public Accountants
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS
Energy Corporation) and subsidiaries as of March 31, 1994 and 1993, and
the related consolidated statements of income, common stockholder's equity
and cash flows for the three-month and twelve-month periods then ended.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1993, and the related consolidated
statements of income, common stockholder's equity and cash flows for the
year then ended (not presented herein), and, in our report dated January
28, 1994, we expressed an unqualified opinion on those statements. In our
opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1993, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen & Co.
Detroit, Michigan,
May 10, 1994.
<PAGE>
<PAGE> 37
<TABLE>
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C>
OPERATING REVENUE
Electric $ 545 $ 490 $2,132 $1,874
Gas 528 495 1,194 1,151
Other 1 3 4 3
------------------------------------------
Total operating revenue 1,074 988 3,330 3,028
------------------------------------------
OPERATING EXPENSES AND TAXES
Operation
Fuel for electric generation 79 70 303 295
Purchased power - related parties 122 107 481 464
Purchased and interchange power 42 25 165 108
Cost of gas sold 334 318 695 683
Other 127 119 523 499
------------------------------------------
Total operation 704 639 2,167 2,049
Maintenance 43 44 202 197
Depreciation, depletion and amortization 95 91 320 309
General taxes 60 58 189 181
------------------------------------------
Total operating expenses 902 832 2,878 2,736
------------------------------------------
PRETAX OPERATING INCOME
Electric 88 81 293 172
Gas 84 72 158 120
Other - 3 1 -
------------------------------------------
Total pretax operating income 172 156 452 292
------------------------------------------
INCOME TAXES 53 45 124 66
------------------------------------------
NET OPERATING INCOME 119 111 328 226
------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 16 16
Accretion income 3 4 14 15
Accretion expense (Note 2) (9) (9) (37) (9)
MCV Bond income - 8 24 34
Loss on MCV power purchases - settlement (Note 2) - - - (520)
Other income taxes, net 5 5 24 183
Other, net - (2) 3 (10)
------------------------------------------
Total other income (deductions) 3 10 44 (291)
------------------------------------------
INTEREST CHARGES
Interest on long-term debt 34 38 149 150
Other interest 3 5 20 14
Capitalized interest - - (2) (1)
------------------------------------------
Net interest charges 37 43 167 163
------------------------------------------
Net Income (Loss) 85 78 205 (228)
Preferred Stock Dividends 3 3 11 11
------------------------------------------
NET INCOME (LOSS) AFTER DIVIDENDS ON PREFERRED STOCK $ 82 $ 75 $ 194 $ (239)
==========================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 38
<TABLE>
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1994 1993 1994 1993
------ ------ ------ ------
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 85 $ 78 $ 205 $(228)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization 98 86 304 301
Nuclear decommissioning 12 14 53 51
Deferred income taxes and investment tax credit 15 15 49 (179)
Accretion expense (Note 2) 9 9 37 9
Accretion income - abandoned Midland project (3) (4) (14) (15)
MCV power purchases - settlement (Note 2) (22) (27) (78) (27)
Loss on MCV power purchases - settlement (Note 2) - - - 520
Other (1) (3) (2) (7)
Changes in other assets and liabilities 174 154 (106) 133
------ ------ ------ ------
Net cash provided by operating activities 367 322 448 558
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (83) (81) (453) (435)
Investments in nuclear decommissioning trust funds (12) (14) (53) (51)
Deferred demand-side management costs - (11) (39) (37)
Cost to retire property, net (7) (6) (33) (16)
Sale of subsidiary - - (14) -
Other 2 - 1 (1)
Proceeds from Midland-related assets - - 322 10
Proceeds from sale of property - - 1 11
Proceeds from loan to affiliate - - - 50
Proceeds from Bechtel settlement - - - 46
------ ------ ------ ------
Net cash used in investing activities (100) (112) (268) (423)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable, net (259) (195) (20) (105)
Retirement of bonds (Note 7) (100) (46) (694) (58)
Repayment of bank loans (47) - (78) -
Payment of common stock dividends (16) - (149) -
Payment of capital lease obligations (15) (8) (32) (36)
Retirement of other long-term debt (7) - (8) -
Payment of preferred stock dividends (6) (3) (14) (11)
Proceeds from preferred stock 193 - 193 -
Proceeds from bonds and bank loans - - 644 60
------ ------ ------ ------
Net cash used in financing activities (257) (252) (158) (150)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 10 (42) 22 (15)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 40 70 28 43
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 50 $ 28 $ 50 $ 28
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 39
<TABLE>
Consumers Power Company
Consolidated Balance Sheets
<CAPTION>
March 31 March 31
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Electric $5,407 $5,347 $5,091
Gas 1,849 1,837 1,739
Other 265 253 216
-----------------------------------
7,521 7,437 7,046
Less accumulated depreciation, depletion and amortization 3,631 3,550 3,409
-----------------------------------
3,890 3,887 3,637
Construction work-in-progress 248 248 285
-----------------------------------
4,138 4,135 3,922
-----------------------------------
INVESTMENTS
Stock of affiliates (Note 6) 314 291 291
First Midland Limited Partnership (Note 2) 214 213 209
Midland Cogeneration Venture Limited Partnership (Note 2) 67 67 69
Other 7 6 7
-----------------------------------
602 577 576
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market (Note 2) 50 40 28
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 7) 87 110 130
Acounts receivable - related parties 9 12 9
Inventories at average cost
Gas in underground storage 62 228 39
Materials and supplies 77 73 76
Generating plant fuel stock 22 41 28
Trunkline settlement (Note 3) 30 31 31
Postretirement benefits 25 25 25
Deferred income taxes 15 17 -
Investment in MCV Bonds - - 322
Prepayments and other 104 149 116
-----------------------------------
481 726 804
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 492 485 466
Nuclear decommissioning trust funds (Note 4) 179 165 125
Abandoned Midland Project (Note 3) 158 162 172
Trunkline settlement (Note 3) 78 86 108
Other 252 215 164
-----------------------------------
1,159 1,113 1,035
-----------------------------------
TOTAL ASSETS $6,380 $6,551 $6,337
===================================
</TABLE>
<PAGE>
<PAGE> 40
<TABLE>
<CAPTION>
March 31 March 31
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 391 391 391
Revaluation capital (Note 6) 15 - -
Retained earnings since December 31, 1992 120 54 75
-----------------------------------
1,367 1,286 1,307
Preferred stock (Note 7) 356 163 163
Long-term debt (Note 7) 1,793 1,839 2,031
Non-current portion of capital leases 114 106 81
-----------------------------------
3,630 3,394 3,582
-----------------------------------
CURRENT LIABILITIES
Current portion of long - term debt and capital leases 249 355 120
Accounts payable 128 148 158
Accounts payable-related parties 51 49 59
Notes payable - 259 20
Accrued taxes 125 171 152
MCV power purchases - settlement (Note 2) 82 82 81
Accrued refunds 33 28 101
Accrued interest 25 39 56
Deferred income taxes - - 31
Other 163 183 164
-----------------------------------
856 1,314 942
-----------------------------------
NONCURRENT LIABILITIES
Postretirement benefits 540 527 507
Deferred income taxes 501 485 334
MCV power purchases - settlement (Note 2) 378 391 421
Deferred investment tax credit 187 190 196
Trunkline settlement (Note 3) 78 86 108
Regulatory liabilities for income taxes, net 13 6 67
Other (Note 4) 197 158 180
-----------------------------------
1,894 1,843 1,813
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,380 $6,551 $6,337
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 41
<TABLE>
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 391 391 391 965
Quasi-reorganization (Note 7) - - - (574)
------- ------- ------- -------
At end of period 391 391 391 391
------- ------- ------- -------
REVALUATION CAPITAL (Note 6)
At beginning of period - - - -
Implementation of SFAS 115 - January 1, 1994 20 - 20 -
Change in unrealized loss, net of tax (5) - (5) -
------- ------- ------- -------
At end of period 15 - 15 -
------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period 54 - 75 (260)
Net income (loss) 85 78 205 (228)
Common stock dividends declared (16) - (149) -
Preferred stock dividends declared (3) (3) (11) (11)
Quasi-reorganization (Note 7) - - - 574
------- ------- ------- -------
At end of period 120 75 120 75
------- ------- ------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,367 $1,307 $1,367 $1,307
======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 42
Consumers Power Company
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 1993 Form 10-K of Consumers Power Company that includes the Report
of Independent Public Accountants. In the opinion of management, the
unaudited information herein reflects all adjustments necessary to assure
the fair presentation of financial position, results of operations and
cash flows for the periods presented.
1: Corporate Structure
Consumers is a combination electric and gas utility company serving most
of the Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company
for 15- and 20-year periods, respectively. At March 31, 1994, Consumers,
through its subsidiaries, held the following assets related to the MCV:
1) CMS Midland owned a 49 percent general partnership interest in the MCV
Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor
interest in the MCV Facility.
Power Purchases from the MCV Partnership
Consumers' obligation to purchase contract capacity from the MCV
Partnership under the PPA follows:
1995 and
Year 1992 1993 1994 thereafter
- ---- ---- ----- ----- ----------
MW 915 1,023 1,132 1,240
Prior to 1993, the MPSC only allowed Consumers to recover costs of power
purchased from the MCV Partnership based on delivered energy for up to 840
MW at rates less than Consumers paid. In March 1993, the MPSC approved,
with modifications, the Revised Settlement Proposal which had been co-
sponsored by Consumers, the MPSC staff and 10 small power and cogeneration
developers. These parties accepted the Settlement Order and the MCV
Partnership confirmed that it did not object to the modifications. ABATE
and the Attorney General have filed claims of appeal of the Settlement
Order with the Court of Appeals.
The Settlement Order determined the cost of power purchased from the MCV
Partnership that Consumers can recover from its electric retail customers
and significantly reduced the amount of future underrecoveries for these
power costs. Effective January 1993, the Settlement Order allowed
Consumers to recover substantially all of the payments for its ongoing
purchase of 915 MW of contract capacity from the MCV Partnership.
Capacity and energy purchases from the MCV Partnership above the 915 MW
level can be competitively bid into Consumers' next solicitation for power
or, if necessary, utilized for current power needs with a prudency review
and a pricing recovery determination in annual PSCR cases. In either
instance, the MPSC would determine the levels of recovery from customers
for the power purchased. The Settlement Order also provides Consumers the
right to remarket the remaining capacity to third parties.
The PPA requires Consumers to pay to the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge based primarily on Consumers' average
cost of coal consumed. Consumers is scheduling deliveries of energy from
the MCV Partnership whenever it has energy available up to hourly
availability limits, or "caps," for the 915 MW of capacity authorized for
recovery in the Settlement Order. Consumers can recover an average 3.62
cents per kWh capacity charge and the prescribed energy charges associated
with the scheduled deliveries within the caps, whether or not those
deliveries are scheduled on an economic basis. Through December 1997,
there is no cap applied during on-peak hours to Consumers' recovery for
the purchase of capacity made available within the 915 MW authorized.
Recovery for purchases during off-peak hours is capped at 82 percent in
1994 and 1995, 84 percent in 1996 and 1997, increasing to 88.7 percent in
1998 and thereafter at which time the 88.7 percent cap is applicable
during all hours. For all economic energy deliveries above the caps to
915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment
in addition to the corresponding energy charge.
In December 1992, Consumers recognized an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power costs
under the PPA as a result of the Settlement Order. This loss included
management's best estimates regarding 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. Except for adjustments to the above
loss to reflect the after-tax time value of money through accretion
expense, no additional losses are expected unless actual future experience
materially differs from management's estimates. The after-tax expense for
the time value of money for the loss is estimated to be approximately $24
million in 1994, and various lower levels thereafter, including $22
million in 1995 and $20 million in 1996. Although the settlement loss was
recorded in 1992, Consumers' continues to experience cash underrecoveries
associated with the Settlement Order. These after-tax cash
underrecoveries, including fixed energy charges, totaled $15 million for
the first quarter of 1994. Consumers believes there is and will be a
market for the resale of capacity purchases from the MCV Partnership above
the MPSC-authorized level. However, if Consumers is unable to sell any
capacity above the current MPSC-authorized level, future additional after-
tax losses and after-tax cash underrecoveries could be incurred.
Consumers' estimates of its 1994 and future after-tax cash underrecoveries
and possible additional losses for the next five years if none of the
additional capacity is sold are as follows:
After-tax, In Millions
1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------
Expected cash underrecoveries $56 $65 $62 $61 $ 8
Possible additional underrecoveries
and losses (a) $14 $20 $20 $22 $72
===========================================================================
(a) If unable to sell any capacity above the MPSC's authorized level
As of December 31, 1993, and March 31, 1994, the after-tax, present value
of the Settlement Order liability totaled $307 million and $299 million,
respectively. The reduction in the Settlement Order liability reflects
after-tax cash underrecoveries related to capacity totaling $14 million,
partially offset by after-tax accretion expense of $6 million.
The PPA, while requiring payment of a fixed energy charge, contains a
"regulatory out" provision which permits Consumers to reduce the fixed
energy charges payable to the MCV Partnership throughout the entire
contract term if Consumers is not able to recover these amounts from its
customers. In connection with the MPSC's approval of the Revised
Settlement Proposal, Consumers and the MCV Partnership are engaged in
arbitration proceedings under the PPA to determine whether Consumers is
entitled to exercise its regulatory out regarding fixed energy charges on
the portion of available MCV capacity above the current MPSC-authorized
levels. An arbitrator acceptable to both parties has been selected. If
the arbitrator determines that Consumers cannot exercise its regulatory
out, Consumers would be required to make these fixed energy payments to
the MCV Partnership even though Consumers may not be recovering these
costs. The arbitration proceedings will also determine who is entitled to
the fixed energy amounts for which Consumers did not receive full cost
recovery during the years prior to settlement. Although Consumers
believes its position on arbitration is sound and intends to aggressively
pursue its right to exercise the regulatory out, management cannot predict
the outcome of the arbitration proceedings or any possible settlement of
the matter. Accordingly, losses were recorded prior to 1993 for all fixed
energy amounts at issue in the arbitration. As of March 31, 1994,
approximately $22 million has been escrowed by Consumers and is included
in Consumers' temporary cash investments. In December 1993, Consumers
made an irrevocable offer to pay through September 15, 2007, fixed energy
charges to the MCV Partnership on all kWh delivered by the MCV Partnership
to Consumers from the contract capacity in excess of 915 MW, which
represents a portion of the fixed energy charges in dispute. Consumers
made the offer to facilitate the sale of its remaining $309 million
investment in the MCV Bonds which was completed in 1993.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings. It
alleges breach of contract, breach of fiduciary duty and negligent or
fraudulent misrepresentation relating to the MCV Partnership's failure to
object to the Settlement Order in light of Consumers' interpretation of
the Settlement Order, which is the subject of an arbitration between the
MCV Partnership and Consumers. The action alleges damages in excess of $1
billion and seeks injunctive relief relative to Consumers' payments of the
fixed energy charges. CMS Energy and Consumers believe that at all times
they and CMS Holdings have conducted themselves properly and that the
action is without merit. They also believe that a significant portion of
the alleged damages represent fixed energy charges in dispute in the
arbitration. CMS Energy and Consumers have requested that the lawsuit be
dismissed for lack of jurisdiction and have commenced a lawsuit in
Midland, Michigan, to address these issues. In addition, CMS Holdings has
filed a lawsuit in the circuit court of Jackson, Michigan, seeking
reimbursement of approximately $8 million of certain tax indemnification
payments made to its partners in the FMLP and owed to CMS Holdings. CMS
Energy and Consumers are unable to predict the outcome of these actions.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct.
PSCR Matters: Consistent with the terms of the 1993 Settlement Order,
Consumers withdrew its appeals of various MPSC orders issued in connection
with several PSCR cases. Consumers also agreed not to appeal any MCV-
related issues raised in future orders for these plan cases and related
reconciliations to the extent those issues are resolved by the Settlement
Order. In March 1994, the MPSC issued an order in the PSCR reconciliation
case for 1992 confirming Consumers' recovery for the purchase of 840 MW
from the MCV in accordance with the MPSC plan case order and allowing
recovery for the purchase of power above 840 MW based on replacement power
costs.
3: Rate Matters
Electric Rate Case
On May 10, 1994, the MPSC issued an order, granting Consumers a $58
million annual increase in its retail electric rates effective May 11,
1994. The order provides Consumers with higher revenues associated with
increased expenditures primarily related to capital additions, operation
and maintenance, higher depreciation and postretirement benefits computed
under SFAS 106, Employers' Accounting for Postretirement Benefits Other
than Pensions and the continuation of certain demand-side management
programs at reduced levels. The MPSC order generally supported Consumers'
rate design proposal and reduced the level of subsidization of residential
customers by commercial and industrial customers. Residential customers
were assigned $40 million or 70 percent of the rate increase.
As finally revised, Consumers requested an electric rate increase of $118
million for 1994 and an incremental increase of $27 million in 1995. The
MPSC's order did not provide Consumers with an additional rate increase in
1995, but does allow Consumers to file a separate rate increase request
for 1995. The order also differed from Consumers' requested increase as
it included a lower return on common equity, a lower level of working
capital, provides for a lower equity ratio for Consumers' projected
capital structure and reflects a $15 million decrease for lower property
taxes due to a recent reduction in state tax rates; and $9 million for
reduced demand-side management program expenditures and miscellaneous
costs which will not be incurred. Consumers is studying the order and has
30 days from May 10, 1994, to file an appeal or request a rehearing with
the MPSC regarding this order.
Abandoned Midland Project: In 1984, Consumers abandoned construction of
its unfinished nuclear power plant located in Midland, Michigan, and
subsequently took a series of write-downs. In 1991, the MPSC issued
orders permitting recovery of a portion of the plant and Consumers began
collecting $35 million pretax annually for the next 10 years. Several
parties, including the Attorney General, have filed claims of appeal with
the Court of Appeals regarding MPSC orders issued in 1991 that specified
the recovery of abandoned investment.
Electric Demand-side Management: As a result of settlement discussions
regarding demand-side management and an MPSC order in 1991, Consumers
agreed to spend $65 million over two years on demand-side management
programs. Based on the MPSC's determination of Consumers' effectiveness
in implementing these programs, Consumers' future rate of return on common
equity may be adjusted either upward by up to 1 percent or downward by up
to 2 percent. This adjustment, if implemented, would be applied to
Consumers' retail electric tariff rates and be in effect for one year
following reconciliation hearings with the MPSC during 1994. The
estimated revenue effects of the potential adjustment range from an $11
million increase to a $22 million decrease. In March 1994, Consumers
filed its demand-side management reconciliation case with the MPSC that
requests a 1 percent increase on its return on common equity based on
having achieved all of the agreed-upon objectives.
In October 1993, Consumers completed the customer participation portion of
these programs. In May 1994, as part of Consumers' electric rate case,
the MPSC issued an order that allowed Consumers to recover demand-side
management expenditures which exceeded the $65 million level. The order
also authorized Consumers to continue certain programs in 1994 through
1996. Consumers is deferring program costs and amortizing the costs over
the period these costs are being recovered from its customers in
accordance with an accounting order issued by the MPSC in September 1992.
The unamortized balance of deferred costs at March 31, 1994, was $69
million.
PSCR Issues
Consumers began a planned refueling and maintenance outage at Palisades in
June 1993. Following several required, unanticipated repairs that
extended the outage, the plant returned to service in early November. In
addition, in mid-February 1994, Palisades was temporarily taken out of
service to repair valve leakage and conduct other needed inspections and
repairs. Recovery of replacement power costs incurred by Consumers during
these outages will be reviewed by the MPSC during the 1993 and 1994 PSCR
reconciliations of actual costs and revenues to determine the prudency of
actions taken during the outages. Any finding of delay due to imprudence
could result in disallowances of a portion of replacement power costs.
Net replacement power costs during the outages were approximately $180,000
per day above the cost of fuel incurred when the plant is operating. See
Note 4 for information regarding the NRC's review of Palisades'
performance.
GCR Issues
The MPSC, in a February 1993 order, provided that the price payable to
certain intrastate gas producers by Consumers be reduced prospectively.
In a related case, Consumers was not allowed to recover approximately $13
million of costs incurred prior to February 8, 1993. Consumers previously
had accrued a loss sufficient for this issue. Future disallowances are
not anticipated, unless the remaining appeals filed by the intrastate
producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and
certain other parties, which resolved numerous claims and proceedings
concerning Trunkline liquified natural gas costs. The settlement
represents significant gas cost savings for Consumers and its customers in
future years. As part of the settlement, Consumers will not incur any
transition costs from Trunkline as a result of FERC Order 636. In
November 1992, Consumers had recorded a liability and regulatory asset for
the principal amount of payments to Trunkline over a five-year period. In
May 1993, the MPSC approved a separate settlement agreement that provides
Consumers with full recovery of these costs over a five-year period. At
March 31, 1994, Consumers' remaining liability and regulatory asset was
$108 million.
Other
Certain of Consumers' direct gas suppliers have contract prices tied to
the price Consumers pays Trunkline for its gas. In September 1993,
Consumers commenced gas purchases from Trunkline under a continuation of
prior sales agreements. The current contract covers gas deliveries
through October 1994 and is at a reduced price compared to prior gas
sales. Four domestic and four Canadian direct gas suppliers have claimed
that the reduced Trunkline gas cost is not a proper reference price under
their contracts with Consumers and that their contracts are terminable
after a 12-month period. Consumers disputed these claims and, in March
1994, reached a settlement with the four domestic suppliers regarding the
price Consumers is required to pay for gas.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
4: Commitments and Contingencies
Ludington Pumped Storage Plant Litigation
In 1986, the Attorney General filed a lawsuit on behalf of the State of
Michigan in the Circuit Court of Ingham County, seeking damages from
Consumers and Detroit Edison for alleged injuries to fishery resources
because of the operation of the Ludington Pumped Storage Plant. The state
sought $148 million (including $16 million of interest) for past injuries
and $89,000 per day for future injuries, with the latter amount to be
adjusted upon installation of "adequate" fish barriers and other changed
conditions.
In 1987, the Attorney General filed a second lawsuit alleging that
Consumers and Detroit Edison have breached a bottomlands lease agreement
with the state and asked that the lease be declared void. This complaint
was consolidated with the suit described in the preceding paragraph. In
1990, both of the lawsuits were dismissed on the basis of federal
preemption. In 1993, the Court of Appeals overturned the dismissal, as to
damages, effectively allowing the state to continue its damages lawsuit
against Consumers and Detroit Edison, but generally affirmed the lower
court's ruling as to the breach of lease claim. The Court of Appeals'
ruling also limited any potential damages to those occurring no earlier
than 1983. Consumers, Detroit Edison and the Attorney General have filed
an application for leave to appeal with the Michigan Supreme Court.
Consumers and Detroit Edison are seeking to have the trial court's
dismissal of the damages claim affirmed.
Each year since 1989, Consumers and Detroit Edison have complied with FERC
orders by installing a seasonal barrier net from April to October at the
Ludington plant site. The FERC is now considering whether the barrier net
(along with other actions by Consumers, including contributions to state
fish-stocking programs) would be a satisfactory permanent solution.
Environmental Matters
Consumers is a so-called "Potentially Responsible Party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on
information currently known by management, Consumers believes that it is
unlikely that its liability at any of the known Superfund sites,
individually or in total, will have a material adverse effect on its
financial position or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites to define the nature and extent of
contamination at these sites and to determine which of several possible
remedial action alternatives, including no action, may be required under
the Environmental Response Act. The DNR has approved two of three plans
for remedial investigation/feasibility studies submitted by Consumers and
is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study completed by Consumers in the first quarter of 1994 indicated that
the expenditures for remedial action at this site are likely to be
minimal. However, Consumers did not believe that a single site was
representative of all of the sites. Data available to Consumers and its
continued internal studies have resulted in an estimate of remedial action
for all 23 sites of between $40 million and $140 million. These estimates
are based on undiscounted 1994 costs. As of March 31, 1994, Consumers has
accrued $40 million, representing the minimum amount in the range. Any
significant change in estimating assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial costs for the sites.
Consumers believes that remedial costs will be recovered in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part of a gas rate
case. In that proceeding, the MPSC determined that prudent investigation
and remedial costs could be deferred and amortized over 10-year periods
and prudent unamortized costs can be included for recovery in the
utility's rate cases. The MPSC stated that the length of the period may
be reviewed from time to time, but any revisions would be prospective.
The order further provided that the prudency review would include a review
of the utility's attempts to obtain reimbursement from others. The MPSC
has also approved similar deferred accounting requests by two other
Michigan utilities relative to investigation and remediation costs.
Accordingly, Consumers has recorded a regulatory asset for the same amount
as the accrued liability for anticipated recovery of these investigation
and remedial clean-up costs.
Included in the 1990 amendments to the federal Clean Air Act are
provisions that limit emissions of sulfur dioxide and nitrogen oxides and
require enhanced emissions monitoring. All of Consumers' coal-fueled
electric generating units burn low-sulfur coal and are presently operating
at or near the sulfur dioxide emission limits which will be effective in
2000. Beginning in 1995, certain coal-fueled generating units will
receive emissions allowances (all of Consumers' coal units will receive
allowances beginning in 2000). Based on projected emissions from these
units, Consumers expects to have excess allowances which may be sold or
saved for future use.
The Clean Air Act's provisions require Consumers to make capital
expenditures estimated to total $74 million through 1999 for completed,
in-process and possible modifications at coal-fired units based on
existing and proposed regulations. Management believes that Consumers'
annual operating costs will not be materially affected.
The EPA has asked a number of utilities in the Great Lakes area to
voluntarily retire certain equipment containing specific levels of
polychlorinated biphenyls. While Consumers believes that it is largely in
compliance with the EPA's petition, it has agreed to a 10-year retirement
period for equipment included in the EPA's request. Consumers does not
anticipate any additional costs will be incurred as a result of this
agreement.
In 1993, Consumers experienced increases in complaints relating to so-
called stray voltage. Claimants contend that stray voltage results when
small electrical currents present in grounded electric systems are
diverted from their intended path. 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. A complaint seeking
certification as a class action suit was filed against Consumers in a
local county circuit court in 1993. The complaint alleged the existence
of a purported class that incurred damages of up to $1 billion, primarily
to certain livestock owned by the purported class, as a result of stray
voltage from electricity being supplied by Consumers. Consumers believes
the allegations to be without merit and in March 1994, the circuit judge
hearing the complaint refused to grant class action status to the suit.
In April 1994, the plaintiffs in this action appealed the matter to the
Court of Appeals. A number of individuals who would have been part of the
class action have refiled their claims as separate lawsuits.
Palisades Plant
In April 1993, the NRC approved the design of the dry spent fuel storage
casks now being used by Consumers at Palisades. In May 1993, the Attorney
General and certain other parties commenced litigation to block Consumers'
use of the storage casks, alleging that the NRC had failed to comply
adequately with the National Environmental Policy Act. As of mid-February
1994, the courts have declined to prevent such use and have refused to
issue temporary restraining orders or stays. Several appeals relating to
this matter are now pending at the U.S. Sixth Circuit Court of Appeals.
Consumers loaded two dry storage casks with spent nuclear fuel in 1993 and
expects to load additional casks in 1994 prior to Palisades' 1995
refueling. If Consumers is unable to continue to use the casks as
planned, significant costs, including replacement power costs during any
resulting plant shutdown, could be incurred. In March 1994, Consumers
agreed to a request from the NRC to complete certain tests and analysis
regarding Consumers' cask storage site at Palisades, including the effects
of an earthquake on the surrounding soil and the support pad on which the
casks are placed. These tests and analysis have been completed and
conclude that the storage system is adequate. A summary of the results is
being reviewed by the NRC staff. Consumers cannot predict the response of
the NRC staff.
In November 1993, Palisades returned to service following a planned
refueling and maintenance outage that had been extended due to several
unanticipated repairs (see Note 3). The results of an NRC review of
Consumers' performance at Palisades published shortly thereafter showed a
decline in performance ratings for the plant. Management believes that an
increased emphasis on internal assessments will improve performance at
Palisades. In order to provide NRC senior management with a more in-depth
assessment of plant performance, the NRC has completed a diagnostic
evaluation inspection at Palisades. The inspection evaluated all aspects
of nuclear plant operation and management. Final results of the
evaluation are expected to be available at the end of May 1994. The final
outcome of this evaluation, including any increase in regulatory oversight
or changes in operation and maintenance requirements at the plant beyond
those already planned, cannot be predicted. Similar reviews conducted at
nuclear plants of other utilities in recent years have in some cases
resulted in increased regulatory oversight or required actions to improve
plant conditions, resulting in increased capital expenditures.
Nuclear Decommissioning
Consumers collects estimated costs to decommission (decontamination and
dismantlement) its two nuclear plants through a monthly surcharge to
electric customers which currently totals approximately $45 million
annually. Consumers currently estimates decommissioning costs of $208
million and $399 million, in 1993 dollars, for the Big Rock Point and
Palisades nuclear plants, respectively. Amounts collected from electric
retail customers and deposited in trusts and earnings on the trusts are
estimated to accumulate approximately $425 million and $1.2 billion for
decommissioning Big Rock and Palisades, respectively. The trust funds
will be used for decommissioning Big Rock Point and Palisades at the end
of their respective license periods in 2000 and 2007. Consumers believes
the amounts being collected are adequate to meet its currently estimated
decommissioning costs and current NRC requirements. Consumers expects to
file updated decommissioning estimates with the MPSC on or before
March 31, 1995. At March 31, 1994, Consumers had collected and deposited
$179 million in trust for future decommissioning.
Capital Expenditures
Consumers estimates capital expenditures, including demand-side management
and new lease commitments, of $486 million for 1994, $513 million for 1995
and $448 million for 1996.
Public Utility Holding Company Act Exemption
CMS Energy is exempt from registration under PUHCA. However, the Attorney
General and the MMCG have asked the SEC to revoke CMS Energy's exemption
from registration under PUHCA. In 1992, the MPSC filed a statement with
the SEC recommending that CMS Energy's current exemption be revoked and a
new exemption be issued conditioned upon certain reporting and operating
requirements. If CMS Energy were to lose its current exemption, it would
become more heavily regulated by the SEC; Consumers could ultimately be
forced to divest either its electric or gas utility business; and
CMS Energy would be restricted from conducting businesses that are not
functionally related to the conduct of its utility business as determined
by the SEC. CMS Energy is opposing this request and believes it will
maintain its current exemption from registration under PUHCA.
Other
In addition to the matters disclosed in these notes, Consumers and certain
of its subsidiaries are parties to certain lawsuits and administrative
proceedings before various courts and governmental agencies, arising from
the ordinary course of business involving personal injury and property
damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
The ultimate effect of the proceedings discussed in this note is not
expected to have a material impact on Consumers' financial position or
results of operations.
5: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended March 31 were:
In Millions
Three Months Ended Twelve Months Ended
- --------------------------------------------------------------------------
1994 1993 1994 1993
Cash transactions
Interest paid (net of
amounts capitalized) $ 49 $ 34 $192 $173
Income taxes paid
(net of refunds) 3 30 63 11
Non-cash transactions
Nuclear fuel placed under
capital lease $ 2 $ 1 $ 30 $ 8
Other assets placed under
capital leases 1 12 19 47
Capital leases refinanced - 42 - 42
Assumption of debt - - - 15
==========================================================================
6: Financial Instruments
On January 1, 1994, Consumers adopted SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, requiring accounting for
investments in debt securities to be held to maturity at amortized cost;
otherwise debt and marketable equity securities would be recorded at fair
value, with any unrealized gains or losses included in earnings if the
security is for trading purposes or as a separate component of
stockholders' equity if the security is available for sale. The
implementation resulted in an increase in assets of $30 million with a
corresponding increase in stockholders' equity of $20 million, net of tax.
The amortized costs, fair values and gross unrealized gains for available
for sale securities at March 31, 1994, are as follows:
In Millions
Gross
Amortized Fair Unrealized
Available for sale securities Cost Value Gain
- ----------------------------------------------------------------------------
Common stock of CMS Energy $ 42 $ 65 $ 23
Nuclear decommissioning and SERP trusts 192 193 1
============================================================================
In addition, Consumers has an investment of $250 million in 10 shares of
Enterprises' preferred stock classified as held to maturity. Beginning in
1997, two shares of these securities are required to be redeemed each year
at a redemption price of $25 million per share.
7: Capitalization and Other
Debt
Consumers has authorization from the FERC to issue or guarantee up to $900
million of short-term debt through December 31, 1994. Consumers has a
$470 million facility that is used to finance seasonal working capital
requirements and unsecured, committed lines of credit aggregating $165
million. As of March 31, 1994, Consumers had no amounts outstanding under
these facilities.
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, Articles and the need for regulatory approvals in compliance
with appropriate state and federal law. In February 1994, Consumers
redeemed two issues of first mortgage bonds totaling approximately $91
million. These redemptions completed Consumers' commitment to the MPSC,
under the 1993 authorization to issue first mortgage bonds, to refinance
certain long-term debt. Further, in March 1994, Consumers redeemed first
mortgage bonds totaling $10 million.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. As of March 31, 1994, receivables sold under the agreement
totaled $335 million as compared to $285 million at December 31, 1993. As
of April 30, 1994, Consumers had reduced the level of receivables sold to
$243 million.
In March 1994, Consumers issued and sold 8 million shares of Consumers'
$2.08 Class A Preferred Stock (cumulative, without par value) with a
stated annual dividend of 8.32 percent. Net proceeds to Consumers were
approximately $194 million. The stock is redeemable at the option of
Consumers, on or after April 1, 1999, at a redemption price of $25 per
share plus accrued dividends.
As of December 31, 1992, Consumers effected a quasi-reorganization, an
elective accounting procedure in which Consumers' accumulated deficit of
$574 million was eliminated against other paid-in capital. The fair
values of Consumers' assets and liabilities at the date of the quasi-
reorganization were determined by management to approximate their carrying
values and no material adjustments to the historical bases were made.
This action was approved by Consumers' Board of Directors and did not
require shareholder approval. As a result of the quasi-reorganization and
subsequent accumulated earnings, Consumers resumed paying common stock
dividends in 1993, including $16 million in common stock dividends,
attributable to 1993 earnings, during the first quarter of 1994. In April
1994, Consumers declared a $66 million common dividend, attributable to
current year earnings, to be paid in May 1994.
In January 1994, Consumers amended its nuclear fuel lease to include fuel
previously owned at Big Rock Point and further increased the maximum
amount of nuclear fuel that could be leased to $80 million. As of March
31, 1994, approximately $67 million was under lease.
In November 1992, the FASB issued SFAS 112, Employers' Accounting for
Postemployment Benefits, which Consumers adopted January 1, 1994.
Consumers pays for several postemployment benefits, the most significant
being workers compensation. Because Consumers' postemployment benefit
plans do not vest or accumulate, the standard did not materially impact
Consumers' financial position or results of operations.
<PAGE>
<PAGE> 53
Consumers Power Company
Management's Discussion and Analysis (MD&A)
This MD&A should be read along with the MD&A in the 1993 Form 10-K of
Consumers.
Consumers is a combination electric and gas utility company serving most
of the Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry.
Consolidated Earnings for the quarters ended March 31, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $82
million for the first quarter of 1994, compared to net income of $75
million for the corresponding first quarter of 1993. The increased net
income reflects increased electric sales and gas deliveries.
Consolidated Earnings for the 12 months ended March 31, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $194
million for the 12 months ended March 31, 1994, compared to a net loss of
$239 million for the 12 months ended March 31, 1993. The increased net
income reflects the impact of the Settlement Order related to the cost
recovery for power purchases from the MCV Partnership and the benefit of
increased electric sales and gas deliveries.
Cash Position, Financing and Investing
Consumers' operating cash requirements are met by its operating and
financing activities. Consumers' cash from operations mainly resulted
from its sale and transportation of natural gas and its sale and
transmission of electricity. Cash from operations for the first three
months of 1994 reflects the benefits of record-setting electric sales and
significantly higher gas deliveries, due in large part to colder weather.
Financing Activities
As a result of the 1992 quasi-reorganization (see Note 7 of the Condensed
Notes to the Consolidated Financial Statements), and subsequent
accumulated earnings, Consumers resumed paying common stock dividends
during 1993, including $16 million in common stock dividends, attributable
to 1993 earnings, during the first quarter of 1994. In April 1994,
Consumers declared a $66 million common dividend, attributable to current
year earnings, to be paid in May 1994.
During February and March 1994, Consumers continued to reduce its future
interest charges by retiring approximately $101 million of high-cost first
mortgage bonds. Also in March 1994, Consumers issued and sold 8 million
shares of Class A preferred stock (cumulative, without par value) with a
stated annual dividend rate of 8.32 percent. Net proceeds of $194 million
from the sale are targeted for general corporate purposes, including debt
retirement and improvements to Consumers' distribution systems.
Investing Activities
Capital expenditures (excluding assets placed under capital lease) and
deferred demand-side management costs totaled $83 million for the first
quarter of 1994 as compared to $92 million for the first quarter of 1993.
These amounts primarily represent capital investments in Consumers'
electric and gas utility segments.
Outlook
Consumers estimates that capital expenditures, including demand-side
management and new lease commitments, related to its electric and gas
utility operations will total approximately $1.4 billion over the next
three years. Cash generated by operations is expected to satisfy a
substantial portion of these capital expenditures.
<PAGE>
In Millions
Years Ended December 31 1994 1995 1996
- -------------------------------------------------------------------------
Consumers
Construction (including DSM) $449 $441 $376
Nuclear fuel lease 4 40 37
Capital leases other than nuclear fuel 27 27 28
Michigan Gas Storage 6 5 7
---------------------------
$486 $513 $448
=========================================================================
Consumers' short-term sources of credit include unsecured, committed lines
of credit totaling $165 million and a $470 million working capital
facility. As of March 31, 1994, Consumers has no amounts outstanding
under these facilities. Consumers has FERC authorization to issue or
guarantee up to $900 million in short-term debt through December 31, 1994.
Consumers uses short-term borrowings to finance working capital, seasonal
fuel inventory and to pay for capital expenditures between long-term
financings. Consumers has an agreement permitting the sales of certain
accounts receivable for up to $500 million. As of March 31, 1994,
receivables sold totaled $335 million as compared to $285 million at
December 31, 1993. During April 1994, Consumers reduced the level of
receivables sold to $243 million.
Electric Utility Operations
Comparative Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1994 and
1993: During the first quarter of 1994, electric pretax operating income
increased $7 million from the 1993 level. This increase primarily
reflects higher electric system sales from both economic growth and the
impact of colder weather on heating equipment. The increased sales growth
is supported by Michigan's year-over-year improvement in employment and
economic conditions. The increases related to economy and weather are
partially offset by increased expenditures for system reliability
improvements.
Electric Pretax Operating Income for the 12 months ended March 31, 1994
and 1993: The $121 million improvement in 1994 pretax operating income
compared to 1993 primarily is the result of an increase of $112 million
relating to the resolution of the recoverability of MCV power purchase
costs under the PPA and increased electric system sales of $54 million,
partially offset by higher costs related to system reliability
improvements.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:
In Millions
Quarter 12 months
ended ended
------- ---------
1994 1994
Over Over
(Under) (Under)
1993 1993
- --------------------------------------------------------------------------
Sales growth $ 11 $ 41
Weather 3 13
Resolution of MCV power cost issues - 112
Other regulatory issues - 5
O&M, general taxes and depreciation (a) (7) (50)
--------------------
Total change $ 7 $121
==========================================================================
(a) Largely caused by Consumers' system reliability improvement program.
Electric Sales: Electric system sales during the first quarter of 1994
totaled 8.3 billion kWh, a 5.5 percent increase from 1993 levels. In
1994, residential and commercial sales increased 4.6 percent and 2.0
percent, respectively, while industrial sales increased 6.6 percent.
Michigan's motor vehicle industry has benefited from General Motors'
decisions to expand truck and car production in Michigan assembly plants.
Electric system sales during the 12 months ended March 31, 1994 totaled
32.1 billion kWh, a 4.4 percent increase from 1993 levels. In 1994,
residential and commercial sales increased 4.3 percent and 3.2 percent
respectively, while industrial sales increased 6.5 percent. Growth in the
industrial sector was the strongest in the auto-related segments of
fabricated and primary-metals and transportation equipment.
The following table quantifies electric sales by customer type for the
periods ended March 31:
Electric Sales Millions of kWh
Quarter ended 12 months ended
1994 1993 1994 1993
- -----------------------------------------------------------------------------
Residential 2,839 2,713 10,192 9,774
Commercial 2,198 2,155 8,952 8,676
Industrial 2,862 2,684 11,719 11,008
Sales for resale 381 297 1,226 1,266
------------------------------------
System sales (a) 8,280 7,849 32,089 30,724
=============================================================================
(a) Excludes intersystem exchanges of power with other utilities through
joint dispatching for the economic benefit of customers.
Power Costs: Power costs for the three-month period ending March 31, 1994
totaled $243 million, a $41 million increase from the corresponding 1993
period. This increase primarily reflects greater power purchases from
outside sources to meet increased sales demand and to supplement decreased
generation at Palisades due to an outage. Power costs for the 12-month
period ending March 31, 1994 totaled $949 million, an $82 million increase
from the corresponding 1993 period essentially for the same reasons as the
quarter-over-quarter variance.
Electric Utility Rates
Power Purchases from the MCV Partnership: Consumers is obligated to
purchase 1,132 MW in 1994 and 1,240 MW in 1995 and thereafter, of contract
capacity from the MCV Partnership. In 1993, the MPSC issued the
Settlement Order that allows Consumers to recover substantially all
payments for 915 MW of contract capacity purchased from the MCV
Partnership. The market for the remaining 325 MW of contract capacity was
assessed at the end of 1992. This assessment, along with certain
estimates by Consumers, and other factors required by the Settlement
Order, resulted in Consumers recognizing an after-tax loss of $343 million
for the present value of estimated future underrecoveries of power
purchases from the MCV Partnership. Except for adjustments to reflect the
time value of money through accretion expense, no additional losses are
expected unless actual future experience materially differs from
management's estimates. ABATE and the Attorney General have filed claims
of appeal of the Settlement Order with the Court of Appeals. Although the
settlement loss was recorded in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-
tax cash underrecoveries totaled $15 million for the first quarter of
1994, and are estimated to total $41 million for the remaining nine months
of the year. Consumers estimates that its after-tax cash underrecoveries
will total $56 million in 1994, increasing slightly for 1995 through 1997,
and then decreasing to $8 million in 1998. Possible additional losses for
the next five years if Consumers is unable to sell any capacity above the
MPSC's authorized level could be $14 million in 1994, increasing slightly
for 1995 through 1997, and then increasing to $72 million in 1998.
The PPA contains a "regulatory out" provision, permitting Consumers to
reduce the fixed energy charges payable to the MCV Partnership if
Consumers is not able to recover these amounts from its customers.
Consumers and the MCV Partnership are currently engaged in arbitration to
determine whether Consumers is entitled to exercise its rights under the
regulatory out provision. Consumers is escrowing the fixed energy amounts
in dispute until resolution of the arbitration is achieved.
The lessors of the MCV Facility have filed a lawsuit in federal district
court in New York against CMS Energy, Consumers and CMS Holdings, alleging
breach of contract, breach of fiduciary duty and negligent or fraudulent
misrepresentation relating to the MCV Partnership's failure to object to
the Settlement Order in light of Consumers' interpretation of the
Settlement Order. The action alleges damages in excess of $1 billion and
seeks injunctive relief relative to Consumers' payments of the fixed
energy charges. CMS Energy and Consumers believe that at all times they
and CMS Holdings have conducted themselves properly and that the action is
without merit. They also believe that a significant portion of the
alleged damages represent fixed energy charges in dispute in the
arbitration. CMS Energy and Consumers have requested that the lawsuit be
dismissed for lack of jurisdiction and have commenced a lawsuit in
Midland, Michigan, to address these issues. In addition, CMS Holdings has
filed a lawsuit in a local circuit court seeking reimbursement of
approximately $8 million of certain tax indemnification payments made to
its partners in the FMLP and owed to CMS Holdings. CMS Energy and
Consumers are unable to predict the outcome of these actions.
In May 1994, Consumers was notified by the MCV that it was initiating
arbitration proceedings under the PPA to determine whether the energy
charge paid to the MCV is being properly calculated. Consumers believes
that its calculation of the energy charge is correct. For further
information regarding power purchases from the MCV Partnership, see Note
2.
PSCR Issues: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. In mid-February 1994, Palisades was
temporarily taken out of service to repair valve leakage and conduct other
needed inspections and repairs. Recovery of replacement power costs and
the prudency of actions taken during the outages will be reviewed by the
MPSC during the 1993 and 1994 PSCR reconciliations of actual costs and
revenues. For more information on the potential impact of the outages,
see Note 3.
Electric Rate Case: On May 10, 1994, the MPSC issued an order, granting
Consumers a $58 million annual increase in its retail electric rates
effective May 11, 1994. The order provides Consumers with higher revenues
associated with increased expenditures primarily related to capital
additions, operation and maintenance, higher depreciation and
postretirement benefits computed under SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions and the continuation of
certain demand-side management programs at reduced levels. The MPSC order
generally supported Consumers' rate design proposal and reduced the level
of subsidization of residential customers by commercial and industrial
customers. Consumers is studying the order and has 30 days from May 10,
1994, to file an appeal or request a rehearing with the MPSC regarding
this order. For further information, see Note 3.
Electric Conservation Efforts
In 1993, Consumers completed the customer participation portion of several
demand-side management programs designed to encourage the efficient use of
energy. Based on the MPSC's determination of Consumers' effectiveness in
implementing these programs, Consumers' future rate of return on electric
common equity may be adjusted for one year either upward by up to 1
percent or downward by up to 2 percent. In March 1994, Consumers filed
its demand-side management reconciliation case with the MPSC that requests
a 1 percent increase on its return on common equity based on having
achieved all of the agreed-upon objectives. In May 1994, as part of
Consumers' electric rate case, the MPSC issued an order that authorized
Consumers to continue certain demand-side management programs at reduced
levels. For further information, see Note 3.
Electric Capital Expenditures
Consumers estimates capital expenditures, including deferred demand-side
management costs and new lease commitments, related to its electric
utility operations of $324 million for 1994, $376 million for 1995 and
$317 million for 1996.
Electric Environmental Matters
The 1990 amendment of the federal Clean Air Act significantly increased
the environmental constraints that utilities will operate under in the
future. While the Clean Air Act's provisions will require Consumers to
make certain capital expenditures in order to comply with the amendments
for nitrogen oxide reductions, Consumers' generating units are presently
operating at or near the sulfur dioxide emission limits which will be
effective in the year 2000. Therefore, management believes that
Consumers' annual operating costs will not be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental
Response Act, under which Consumers expects that it will ultimately incur
costs at a number of sites, even those in which it has a partial or no
current ownership interest. Parties other than Consumers with current or
former ownership interests may also be considered liable for site
investigations and remedial actions. Consumers believes costs incurred
for both investigation and required remedial actions will be recovered in
rates or from others.
Consumers is a so-called "Potentially Responsible Party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Electric Outlook
A recent NRC review of Consumers' performance at Palisades showed a
decline in performance. Management believes that an increased emphasis on
internal assessments will improve performance at Palisades. To provide
NRC senior management with a more in-depth assessment of plant
performance, the NRC has completed a diagnostic evaluation inspection at
Palisades. The inspection evaluated all aspects of nuclear plant
operation and management. Final results of the evaluation are expected to
be available at the end of May 1994. The final outcome of this
evaluation, including any increase in regulatory oversight or changes in
operation and maintenance requirements at the plant beyond those already
planned, cannot be predicted. Similar reviews conducted at nuclear plants
of other utilities in recent years have in some cases resulted in
increased regulatory oversight or required actions to improve plant
conditions, resulting in increased capital expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is
unlikely that the DOE will begin accepting any spent nuclear fuel by the
originally scheduled date in 1998. Consumers is using NRC-approved dry
casks, which are steel and concrete vaults, for temporary on-site storage.
Several appeals relating to NRC approval of the casks are now pending at
the U.S. Sixth Circuit Court of Appeals. If Consumers is unable to
continue to use the casks as planned, significant costs, including
replacement power costs during any resulting plant shutdown, could be
incurred. In March 1994, Consumers agreed to a request from the NRC to
complete certain tests and analysis regarding Consumers' cask storage
site, including the effects of an earthquake on the surrounding soil and
the support pad on which the casks are placed. These tests and analysis
have been completed and conclude that the storage system is adequate. A
summary of the results is being reviewed by the NRC staff. Consumers
cannot predict the response of the NRC staff.
Consumers has experienced recent increases in complaints relating
primarily to the effect of so-called stray voltage on certain livestock.
A complaint seeking certification as a class action suit was filed in 1993
against Consumers alleging significant damages, primarily related to
certain livestock. Consumers believes the allegations to be without
merit and in March 1994, the circuit judge hearing the complaint refused
to grant class action status to the suit. This decision is being appealed
by the plaintiffs and a number of individuals who would have been part of
the class action have refiled their claims as separate lawsuits (see Note
4).
Some of Consumers' larger industrial customers are exploring the
possibility of constructing and operating their own on-site generating
facilities. Consumers is actively working with these customers to develop
rate and service alternatives designed to compete with self-generation
options. Although Consumers' electric rates are competitive with other
regional utilities, Consumers has on file with the FERC two open access
interconnection tariffs which could have the effect of increasing
competition for wholesale customers. As part of its current electric rate
case, Consumers has requested that the MPSC reduce the level of rate
subsidization of residential customers by commercial and industrial
customers so as to further improve rate competitiveness for its largest
customers.
In April 1994, the MPSC approved a framework for a five-year experimental
retail wheeling program for Consumers and Detroit Edison. Under the
experiment, up to 60 MW of Consumers' additional load requirements could
be met by retail wheeling. Rates to be used for the experiment have yet
to be determined and a final MPSC order on the program is not expected
until mid-1995. Consumers is continuing to study the MPSC order, but does
not expect this experiment to have a material impact on its financial
position or results of operations.
Gas Utility Operations
Comparative Results of Operations
Gas Pretax Operating Income for the quarters ended March 31, 1994 and
1993: During the first quarter of 1994 the record level cold temperatures
during January and February resulted in gas pretax operating income
increasing $12 million from the 1993 level. This increase reflects higher
gas deliveries (both sales and transportation volumes), partially offset
by higher costs related to system reliability improvements.
Gas Pretax Operating Income for the 12 months ended March 31, 1994 and
1993: The $38 million improvement in 1994 pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and more favorable regulatory recovery of gas
costs.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Quarter 12 months
ended ended
------- ---------
1994 1994
Over Over
(Under) (Under)
1993 1993
- --------------------------------------------------------------------------
Sales growth $ 2 $ 9
Weather 15 16
Regulatory recovery of gas cost - 7
O&M, general taxes and depreciation (5) 6
-------------------
$12 $38
==========================================================================
Gas Deliveries: Gas sales and gas transported during the first quarter of
1994 totaled 176.0 bcf, a 12.9 percent increase from 1993 levels due
largely to record cold winter weather. For the 12 months ended March 31,
1994 gas sales and gas transported totaled 427.9 bcf, a 7.6 percent
increase from the corresponding 1993 level.
The following table quantifies gas deliveries by customer type for the
periods ended March 31:
Gas Deliveries Bcf
Quarter ended 12 months ended
1994 1993 1994 1993
- -----------------------------------------------------------------------------
Residential 86.3 77.0 184.1 172.0
Commercial 28.8 25.5 59.3 54.9
Industrial 7.2 6.2 14.9 13.6
Other .1 .1 .2 .2
------------------------------------
Gas sales 122.4 108.8 258.5 240.7
Transportation deliveries 25.3 23.0 72.8 68.4
Transportation for MCV 20.3 17.7 76.0 62.9
Off-system transportation service 8.0 6.5 20.6 25.6
------------------------------------
Total deliveries 176.0 156.0 427.9 397.6
=============================================================================
Cost of Gas Sold: The cost of gas sold for the first quarter of 1994
increased $16 million from the 1993 level; while the increase comparing
the 12 months ended March 31 periods is $12 million. These increases
reflect higher growth and weather related sales volumes partially offset
by lower costs per mcf. The lower costs per mcf are due to more favorable
gas contracts with interstate suppliers, resulting from the impact of FERC
Order 636, and the expiration of high cost contracts with certain Michigan
gas producers.
Gas Utility Rates
Consumers currently plans to file a request in 1994 with the MPSC to,
among other things, incorporate cost increases, including costs for
postretirement benefits computed under SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, into its gas rates. The rate
adjustment to be requested has not been determined. A final order should
be received approximately nine to 12 months after the request is filed.
Certain of Consumers' direct gas suppliers have contract prices tied to
the price Consumers pays Trunkline for its gas. The Trunkline contract
covers gas deliveries through October 1994 and is at a price that was
reduced in September 1993. Four domestic and four Canadian direct gas
suppliers have claimed that the reduced Trunkline gas cost is not a proper
reference price under their contracts with Consumers and that their
contracts are terminable after a 12-month period. Consumers disputed
these claims and in March 1994, reached a settlement with the four
domestic suppliers regarding the price Consumers is required to pay for
gas.
In 1992, the FERC issued Order 636, which makes a number of significant
changes to the structure of the services provided by interstate natural
gas pipelines. This order was implemented during the 1993-94 winter
heating season. Consumers is a significant purchaser of gas from an
interstate pipeline (Trunkline) and is a major transportation customer of
a number of pipelines. Management believes that Consumers will recover
any transition costs it may incur and such restructuring will not have a
significant impact on its financial position or results of operations.
In July 1993, Michigan Gas Storage submitted a notice of rate change with
the FERC to revise its operation and maintenance expenses for 1993 and
update plant costs to reflect the addition of approximately $27 million of
new plant additions in 1993 and began collecting the revised rates subject
to refund and a hearing in February 1994. Settlement conferences were
held during the first quarter of 1994. In April 1994, Michigan Gas
Storage filed with the FERC a stipulation and agreement in full settlement
of this proceeding. Michigan Gas Storage believes the settlement is
unopposed and that it will be approved by the FERC in mid-1994. For
further information regarding gas utility rates, see Note 3.
Gas Capital Expenditures
Consumers estimates capital expenditures, including new lease commitments,
related to its gas utility operations of $106 million for 1994, $100
million for 1995 and $94 million for 1996.
Gas Environmental Matters
Under Michigan's Environmental Response Act, Consumers expects that it
will ultimately incur clean-up 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.
Parties other than Consumers with current or former ownership interests
may also be considered liable for site investigations and remedial
actions.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites to define the nature and extent of
contamination at these sites and to determine which of several possible
remedial action alternatives, including no action, may be required under
the Environmental Response Act. The DNR has approved two of three plans
for remedial investigation/feasibility studies submitted by Consumers and
is currently reviewing the third.
The preliminary findings for the first remedial investigation/feasibility
study completed by Consumers in the first quarter of 1994 indicated that
the expenditures for remedial action at this site are likely to be
minimal. However, Consumers did not believe that a single site was
representative of all of the sites. Data available to Consumers and its
continued internal studies have resulted in an estimate of remedial action
for all 23 sites of between $40 million and $120 million. These estimates
are based on undiscounted 1994 costs. As of March 31, 1994, Consumers has
accrued $40 million, representing the minimum amount in the range. Any
significant change in estimating assumptions such as remediation
technique, nature and extent of contamination and regulatory requirements,
could impact the estimate of remedial costs for the sites.
Consumers believes that remedial costs will be recovered in rates as the
MPSC in 1993 addressed the question of recovery of investigation and
remedial costs for another Michigan gas utility as part a gas rate case.
In that proceeding, the MPSC determined that prudent investigation and
remedial costs could be deferred and amortized over 10-year periods and
prudent unamortized costs can be included for recovery in the utility's
rate cases. The MPSC stated that the length of the period may be reviewed
from time to time, but any revisions would be prospective. The order
further provided that the prudency review would include a review of the
utility's attempts to obtain reimbursement from others. The MPSC has also
approved similar deferred accounting requests by two other Michigan
utilities relative to investigation and remediation costs. Accordingly,
Consumers has recorded a regulatory asset for the same amount as the
accrued liability for anticipated recovery of these investigation and
remedial clean-up costs.
Other
Other Income: The $335 million improvement in Other Income when comparing
the 12 months ended March 31, 1994 to the corresponding 1993 period
reflects the impact of the Settlement Order related to power purchases
from the MCV Partnership. The 12 months ended March 31, 1993 included a
$343 million charge related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, the Attorney General and the MMCG have
asked the SEC to revoke CMS Energy's exemption from registration under
PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that
CMS Energy's current exemption be revoked and a new exemption be issued
conditioned upon certain reporting and operating requirements. If CMS
Energy were to lose its current exemption, it would become more heavily
regulated by the SEC; Consumers could ultimately be forced to divest
either its electric or gas utility business; and CMS Energy would be
restricted from conducting businesses that are not functionally related to
the conduct of its utility business as determined by the SEC. CMS Energy
is opposing this request and believes it will maintain its current
exemption from registration under PUHCA.
<PAGE>
<PAGE> 63
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of developments that have
occurred in various judicial and administrative proceedings, many of which
are more fully described in the 1993 Forms 10-K. Reference is made to the
Notes to the Consolidated Financial Statements included herein for
additional information regarding various pending administrative and
judicial proceedings involving rate, operating and environmental matters.
(a) 1993 Electric Rate Case. On May 10, 1993, Consumers filed an
application with the MPSC seeking an increase in its base electric rates
(MPSC Case No. U-10335). As a result of the new statutory federal tax
rate and interest rate savings resulting from the refinancing of certain
long-term debt, Consumers subsequently revised its requested electric rate
increase to approximately $133 million in 1994 while its requested
electric rate increase for 1995 remained at $38 million. A PFD was issued
in this case on March 4, 1994. In the PFD the ALJ recommended a rate
increase in 1994 of approximately $83 million with no incremental increase
in 1995 to be granted as part of this proceeding. In its Exceptions to
the Proposal for Decision filed March 25, 1994, Consumers revised its
requested annual revenue increase for the 1994 test year to $118 million
and its request for an additional 1995 increase to $26.5 million. On
May 10, 1994, the MPSC issued a final order in this case which increased
annual electric revenues by $58 million, or about 2.8 percent, and
approved an allowed rate of return on common equity of 11.75%. The rate
increase is effective for service rendered on and after May 11, 1994. The
parties have 30 days from the date of the order to file petitions for
clarification or rehearing.
(b) Arbitration Proceedings between Consumers and the MCV Partnership. A
dispute has arisen between the MCV Partnership and Consumers relating to
the impact of the Settlement Order on the fixed energy charge payment
called for in the PPA and Consumers' ability to exercise its rights under
the regulatory out provision based on the issuance of the Settlement
Order. In accordance with the dispute resolution provisions set out in
the PPA, an arbitrator acceptable to both parties has been selected and
the arbitration of this dispute has commenced. Under the schedule
established by the arbitrator, discovery will proceed until June 30, 1994,
filing of pre-trial briefs will conclude August 14, 1994 and cross
examination of witnesses will conclude October 8, 1994. Consumers is
unable to predict the outcome of such arbitration proceedings or of any
possible settlement of the issues underlying this dispute.
On May 5, 1994, the MCV notified Consumers of its desire to commence a
second arbitration proceeding, this one regarding the manner of
calculating the energy charges payable under the PPA. The MCV's notice
stated the MCV's belief that the prerequisite dispute resolution
procedures provided for in the PPA had been attempted and were
unsuccessful in resolving this matter and that this issue should thus be
put to arbitration. Specifically, the MCV stated that two issues were to
be addressed in the arbitration: the calculation of energy charges
payable under the PPA and the question of whether or not Consumers should
be entitled to exercise any regulatory out rights regarding the
calculation determined appropriate by the arbitrator. Consumers believes
that the PPA is clear on the manner in which energy charges are to be
calculated and that Consumers has followed the specified procedure
correctly throughout the term of the PPA. Under the PPA, if the parties
are unable to agree on selection of an arbitrator, and 20 days have passed
from the date of notice of commencement of arbitration, either party is
free to have an arbitrator selected in accordance with the procedures of
the American Arbitration Association. Consumers cannot predict the timing
or outcome of this arbitration.
(c) Lawsuit filed by the lessors of the MCV Facility. The lessors of the
MCV Facility have filed a lawsuit in federal district court in New York
against CMS Energy, Consumers and CMS Holdings. It alleges breach of
contract, breach of fiduciary duty and negligent or fraudulent
misrepresentation relating to the MCV Partnership's failure to object to
the Settlement Order in light of Consumers' interpretation of the
Settlement Order, which is the subject of an arbitration between the MCV
Partnership and Consumers. The action alleges damages in excess of $1
billion and seeks injunctive relief relative to Consumers' payments of the
fixed energy charge. CMS Energy and Consumers believe that at all times
they and CMS Holdings have conducted themselves properly and that the
action is without merit. They also believe that a significant portion of
the alleged damages represent fixed energy charges in dispute in the
arbitration. On March 28, 1994, the Company moved to dismiss this lawsuit
on the grounds that the federal court in New York lacks jurisdiction to
hear it. On April 5, 1994, the lessors filed an amended complaint with
the court in an attempt to remove the jurisdictional deficiency.
Consumers Motion to Dismiss was argued before the court on April 15, 1994
and the parties are awaiting the Court's decision. Also on March 28,
1994, Consumers commenced a lawsuit in State Circuit Court in Midland
County, Michigan seeking declaratory and injunctive relief with respect to
interpretation of the PPA.
In addition, CMS Holdings is owed a refund of approximately $8 million of
tax indemnity payments made by CMS Holdings to the other partners in First
Midland Limited Partnership in 1993 for the 1992 tax year pursuant to a
partnership tax indemnification agreement. The partners have failed to
make the refund and are claiming that retention of the payment is
justified as a setoff against the larger amounts claimed by the lessor-
plaintiffs in the New York court action. On March 23, 1994, CMS Holdings
filed suit in Circuit Court in Jackson County, Michigan for the refund
claiming breach of contract, breach of covenant of good faith and fair
dealing and that no setoff may be claimed by the other First Midland
Partners. CMS Energy and Consumers are unable to predict the outcome of
these actions.
(d) Retail Wheeling Proceedings. In September 1992, in response to an
application filed by ABATE, the MPSC issued an order commencing a joint
contested case proceeding to consider a proposed experimental wheeling
program for Consumers and Detroit Edison. Consumers and Detroit Edison
each opposed the proposed experimental retail wheeling program citing
concerns with the impact of the retail wheeling proposals on utility
planning and procurement practices as well as regarding certain
jurisdictional issues. The MPSC Staff also expressed concern over these
issues. In a PFD issued in August 1993, the ALJ determined that the MPSC
could not order utilities to provide retail wheeling services and
expressed concern regarding the proper pricing for this service should a
utility voluntarily agree to provide the service.
On April 11, 1994, the MPSC issued an Opinion and Interim Order which
approved the framework for a five year experimental retail wheeling
program for Consumers and Detroit Edison, and remanded the case to the
Administrative Law Judge 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.
The MPSC stated that the experimental program (i) would be limited to 60
MW for Consumers Power and 90 MW for Detroit Edison, (ii) would limit
amounts wheeled by individual participating customers to between 2 and
10 MW, (iii) would be limited to customers served at transmission or
subtransmission voltage, (iv) would require retail wheeling customers to
assume responsibility to procure power from third party providers, and
(v) would allow participating customers to return to firm service at the
end of the experiment. The MPSC further stated that contracts between
suppliers and end-users using retail wheeling would be subject to prior
MPSC review and approval and that suppliers must have or obtain suitable
franchises to serve in the end-users location as well as obtain a
certificate of public convenience and necessity from the MPSC to provide
the electric service. Under the schedule currently set for proceedings on
the appropriate retail wheeling rates, the utilities will file their
direct cases in September 1994 with cross examination to begin in December
1994. Under this schedule, a PFD would not be issued before April, 1995.
(e) Stray Voltage Lawsuit. Consumers experienced an increase in
complaints during 1993 relating to so-called stray voltage. Claimants
contend that stray voltage results when small electrical currents present
in grounded electric systems are diverted from their intended path.
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. On October 27, 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 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. On March 11, 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. On April 4, 1994, the plaintiffs appealed the court's
denial of class certification in this matter to the Court of Appeals. A
number of individuals who would have been part of the class action have
refiled their claims as separate lawsuits.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15) - CMS Energy: Letter of independent public accountant
(b) Reports on Form 8-K
Current reports on Form 8-K dated January 3, 1994 and March 8, 1994 (CMS
Energy Corporation and Consumers Power Company) covering matters pursuant
to "Item 5. Other Events", March 30, 1994 (Consumers Power Company only)
and March 31, 1994 (CMS Energy Corporation only) covering matters pursuant
to "Item 5. Other Events" and "Item 7. Financial Statements and Exhibits".
<PAGE>
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
------------------------------
(Registrant)
Date: May 13, 1994 By A M Wright
------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS POWER COMPANY
------------------------------
(Registrant)
Date: May 13, 1994 By A M Wright
------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer<PAGE>
<PAGE>
EXHIBIT NO. (12)<PAGE>
<PAGE>
<TABLE>
EXHIBIT (12)
CMS ENERGY
RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
<CAPTION>
Three Months
Ended Years Ended December 31
March 31, 1994 1993 1992 1991 1990 1989
-------------- ------ ------ ------ ------ ------
(b) (c)(d) (e)
<S> <C> <C> <C> <C> <C> <C>
Earnings as Defined (a)
Net income $ 78 $ 155 $(297) $(262) $(494) $ 312
Income taxes 45 75 (146) (94) 25 170
Exclude equity basis subsidiaries (3) (6) 10 10 13 1
Fixed charges as defined, adjusted
to exclude capitalized interest
of $2, $5, $3, $5, $38 and $177
million for the three months ended
March 31, 1994 and for the years
ended December 31, 1993, 1992, 1991,
1990 and 1989, respectively 54 245 228 364 317 207
------ ------ ------ ------ ------ -----
Earnings as defined $ 174 $ 469 $(205) $ 18 $(139) $ 690
====== ====== ====== ====== ====== =====
Fixed charges as defined(a)
Interest on long-term debt $ 46 $ 204 $ 169 $ 274 $ 293 $ 314
Estimated interest portion of
lease rentals 4 12 16 17 18 15
Other interest charges 3 23 35 68 33 33
Include equity basis subsidiaries - - - - - 3
Preferred and preference
stock dividend 4 17 16 15 17 28
------ ------ ------ ------ ------ -----
Fixed charges as defined $ 57 $ 256 $ 236 $ 374 $ 361 $ 393
====== ====== ====== ====== ====== =====
Ratio of earnings to fixed charges 3.05 1.83 - - - 1.76
====== ====== ====== ====== ====== =====
<FN>
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 pre-tax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and
other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in
its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding
these amounts.
(c) Excludes an extraordinary after-tax loss of $14 million.
(d) For the year ended December 31, 1991, fixed charges exceeded earnings by $356 million. Earnings as defined include
pre-tax losses of $398 million for write-downs and reserve amounts related to the abandonment of the Midland nuclear
plant, $76 million for potential customer refunds and other reserves, and $51 million relating to CMS Generation
Company's reduction in its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have
been 1.45 excluding these amounts.(e) For the year ended December 31, 1990, fixed charges exceeded earnings by $500
million. Earnings as defined include pre-tax losses of $847 million for write-downs and reserve amounts related to the
abandonment of the Midland nuclear plant. The ratio of earnings to fixed charges would have been 1.96 excluding these
amounts.
</TABLE>
<PAGE>
<PAGE>
EXHIBIT (15)<PAGE>
<PAGE>
ARTHUR ANDERSEN & CO.
Exhibit (15)
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
its Registration Statements No. 33-9732, No. 33-29681, No. 33-47629,
No. 33-64044 and No. 33-51877 its Form 10-Q for the quarter ended
March 31, 1994, which includes our report dated May 10, 1994 covering the
unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered
a part of the registration statement prepared or certified by our firm or
a report prepared or certified by our firm within the meaning of Sections
7 and 11 of the Act.
Arthur Andersen & Co.
Detroit, Michigan,
May 10, 1994.
<PAGE>
<PAGE>
- ----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION
AND
CONSUMERS POWER COMPANY
FORM 10-Q
EXHIBITS
FOR QUARTER ENDED MARCH 31, 1994
- ----------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
Exhibit
Numbers Description
- ------- ------------------------------------------------------
(12) - CMS Energy: Statements regarding computation of Ratio
of Earnings to Fixed Charges
(15) - CMS Energy: Letter of independent public
accountants
<PAGE>
