<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 September 30, 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 October 31, 1994 - 86,302,557
Consumers Power Company, $10 par value, shares outstanding and privately
held by CMS Energy Corporation at October 31, 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 September 30, 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. . . . . . . . . . . . . . 27
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . 44
Consolidated Statements of Income . . . . . . . . . . . . . . . 45
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 46
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 47
Consolidated Statements of Common Stockholder's Equity. . . . . 49
Condensed Notes to Consolidated Financial Statements. . . . . . 50
Management's Discussion and Analysis. . . . . . . . . . . . . . 64
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 76
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 79
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
<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. . . . . . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . . . . . Big Rock Point nuclear plant,
owned by Consumers
Clean Air Act . . . . . . . . . . . . Federal Clean Air Act as amended
on November 15, 1990
CMS Energy. . . . . . . . . . . . . . CMS Energy Corporation
CMS Gas Marketing . . . . . . . . . . CMS Gas Marketing Company, a
subsidiary of Enterprises
CMS Gas Transmission. . . . . . . . . CMS Gas Transmission and Storage
Company, a subsidiary of
Enterprises
CMS Generation. . . . . . . . . . . . CMS Generation Co., a subsidiary
of Enterprises
CMS Holdings. . . . . . . . . . . . . CMS Midland Holdings Company, a
subsidiary of 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
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
Hydra-Co. . . . . . . . . . . . . . . Independent power production
subsidiary of Niagara Mohawk Power
Corporation
kWh . . . . . . . . . . . . . . . . . Kilowatt-hour
Ludington . . . . . . . . . . . . . . Ludington pumped storage plant,
jointly owned by Consumers and
Detroit Edison
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
MichCon . . . . . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Cogeneration Partners. . . . Michigan Cogeneration Partners
Limited Partnership
Michigan Gas Storage. . . . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
MMBtu . . . . . . . . . . . . . . . . Million British thermal unit
MMCG. . . . . . . . . . . . . . . . . Michigan Municipal Cooperative
Group
MOAPA . . . . . . . . . . . . . . . . MOAPA Energy Limited Partnership,
a wholly owned affiliate of CMS
Generation
MPSC. . . . . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . . . . Megawatts
NEIL. . . . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NML . . . . . . . . . . . . . . . . . Nuclear Mutual Ltd.
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
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
PCRB. . . . . . . . . . . . . . . . . Pollution control revenue bond
PPA . . . . . . . . . . . . . . . . . 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
PURPA . . . . . . . . . . . . . . . . Public Utility Regulatory Policies
Act of 1978
Revised Settlement Proposal . . . . . 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
Risk Service Contract . . . . . . . . Service Contract for Exploration
and Exploitation of Hydrocarbons
and Block No. 16 of the Ecuadorian
Amazon Region, dated January 27,
1986
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,
approving with modifications the
Revised Settlement Proposal
SFAS. . . . . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . . . . Comprehensive Environmental
Response, Compensation and
Liability Act
Trunkline . . . . . . . . . . . . . . Trunkline Gas Company
Unsecured Credit Facility . . . . . . $400 million unsecured revolving
credit and letter of credit
facility dated as of July 29, 1994
Walter. . . . . . . . . . . . . . . . Walter International, Inc., a
Texas corporation
<PAGE>
<PAGE> 6
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS
ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
September 30, 1994 and 1993, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month,
nine-month and twelve-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated 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 LLP
Detroit, Michigan,
November 10, 1994.
<PAGE>
<PAGE> 7
<TABLE>
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1994 1993 1994 1993 1994 1993
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 573 $ 578 $1,667 $1,556 $2,188 $2,015
Gas utility 126 123 837 809 1,188 1,172
Oil and gas exploration and production 26 19 64 58 82 79
Independent power production 13 5 29 14 37 11
Natural gas pipeline, storage and marketing 28 32 106 105 143 139
Other 1 1 2 4 3 5
---------------------------------------------------------
Total operating revenue 767 758 2,705 2,546 3,641 3,421
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 80 83 230 224 299 294
Purchased power - related parties 119 124 359 344 482 469
Purchased and interchange power 37 53 134 105 177 134
Cost of gas sold 71 83 566 564 803 820
Other 163 134 460 394 637 567
---------------------------------------------------------
Total operation 470 477 1,749 1,631 2,398 2,284
Maintenance 46 52 138 152 193 206
Depreciation, depletion and amortization 85 84 272 263 372 363
General taxes 40 43 138 149 182 193
---------------------------------------------------------
Total operating expenses 641 656 2,297 2,195 3,145 3,046
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 107 98 281 231 336 249
Gas utility 5 3 106 97 156 130
Oil and gas exploration and production 7 - 11 8 6 8
Independent power production 7 1 12 5 13 (3)
Natural gas pipeline, storage and marketing 2 2 8 6 9 8
Other (2) (2) (10) 4 (24) (17)
---------------------------------------------------------
Total pretax operating income 126 102 408 351 496 375
---------------------------------------------------------
INCOME TAXES 27 25 97 82 107 77
---------------------------------------------------------
NET OPERATING INCOME 99 77 311 269 389 298
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Income from contractual arrangements (MCV Bonds) - 8 - 24 8 33
Accretion income 3 4 10 11 13 15
Accretion expense (Note 2) (8) (9) (27) (27) (36) (27)
Loss on MCV power purchases - settlement - - - - - (520)
Other income taxes, net 3 7 9 13 13 190
Other, net 2 7 9 15 10 6
---------------------------------------------------------
Total other income (deductions) - 17 1 36 8 (303)
---------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 49 54 142 155 191 205
Other interest 5 6 10 17 18 27
Capitalized interest (2) (1) (5) (3) (6) (4)
Preferred dividends 7 3 17 8 19 11
---------------------------------------------------------
Net fixed charges 59 62 164 177 222 239
---------------------------------------------------------
NET INCOME (LOSS) $ 40 $ 32 $ 148 $ 128 $ 175 $ (244)
=========================================================
AVERAGE COMMON SHARES OUTSTANDING 86 80 86 80 85 80
=========================================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE $ .46 $ .40 $ 1.73 $ 1.60 $ 2.05 $(3.06)
=========================================================
DIVIDENDS DECLARED PER COMMON SHARE $ .21 $ .18 $ .57 $ .42 $ .75 $ .54
=========================================================
<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>
Nine Months Ended Twelve Months Ended
September 30 September 30
1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 148 $ 128 $ 175 $(244)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $37, $36,
$48 and $47, respectively) 272 263 372 363
Debt discount amortization 28 27 38 37
Capital lease amortization 25 21 34 32
Deferred income taxes and investment tax credit 61 77 40 (163)
Accretion expense (Note 2) 27 27 36 27
Accretion income - abandoned Midland project (10) (11) (13) (15)
MCV power purchases - settlement (Note 2) (71) (64) (90) (64)
Loss on MCV power purchases - settlement (Note 2) - - - 520
Other (13) (6) (15) -
Changes in other assets and liabilities (43) (217) 85 (124)
------ ------ ------ ------
Net cash provided by operating activities 424 245 662 369
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (415) (377) (584) (547)
Investments in partnerships and unconsolidated subsidiaries (40) (83) (66) (96)
Investments in nuclear decommissioning trust funds (37) (36) (48) (47)
Cost to retire property, net (25) (24) (33) (25)
Deferred demand-side management costs (5) (42) (15) (54)
Proceeds from sale of property 10 1 10 11
Sale of subsidiary - (14) - (14)
Reduction of investments in MCV Bonds - 13 309 13
Proceeds from Bechtel settlement - - - 46
Other (5) (1) (8) (2)
------ ------ ------ ------
Net cash used in investing activities (517) (563) (435) (715)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred stock 193 - 193 -
Proceeds from bank loans, notes and bonds 178 667 186 843
Increase (decrease) in notes payable, net 142 349 (163) 160
Issuance of common stock 24 8 148 8
Retirement of bonds and other long-term debt (228) (645) (228) (645)
Repayment of bank loans (143) (57) (278) (58)
Payment of common stock dividends (49) (34) (64) (43)
Payment of capital lease obligations (24) (18) (31) (27)
Retirement of common stock (2) (3) (2) (3)
------ ------ ------ ------
Net cash provided by (used in) financing activities 91 267 (239) 235
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (2) (51) (12) (111)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 28 89 38 149
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 26 $ 38 $ 26 $ 38
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 9
<TABLE>
CMS Energy Corporation
Consolidated Balance Sheets
<CAPTION>
September 30 September 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT AND PROPERTY (At Cost)
Electric $5,523 $5,347 $5,225
Gas 1,931 1,862 1,795
Oil and gas properties (full-cost method) 925 845 823
Other 338 294 254
-----------------------------------
8,717 8,348 8,097
Less accumulated depreciation, depletion and amortization 4,244 4,022 3,967
-----------------------------------
4,473 4,326 4,130
Construction work-in-progress 279 257 365
-----------------------------------
4,752 4,583 4,495
-----------------------------------
INVESTMENTS
First Midland Limited Partnership (Note 2) 216 213 211
Independent power production 131 115 118
Midland Cogeneration Venture Limited Partnership (Note 2) 71 67 67
Other 50 26 26
-----------------------------------
468 421 422
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 26 28 38
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 8) 112 149 121
Inventories at average cost
Gas in underground storage 271 228 284
Materials and supplies 79 74 75
Generating plant fuel stock 33 41 30
Trunkline settlement (Note 3) 30 31 32
Deferred income taxes 20 17 -
Investment in MCV Bonds - - 309
Prepayments and other 99 195 100
-----------------------------------
670 763 989
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 490 491 484
Nuclear decommissioning trust funds (Note 4) 204 165 152
Abandoned Midland project (Note 3) 151 162 165
Trunkline settlement (Note 3) 63 86 93
Other 363 293 235
-----------------------------------
1,271 1,197 1,129
-----------------------------------
TOTAL ASSETS $7,161 $6,964 $7,035
===================================
</TABLE>
<PAGE>
<PAGE> 10
<TABLE>
<CAPTION>
September 30 September 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION (Note 8)
Common stockholders' equity $1,085 $ 966 $ 830
Preferred stock of subsidiary 356 163 163
Long-term debt 2,378 2,405 2,621
Non-current portion of capital leases 118 115 112
-----------------------------------
3,937 3,649 3,726
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 238 368 247
Notes payable 401 259 564
Accounts payable 152 171 158
Accounts payable - related parties 46 46 51
Accrued taxes 102 233 96
MCV power purchases - settlement (Note 2) 82 82 81
Accrued refunds 37 28 19
Accrued interest 29 40 33
Deferred income taxes - - 16
Other 188 189 172
-----------------------------------
1,275 1,416 1,437
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 566 509 450
Postretirement benefits 556 540 531
MCV power purchases - settlement (Note 2) 345 391 402
Deferred investment tax credits 184 191 193
Trunkline settlement (Note 3) 63 86 93
Regulatory liabilities for income taxes, net 20 6 51
Other (Note 4) 215 176 152
-----------------------------------
1,949 1,899 1,872
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,161 $6,964 $7,035
===================================
<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 Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1994 1993 1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
-------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 1,688 1,543 1,672 1,539 1,548 1,539
Common Stock reacquired (1) (3) (2) (3) (2) (3)
Common Stock issued 7 8 24 8 148 8
Common Stock reissued 1 - 1 4 1 4
-------------------------------------------------------------------
At end of period 1,695 1,548 1,695 1,548 1,695 1,548
-------------------------------------------------------------------
REVALUATION CAPITAL (Note 7)
At beginning of period (1) - - - - -
SFAS 115 - unrealized loss,
net of tax (2) - (3) - (3) -
-------------------------------------------------------------------
At end of period (3) - (3) - (3) -
-------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (630) (736) (707) (813) (719) (432)
Net income (loss) 40 32 148 128 175 (244)
Common stock dividends declared (18) (15) (49) (34) (64) (43)
-------------------------------------------------------------------
At end of period (608) (719) (608) (719) (608) (719)
-------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,085 $ 830 $1,085 $ 830 $1,085 $ 830
===================================================================
<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, nine and 12 month periods ended September 30,
1994, equity earnings were $10 million, $21 million and $25 million,
respectively and $4 million, $13 million and $10 million for the three,
nine and 12 month periods ended September 30, 1993.
In September 1994, management announced that Consumers is being internally
reorganized into separate electric utility and gas utility strategic
business units. The restructuring, effective January 1, 1995, while not
affecting Consumers' or CMS Energy's consolidated financial statements or
corporate legal form, is designed to sharpen management focus, improve
efficiency and accountability in both business segments and better
position Consumers for growth in the gas market and to meet increased
competition in the electric power market. Management believes that the
strategic business unit structure will allow each unit to focus more on
its own profitability and growth potential, and will ultimately, in the
long term, result in lower overall costs.
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 September 30, 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' obligations for purchase of contract capacity from the MCV
Partnership under the PPA since 1992 follows:
1995 and
Year 1992 1993 1994 thereafter
- ---- ---- ----- ----- ----------
MW 915 1,023 1,132 1,240
Prior to 1993, the MPSC 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 cost 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 to third parties the remaining contract capacity, the
cost of which Consumers is currently not authorized to recover from retail
customers.
The PPA provides that Consumers is 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 which is 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 variable 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. Because the calculation
of the 1992 loss depended in part upon estimates of future unregulated
sales of energy to third parties, a more conservative or risk-free
investment rate of 7 percent was used to calculate $188 million of the
total $343 million after-tax loss. The remaining portion of the loss was
calculated using an 8.5 percent discount rate reflecting Consumers'
incremental borrowing rate as required by SFAS 90, Regulated Enterprises-
Accounting for Abandonments and Disallowances of Plant Costs. The after-
tax expense for the time value of money for the loss is estimated to be
$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 (in connection with a
dispute with the MCV Partnership discussed below), which are being
escrowed, totaled $51 million for the first nine months 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 $65 $65 $62 $61 $ 8
Possible additional
underrecoveries and losses (a) $ 5 $20 $20 $22 $72
=====================================================================
(a) If unable to sell any capacity above the MPSC's authorized level.
At December 31, 1993, and September 30, 1994, the after-tax, present value
of the Settlement Order liability totaled $307 million and $277 million,
respectively. The reduction in the Settlement Order liability during 1994
reflects after-tax cash underrecoveries related to capacity totaling $47
million, partially offset by after-tax accretion expense of $17 million.
The PPA, while providing for 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 and
hearings are being conducted. 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.
At September 30, 1994, $25 million has been escrowed by Consumers and is
included as a non-current asset in Consumers' financial statements. 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 in connection with 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 the arbitration between the
MCV Partnership and Consumers discussed above. 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. It appears from the complaint 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. While
management believes that the possibility of the alleged damages being
awarded is remote, CMS Energy and Consumers are unable to predict the
outcome of this issue. In addition, CMS Holdings has filed a lawsuit in
the circuit court of Jackson, Michigan, seeking reimbursement of $7
million of certain tax indemnification payments made to its partners in
the FMLP and owed to CMS Holdings. Consumers is unable to predict the
outcome of this issue.
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. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility being developed by
Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to
substitute 65 MW of less expensive contract capacity from the MCV Facility
which Consumers is currently not authorized to recover from retail
customers. The proposed substitution of capacity which would start in
1997, the year the coal-fired cogeneration facility was scheduled to begin
operations, represents significant savings to Consumers' customers,
compared to the cost approved by the MPSC for a coal-fired cogeneration
facility. As a result, Consumers recorded a regulatory asset of $30
million, which it believes will ultimately be recoverable in rates.
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. The MPSC subsequently confirmed the recovery of MCV-related costs
consistent with the Settlement Order as part of the 1993 and 1994 PSCR
plan case orders.
3: Rate Matters
Electric Rate Case
In May 1994, the MPSC issued an order, granting Consumers a $58 million
annual increase in its retail electric rates. 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. Consequently, residential
customers were allocated $40 million, which is 70 percent of the rate
increase.
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104.4 million to
$139.5 million, depending upon the ratemaking treatment afforded sales
losses to competition and the treatment of the MCV contract capacity above
915 MW. The request includes recognition of increased expenditures
related to continuing construction activities and capital additions aimed
at maintaining and improving system reliability and increases in financing
costs. The filing addresses the ratemaking effect of jurisdictional sales
losses by assuming adoption of a proposed special nonjurisdictional rate
to large, qualifying industrial customers as requested by Consumers in an
earlier June 1994 filing with the MPSC. An alternative approach presented
would use the MCV contract capacity above 915 MW for jurisdictional
electric customers and offer discounted jurisdictional tariffs. Consumers
has also requested that the MPSC eliminate the rate cross-subsidization of
residential rates in a two-step adjustment. In addition, Consumers
proposes to eliminate all DSM expenditures after April 1995 and further
requests MPSC approval to recover all jurisdictional costs associated with
the proposed settlement of the proceedings concerning the operation of
Ludington.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. Certain other parties have subsequently
filed various alternative proposals. The MPSC has adopted a hearing
schedule that calls for briefs to be filed in December 1994. A final
order is expected in the first quarter of 1995.
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, filed claims of appeal with the
Court of Appeals regarding MPSC orders issued in 1991 that specified the
recovery of abandoned investment. Oral arguments took place before the
Court of Appeals in October 1994.
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. The estimated revenue
effects of the potential adjustment range from an $11 million increase to
a $22 million decrease. The proceedings before the MPSC have started and
based on the criteria set out in the demand-side management settlement
agreement approved by the MPSC in 1992, Consumers has achieved all the
agreed-upon objectives. Consumers believes that the MPSC will ultimately
allow collection of the full $11 million incentive. Accordingly, during
the second quarter of 1994, Consumers recognized $11 million in revenue,
related to its demand-side management program. A final order from the
MPSC is expected by mid-1995.
In October 1993, Consumers completed the customer participation portion of
these DSM 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 $65 million. 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 September 30, 1994 was $71
million.
PSCR Issues
On November 9, 1994, the ALJ presiding over the 1993 PSCR reconciliation
proceeding issued a proposal for decision in this case. Several issues
were included in this proposal for decision including issues related to a
planned refueling and maintenance outage which Consumers began at
Palisades in June 1993. Following several required, unanticipated repairs
that extended the outage, the plant returned to service in early November.
In addition, from mid-February through mid-June 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 were reviewed during the 1993
PSCR reconciliation of actual costs and revenues to determine the prudency
of actions taken during the outages. The 1994 outages will be reviewed as
part of that years reconciliation proceedings. Net replacement power
costs during the outages were approximately $180,000 per day above the
cost of fuel Consumers would have otherwise incurred when the plant is
operating. Consumers had conceded that one day of the 1993 outage was
inappropriate, while the MPSC staff has recommended a 20-day disallowance.
The ALJ proposed a disallowance of 22 days of outage totaling $4.2
million. CMS Energy had previously established a reserve for this
potential disallowance. See Note 4 for information regarding the NRC's
review of Palisades' performance.
Gas Rates
In July 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
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 $13 million of gas
supply costs incurred prior to February 8, 1993. Consumers previously had
accrued a loss for this issue in excess of the disallowed amount. 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 1992,
Consumers 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 September 30,
1994, Consumers' remaining liability and regulatory asset were $93
million.
Other
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been resolved. The dispute revolved around
whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
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
In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR
and certain other parties, signed an agreement in principle designed to
resolve all legal issues associated with fish mortality at Ludington. The
proposed settlement, which allows for the continued operation of the plant
through the end of its FERC license, will require Consumers and Detroit
Edison to continue using a seasonal barrier net as well as monitoring new
technology which may further reduce fish loss at the plant. The proposed
settlement also requires Consumers to make annual payments to the Great
Lakes Fishery Trust, develop and improve recreational areas and convey
undeveloped land to the State of Michigan and the Great Lakes Fishery
Trust. Upon approval of the settlement agreement, Consumers will transfer
land (with an original cost of $9 million and a fair market value in
excess of $20 million), make an initial payment of approximately $3
million and incur approximately $1 million of expenditures related to
recreational improvements. Future annual payments of approximately $1
million are also anticipated over the next 24 years and are intended to
enhance the fishery resources of the Great Lakes. The agreement is
subject to MPSC approval of Consumers being permitted to recover all such
settlement costs from electric customers, and approval by the FERC.
The proposed settlement would resolve a lawsuit filed by the Attorney
General in 1986 on behalf of the State of Michigan in the Circuit Court of
Ingham County, seeking damages from Consumers and Detroit Edison for
injuries to fishery resources because of the operation of the Ludington
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. Since 1986 the parties have continued to
dispute, in various courts, the amount of actual damages as well as the
best alternative to mitigate future damages.
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 manufactured gas plant 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 findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal.
However, Consumers does not believe that a single site is representative
of all of the sites. Data available to Consumers and its continued
internal review have resulted in an estimate for all costs related to
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At September 30,
1994, Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in 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 are recoverable 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.
In order to be recovered in rates, prudent costs must be approved in a
rate case. Any costs amortized in years prior to filing a rate case may
not be recoverable. The MPSC stated that the length of the amortization
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. Consumers has initiated
discussions with certain insurance companies regarding coverage for some
or all of the costs which may be incurred for these sites. Consumers
plans to seek recovery of remedial action costs in its gas rate case to be
filed in 1994.
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 current
regulations. Management believes that Consumers' annual operating costs
will not be materially affected.
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 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 in excess of $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. Consumers believes that the various claims are
different enough to warrant separate trials, and that the circuit court's
denial of class-action status will be upheld. A number of individuals who
would have been part of the class action have refiled their claims as
separate lawsuits. At October 31, 1994, Consumers had 88 separate stray
voltage lawsuits pending.
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 procedural requirements of the Atomic Energy Act and
the National Environmental Policy Act. 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 where oral argument was held during
October 1994. As of October 31, 1994, Consumers had loaded seven dry
storage casks with spent nuclear fuel and expects to load six additional
casks prior to Palisades' 1995 refueling. If Consumers is unable to
continue to use the casks as planned, significant costs could be incurred,
including replacement power costs during any resulting plant shutdown and
costs to remove the spent fuel from the dry casks. If Consumers cannot
store fuel on-site in the dry casks, and if no off-site storage is
available, Palisades could be forced to cease operation as early as mid-
1995, when all fuel must be off-loaded for a ten-year inspection of the
reactor vessel. In order to address concerns raised subsequent to the
initial cask loading, Consumers and the NRC each analyzed the effects of
seismic and other natural hazards on the support pad on which the casks
are placed, and concluded that the pad location is acceptable to support
the casks.
In August 1994, Consumers announced that it would unload and replace one
of the dry fuel storage casks at Palisades that contain spent nuclear
fuel. In examining radiographs during a review of the cask manufacturer's
quality assurance program, Consumers detected indications of minor flaws
in welds in the steel liner of one of the loaded casks. Although testing
has not disclosed any leakage from the cask, Consumers has nevertheless
decided to remove the spent fuel from this cask and insert it in another
cask. Consumers has examined the radiographs for all of its casks,
including the casks containing spent fuel, and has found all other welds
to be acceptable.
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 after the planned
outage showed a decline in performance ratings for the plant. In order to
provide NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades. The inspection evaluated all aspects of nuclear plant
operation and management. The inspection, completed in June 1994, found
certain performance, operational and management deficiencies at Palisades.
The NRC acknowledged that the new Palisades senior management team, in
place since early 1994, had recognized and begun to address the problems
at Palisades. The NRC did not place Palisades on either the NRC's
"Troubled" or "Declining Performance" list. In August 1994, Consumers
filed its response to the NRC's diagnostic evaluation report, which
included both short- and long-term enhancements planned for Palisades to
improve performance. Attaining and maintaining acceptable performance at
Palisades will require continuing performance improvements and additional
expenditures at the plant, which have been included in Consumers' total
planned levels of expenditures.
As the holder of a license to operate a pressurized-water reactor nuclear
power plant, Consumers is required by NRC regulations to calculate and
report to the NRC, values relating to the continuing ability of the
Palisades reactor vessel to withstand postulated "pressurized thermal
shock" events during its remaining license life, in light of the
embrittlement of reactor vessel materials over time due to operation in a
radioactive environment. If the results of the calculation indicate that
a temperature screening criterion established in the regulations will be
exceeded, Consumers must submit a safety analysis to determine what, if
any, plant modifications are necessary to prevent potential reactor vessel
failure as a result of postulated pressurized thermal shock events if
continued operation beyond the screening criterion value is allowed, and
the NRC will then decide whether to permit continued operation in excess
of the criterion. Consumers had previously submitted a calculation
indicating that the Palisades reactor vessel would not exceed the
screening criterion before the year 2004. Preliminary analysis of more
recent data from testing of similar materials indicates that the Palisades
reactor vessel could exceed the screening criterion prior to 2004.
Consumers is continuing to analyze this data and will report its
conclusions to the NRC in late November. Consumers is also continuing to
analyze alternative means to permit continued operation of Palisades to
the end of its license life in the year 2007. Consumers cannot predict
the outcome of these efforts.
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 $45 million annually. Consumers
currently estimates decommissioning costs of $220 million and $423
million, in 1994 dollars, for the Big Rock and Palisades nuclear plants,
respectively. Amounts collected from electric retail customers and
deposited in trusts, and earnings on the trusts, which are credited to
accumulated depreciation, are estimated to accumulate $425 million and
$1.2 billion for decommissioning Big Rock and Palisades, respectively.
The trust funds, which are estimated to earn 7.1 percent, will be used for
decommissioning Big Rock and Palisades at the end of their respective
license periods in 2000 and 2007. In order to meet NRC requirements for
decommissioning, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades which assumed that each plant site
will be restored to conform with the adjacent landscape, and that all
contaminated equipment will be disassembled and disposed of in a licensed
burial facility. Consumers is currently updating those estimates, and
expects that the decommissioning costs may increase, principally due to
the unavailability of low- and high-level radioactive waste disposal
facilities. The lack of an available disposal site could result in the
need to maintain the facilities in a mothballed state for a significant
period of time after retirement. Consumers expects to file updated
decommissioning estimates with the MPSC on or before March 31, 1995. At
September 30, 1994, Consumers had an investment in nuclear decommissioning
trust funds of $204 million for future decommissioning.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed: annual
provisions for decommissioning could increase; estimated costs for
decommissioning could be recorded as a liability rather than as
accumulated depreciation; and trust fund income from the external
decommissioning trusts could be reported as investment income rather than
as a reduction to decommissioning expense.
Nuclear Insurance
Consumers, as a member of NML and NEIL and through the purchase of other
forms of nuclear insurance, maintains coverage against property damage,
debris removal, personal injury liability and other losses for damages
that could be incurred at its nuclear generating facilities. In the event
of covered losses at its own or any other participating nuclear facility,
Consumers could be subject to the following maximum assessments: $18
million in any one year under the NML and NEIL policies; $79 million per
incident under other forms of nuclear insurance and financial protection,
limited to a maximum payment of $10 million per incident in any one year;
and $6 million in the event of claims under insurance provisions of the
master workers program. Consumers considers the possibility of these
assessments to be remote. For further information regarding Consumers'
nuclear insurance, see Item 1. Business, contained in the 1993 Form 10-K
of Consumers.
Commitments for Coal and Gas Supplies
Consumers has entered into coal supply contracts with various suppliers
for its coal-fired generating stations. These contracts have expiration
dates that range from 1994 to 2004. Generally, Consumers contracts for
approximately 70% of its annual coal requirements which in 1993 totalled
approximately $260 million. Consumers supplements its long-term contracts
with spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1994 to 1999. Generally, Consumers contracts for approximately
75% of its annual gas requirements which in 1993 totalled approximately
$680 million. Consumers supplements its long-term contracts with spot-
market purchases to fulfill its gas needs.
Capital Expenditures
CMS Energy's estimated capital expenditures, including demand-side
management and new lease commitments, are $863 million for 1994, $733
million for 1995 and $645 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.
Estimated losses for certain contingencies discussed in this note have
been accrued. 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: Effects of the Ratemaking Process
Consumers is subject to the provisions of SFAS 71, Accounting for the
Effects of Certain Types of Regulation. Regulatory assets represent
probable future revenue to Consumers associated with certain incurred
costs as these costs are recovered through the ratemaking process. The
following regulatory assets (liabilities) which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets:
In Millions
Sept. 30, 1994 Dec. 31, 1993 Sept. 30, 1993
- ---------------------------------------------------------------------
Postretirement benefits $ 509 $ 510 $ 503
Income taxes 180 189 154
Abandoned Midland project 151 162 165
Trunkline settlement 93 117 125
Demand-side management -
deferred costs 71 71 63
Environmental clean-up 40 - -
DOE - decommissioning uranium
enrichment facility 32 33 33
Power purchase termination 30 - -
Other 32 39 39
--------------------------------------
Total regulatory assets $1,138 $1,121 $1,082
=====================================================================
Income taxes $ (199) $ (195) $ (205)
Demand-side management -
deferred revenue (19) (17) (17)
Other (1) - -
--------------------------------------
Total regulatory liabilities $ (219) $ (212) $ (222)
=====================================================================
Consumers has MPSC orders to recover virtually all of its regulatory
assets through future rates and anticipates MPSC approval for recovery of
the remaining amounts.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with original maturities of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1994 1993 1994 1993
- ---------------------------------------------------------------------
Cash transactions
- -----------------
Interest paid (net of
amounts capitalized) $126 $157 $163 $207
Income taxes paid
(net of refunds) 24 37 19 43
Non-cash transactions
- ---------------------
Nuclear fuel placed
under capital lease $ 18 $ 23 $ 24 $ 27
Other assets placed
under capital leases 11 28 12 46
Capital leases refinanced - 42 - 42
Assumption of debt - - - 15
=====================================================================
7: 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 are recorded at fair
value, with any unrealized gains or losses included in earnings if the
securities are 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 investments classified as available
for sale securities with an amortized cost of $227 million and a fair
market value of $223 million. An unrealized loss on available for sale
securities of $2 million, $3 million and $3 million, net of taxes, is
included in common stockholders' equity for three, nine and 12 months
ended September 30, 1994. CMS Energy also has certain equity investments
classified as trading securities with a carrying cost of $11 million and a
fair market value of $15 million. An unrealized gain (loss) on trading
securities of $1 million, $3 million and $3 million, net of taxes, is
included in other income for three, nine and 12 months ended September 30,
1994.
8: Capitalization and Other
CMS Energy
In January 1994, CMS Energy filed a registration statement with the SEC
permitting the issuance and sale of up to $250 million of GTNs. The net
proceeds are being used to reduce the amount of Notes outstanding and for
general corporate purposes. As of November 4, 1994, CMS Energy had issued
approximately $80 million of GTNs with interest rates ranging from 6.75 to
7.75 percent and reduced the principal amount of Notes outstanding by $95
million.
On July 29, 1994, CMS Energy refinanced its Secured Credit Facility with a
new $400 million Unsecured Credit Facility and extended the termination
date to June 30, 1997. At October 31, 1994, $129 million was outstanding
at a weighted average interest rate of 6.4 percent.
On October 6, 1994, CMS Energy filed a shelf registration statement for
the offering and issuance of up to two million shares of common stock. As
described in the SEC filing, the shares may be offered and issued in
connection with acquisitions of energy-related businesses and assets.
Consumers Power
Debt
In October 1994, the FERC granted Consumers' request for authorization to
issue or guarantee up to $900 million of short-term debt through December
31, 1996. This is the same amount of short-term debt currently authorized
through 1994. Consumers has a $470 million facility to finance seasonal
working capital requirements and unsecured, committed lines of credit
aggregating $185 million. At September 30, 1994, Consumers had $300
million and $101 million, respectively, 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 applicable state and federal law. In the first quarter of 1994,
Consumers redeemed first mortgage bonds totaling $100 million. These
redemptions completed Consumers' commitment to the MPSC, under the 1993
authorization to issue first mortgage bonds, to refinance certain long-
term debt.
In January 1993, Consumers entered into an interest rate swap agreement,
exchanging variable-rate interest for a fixed-rate interest of 5.2 percent
on the latest maturing $250 million of the then remaining $500 million
obligation under its long-term credit agreement. The swap agreement has
the same term as the debt agreement and had the effect of increasing the
weighted average interest rate to 4.8 percent from 3.9 percent for the 12
month period ended December 31, 1993. The swap agreement will amortize
beginning in February 1995 and terminate in May 1996. At September 30,
1994, the outstanding balance of Consumers' long-term credit agreement
totaled $328 million. In November 1994, subsequent to MPSC authorization,
Consumers entered into a new $400 million unsecured, variable rate, five-
year term loan and subsequently used the proceeds to refinance the long-
term credit agreement discussed above and to reduce short-term borrowings.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. At September 30, 1994, receivables sold under the agreement
totaled $210 million as compared to $285 million at December 31, 1993.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets
have been reduced to reflect receivables sold.
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 rate of 8.32 percent. Net proceeds to Consumers
were $193 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.
In May 1994, Consumers received a $100 million equity investment from
CMS Energy. The investment was consistent with CMS Energy's plan to
improve Consumers' capital structure and was recognized and included in
the capitalization structure employed by the MPSC as part of Consumers'
most recent electric rate order.
At 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 during 1993. Consumers
has continued paying common stock dividends in 1994, including $16 million
attributable to 1993 earnings, and $97 million, attributable to current
year earnings through September 30, 1994. In addition, in October 1994,
Consumers declared a $36 million common stock dividend payable in November
1994.
In January 1994, Consumers amended its nuclear fuel lease to include fuel
previously owned at Big Rock and further increased the maximum amount of
nuclear fuel that could be leased to $80 million. At September 30, 1994,
$61 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 June, 1994, NOMECO executed a non-binding letter of intent which calls
for a newly-formed subsidiary of CMS Energy to merge with and into Walter,
thereby making Walter a wholly-owned subsidiary of CMS Energy. Walter is
a privately held corporation primarily engaged in international oil and
gas exploration, development and production and activities related
thereto. The letter of intent has expired pursuant to its terms.
Nonetheless, NOMECO expects that this transaction will be completed in
late 1994 or early 1995. The letter of intent contemplated that the
holders of Walter common stock would receive shares of CMS Energy Common
Stock with an aggregate market value of approximately $25 million.
In November 1993, NOMECO amended the terms of its revolving credit
agreement and increased the amount to $110 million. At September 30,
1994, $90 million of revolving credit debt was outstanding at a weighted
average interest rate of 6.3 percent.
NOMECO has hedging arrangements which are used to reduce the risk of price
fluctuations for its spot sales of oil and gas. These arrangements limit
potential gains/losses from any future decrease/increase in the spot
prices.
NOMECO has one arrangement which is used to fix the price that NOMECO will
pay to supply gas for the years 2001 - 2006 by purchasing the economic
equivalent of 10,000 MMBtu per day at a fixed, escalated price starting at
$2.82 per MMBtu in 2001. The settlement periods are each a one-year
period ending December 31, 2001 through 2006 on 3.65 MMBtu. If the
"floating price," essentially the then current Gulf Coast spot price, for
a period is higher than the "fixed price," the seller pays NOMECO the
difference, and vice versa. If a party's exposure at any time exceeds $2
million, that party is required to obtain a letter of credit in favor of
the other party for the excess over $2 million and up to $10 million,
which is the maximum exposure under this hedge arrangement. At December
31, 1993 and September 30, 1994, the seller had arranged a letter of
credit in NOMECO's favor for $10 million.
NOMECO also periodically enters into oil and gas price hedging
arrangements to mitigate its exposure to price fluctuations on the sale of
crude oil and natural gas. As of December 31, 1993, NOMECO was party to
gas price collar contracts on 7.3 bcf of gas for the delivery months of
January through December 1994 at prices ranging from $2.05 to $2.30 per
MMBtu. Also, NOMECO has contracts on 7.3 bcf of gas for the delivery
months of January through December 1995 at prices ranging from $2.05 to
$2.35 per MMBtu. These hedging arrangements are accounted for as hedges;
accordingly, any gains or losses are deferred and recognized on the
settlement dates. As of December 31, 1993 and September 30, 1994, the
fair value of these hedge arrangements was not materially different than
the book value.
CMS Generation
In May 1994, MOAPA redeemed $22 million of Clark County, Nevada tax-exempt
bonds. The bonds had been included in current maturities on the balance
sheet and the funds held in a trust account had been included as 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. The bonds
were redeemed due to the Nevada Public Service Commission's rejection of a
signed power purchase agreement for the facility.
Other
In October 1994, the FASB issued SFAS 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures, which amends SFAS
114, Accounting by Creditors for Impairment of a Loan. SFAS 114 provided
two alternatives for income recognition to be used for changes in the net
carrying amount of an impaired loan subsequent to the initial measure of
impairment. The creditor could recognize all changes in the net carrying
amount of the loan as an adjustment to bad-debt expense, or the creditor
could accrue interest on the net carrying amount of the impaired loan and
recognize other changes as an adjustment to bad-debt expense. SFAS 118
allows the use of any existing methods for recognizing interest income on
impaired loans.
In October 1994, the FASB also issued SFAS 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,
which requires added disclosures about the amounts, nature and terms of
derivatives. Derivatives are financial agreements whose returns are
linked to or derived from the performance of underlying assets such as
bonds, currencies or commodities. CMS Energy is continuing to study SFAS
118 and SFAS 119, which are effective for year-end 1994 financial
statements, but does not expect either statement will have a material
impact on CMS Energy's financial position or results of operations.
<PAGE>
<PAGE> 27
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.
In September 1994, management announced that Consumers is being internally
reorganized into separate electric utility and gas utility strategic
business units. The restructuring, effective January 1, 1995, while not
affecting Consumers' or CMS Energy's consolidated financial statements or
corporate legal form, is designed to sharpen management focus, improve
efficiency and accountability in both business segments and better
position Consumers for growth in the gas market and to meet increased
competition in the electric power market. Management believes that the
strategic business unit structure will allow each unit to focus more on
its own profitability and growth potential, and will ultimately, in the
long term, result in lower overall costs.
In conjunction with the internal reorganization of Consumers into separate
electric and gas strategic business units, CMS Energy is considering the
possible future issuance of equity securities whose financial
characteristics would be tied to the performance of one or the other of
the business units. No final decision has been made to issue any such
securities, and no assurance can be given as to whether or in what form
such securities may be issued.
Consolidated earnings for the quarters ended September 30, 1994 and 1993
Consolidated net income totaled $40 million or 46 cents per share for the
third quarter of 1994, compared to $32 million or 40 cents per share for
the corresponding third quarter of 1993. The increased net income
reflects increased electric utility sales resulting from Michigan's
continuing economic growth, increased revenue from the May 1994 electric
rate increase and additional earnings from the growth of non-utility
businesses.
Consolidated earnings for the nine months ended September 30, 1994 and
1993
Consolidated net income totaled $148 million or $1.73 per share for the
nine months ended September 30, 1994, compared to $128 million or $1.60
per share for the nine months ended September 30, 1993. The increased net
income reflects increased electric utility sales resulting from increased
motor vehicle production, increased levels of employment and the overall
strong economic expansion in Consumers' service territory. Also, the
increased net income reflects increased gas utility deliveries due largely
to record cold winter weather. Furthermore, net income benefited from a
mid-May 1994 electric rate increase and additional earnings from the
growth of non-utility businesses.
Consolidated earnings for the 12 months ended September 30, 1994 and 1993
Consolidated net income totaled $175 million or $2.05 per share for the 12
months ended September 30, 1994, compared to a net loss of $244 million or
$3.06 per share for the 12 months ended September 30, 1993. The increased
net income reflects the impact of the 1993 Settlement Order related to the
cost recovery for power purchases from the MCV Partnership, the benefit of
increased electric utility sales and gas utility deliveries. Furthermore,
net income benefited from the impact of a mid-May 1994 electric rate
increase 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 generation, sale
and transmission of electricity and from NOMECO's sale of oil and natural
gas. Consolidated cash from operations for the first nine months of 1994
primarily reflects the benefits of Consumers' increased electric sales and
significantly higher gas deliveries.
Financing Activities
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 are being used to reduce the amount of Notes outstanding and
for general corporate purposes. As of November 4, 1994, CMS Energy had
issued approximately $80 million of GTNs with interest rates ranging from
6.75 to 7.75 percent and reduced the principal amount of Notes outstanding
by $95 million.
On July 29, 1994, CMS Energy refinanced its Secured Credit Facility with a
new $400 million Unsecured Credit Facility and extended the termination
date to June 30, 1997. At October 31, 1994, $129 million was outstanding
at a weighted average interest rate of 6.4 percent.
On October 6, 1994, CMS Energy filed a shelf registration statement for
the offering and issuance of up to two million shares of common stock. As
described in the SEC filing, the shares may be offered and issued in
connection with acquisitions of energy-related businesses and assets.
As a result of the 1992 quasi-reorganization (see Note 8 of the Condensed
Notes to Consolidated Financial Statements), and subsequent accumulated
earnings, Consumers resumed paying common stock dividends during 1993.
Consumers has continued paying common stock dividends in 1994, including
$16 million attributable to 1993 earnings, and $97 million attributable to
current year earnings through September 30, 1994. In October 1994,
Consumers declared a $36 million common stock dividend payable in November
1994.
During February and March 1994, Consumers continued to reduce its future
interest charges by retiring $100 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 $193 million from
the sale are being used for general corporate purposes, including debt
retirement and improvements to Consumers' distribution systems.
In November 1994, Consumers entered into a new $400 million unsecured,
variable rate, five-year term loan and subsequently used the proceeds to
refinance its long-term credit agreement (see Note 8) and to reduce short-
term borrowings.
Investing Activities
Capital expenditures (excluding assets placed under capital lease),
deferred demand-side management costs and investments in unconsolidated
subsidiaries totaled $460 million for the first nine months of 1994 as
compared to $502 million for the first nine months of 1993. These amounts
primarily represent capital investments in CMS Energy's electric and gas
utility segments, and the continued expansion of the non-utility business
segments. CMS Energy's expenditures for the first nine months of 1994 for
its utility and non-utility businesses were $318 million and $142 million,
respectively.
Outlook
CMS Energy estimates that capital expenditures, including demand-side
management and new lease commitments, will total approximately $2.2
billion for the years 1994 through 1996. 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
and 1995 as a potential source of financing its subsidiaries' investing
activities. The following estimates for electric and gas utility reflect
Consumers' current outage schedules for its nuclear plants and
construction expenditures to be included in its electric and gas rate
requests which are expected to be filed with the MPSC in late 1994. For
independent power production, the following estimates include acquisition
costs relating to HYDRA-CO.
In Millions
Years Ended December 31 1994 1995 1996
- --------------------------------------------------------------------------
Electric utility $ 347 $ 333 $ 255
Gas utility 132 125 115
Oil and gas exploration and production 162 85 100
Independent power production 186 166 146
Natural gas pipeline, storage and marketing 36 24 29
------------------------
$ 863 $ 733 $ 645
============================================================================
Consumers' short-term sources of credit include a $470 million working
capital facility and unsecured, committed lines of credit totaling $185
million. At September 30, 1994, Consumers had $300 million and $101
million, respectively, outstanding under these facilities. Consumers has
also received FERC authorization to issue or guarantee up to $900 million
in short-term debt through December 31, 1996. This is the same amount of
short-term debt authorized through 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. At September 30, 1994, receivables sold totaled $210
million as compared to $285 million at December 31, 1993.
Electric Utility Operations
Comparative Results of Operations
Electric Pretax Operating Income for the quarters ended September 30, 1994
and 1993: During the third quarter of 1994, electric pretax operating
income increased $9 million from the 1993 level. This increase reflects
higher electric system sales related to economic growth, and the impact of
the May 1994 electric rate increase.
Electric Pretax Operating Income for the nine months ended September 30,
1994 and 1993: The $50 million improvement in 1994 electric pretax
operating income compared to 1993 primarily is the result of increased
electric system sales due in large part to Michigan's increased levels of
employment and overall economic expansion and the May 1994 electric rate
increase. Also, during the second quarter of 1994, Consumers recognized
$11 million in revenue, related to DSM, based on having achieved all
objectives agreed-upon with the MPSC (see Note 3).
Electric Pretax Operating Income for the 12 months ended September 30,
1994 and 1993: The $87 million improvement in 1994 electric pretax
operating income compared to 1993 primarily is the result of the 1993
resolution of the recoverability of MCV power purchase costs under the
PPA, increased electric system sales and the May 1994 electric rate
increase, partially offset by higher electric operating costs and
depreciation.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended
September 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1994 Compared 1994 Compared 1994 Compared
to 1993 to 1993 to 1993
- ------------------------------------------------------------------------
Sales $7 $31 $37
Resolution of MCV
power cost issues - - 34
Rate increases and other
regulatory issues 11 29 39
O&M, general taxes and
depreciation (9) (10) (23)
----------------------------------------
Total change $ 9 $50 $87
========================================================================
Electric Sales: Electric system sales during the third quarter of 1994
totaled 8.5 billion kWh, a 3.0 percent increase from 1993 levels. During
the third quarter of 1994, residential sales decreased .2 percent,
commercial sales increased 1.6 percent, and industrial sales increased 7.9
percent, compared to the corresponding period in 1993. Consumers'
electric sales have benefited from improved employment and economic
conditions. Electric system sales during the nine months ended September
30, 1994 totaled 24.8 billion kWh, a 4.8 percent increase from 1993
levels. During the nine month 1994 period, residential and commercial
sales increased 2.7 percent and 3.0 percent respectively, while industrial
sales increased 7.6 percent. The industrial segments of chemicals,
primary metals, and transportation equipment contributed approximately
one-fourth of the total Company electric sales growth this year. Electric
system sales during the 12 months ended September 30, 1994 totaled 32.8
billion kWh, a 4.2 percent increase from 1993 levels. During the 12
months ended 1994 period, residential and commercial sales increased 2.0
percent and 2.8 percent respectively, while industrial sales increased 7.5
percent. Growth in the industrial sales was the strongest in the
automotive and chemical sectors.
The following table quantifies electric sales by customer type for the
periods ended September 30:
Electric Sales Millions of kWh
Quarter ended Nine months ended 12 months ended
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------
Residential 2,596 2,602 7,753 7,549 10,271 10,073
Commercial 2,487 2,449 6,920 6,718 9,110 8,866
Industrial 3,158 2,926 9,159 8,515 12,185 11,330
Sales for resale 304 316 964 869 1,237 1,201
--------------------------------------------------
System sales (a) 8,545 8,293 24,796 23,651 32,803 31,470
==========================================================================
(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 September 30,
1994 totaled $236 million, a $24 million decrease from the corresponding
1993 period. This decrease primarily reflects increased generation at
Consumers' nuclear power plants and the corresponding reduction in
purchased power. Power costs for the nine-month period ending September
30, 1994 totaled $723 million, a $50 million increase from the
corresponding 1993 period. Power costs for the 12-month period ending
September 30, 1994 totaled $958 million, a $61 million increase from the
corresponding 1993 period.
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. This loss included all fixed energy
amounts at issue in the arbitration proceedings discussed below. 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 $51
million for the first nine months of 1994. Consumers estimates that its
after-tax cash underrecoveries will total $65 million in 1994 and 1995,
decreasing slightly for 1996 and 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 are
estimated to be $5 million in 1994, $20 million in 1995, increasing
slightly for 1996 and 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. At September
30, 1994, Consumers has escrowed $25 million related to this issue.
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. It appears from the complaint 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. While management believes
that the possibility of the alleged damages being awarded is remote,
CMS Energy and Consumers are unable to predict the outcome of this issue.
In addition, CMS Holdings has filed a lawsuit in a local circuit court
seeking reimbursement of $7 million of certain tax indemnification
payments made to its partners in the FMLP and owed to CMS Holdings.
Consumers is unable to predict the outcome of this issue.
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. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings. For further
information regarding power purchases from the MCV Partnership, see Note
2.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility being developed by
Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to
substitute 65 MW of less expensive contract capacity from the MCV Facility
which Consumers is currently not authorized to recover from retail
customers. For further information, see Note 2.
PSCR Issues: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. From mid-February through mid-June 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. On November 9, 1994, the ALJ presiding over
the 1993 PSCR reconciliation proceeding issued a proposal for decision
that recommended a disallowance to Consumers related to the Palisades
outage of $4.2 million. CMS Energy had previously established a reserve
for this potential disallowance. For more information on the potential
impact of the outages, see Note 3.
Electric Rate Case: In May 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 filed a request with the MPSC on November 10, 1994,
to increase its retail electric rates in a range from $104.4 million to
$139.5 million annually. For further information, see Note 3.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. The MPSC has adopted a hearing schedule
that calls for briefs to be filed in December 1994. A final order is
expected in the first quarter of 1995.
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. The proceedings before the MPSC
have started and based on the criteria set out in the demand-side
management settlement agreement approved by the MPSC in 1992, Consumers
has achieved all the agreed-upon objectives. Consumers believes that the
MPSC will ultimately allow collection of the full $11 million incentive.
Accordingly, during the second quarter of 1994, Consumers recognized $11
million in revenue, related to its demand-side management program. A
final order from the MPSC is expected by mid-1995. 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 Consumers' electric
utility operations of $347 million for 1994, $333 million for 1995 and
$255 million for 1996. These amounts include an attributed portion of
anticipated capital expenditures for plant and equipment common to both
the electric and gas utility businesses.
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.
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 request, it has agreed to a 10-year retirement
period for certain equipment included in the EPA's request. Consumers
does not anticipate that any significant additional costs will be incurred
as a result of this agreement. For further information regarding electric
environmental matters, see Note 4.
Electric Outlook
In late 1993, the NRC completed a review of Consumers' performance at
Palisades that showed a decline in performance. To provide NRC senior
management with a more in-depth assessment of plant performance, the NRC
conducted a diagnostic evaluation inspection at Palisades. The inspection
evaluated all aspects of nuclear plant operation and management. The
inspection, completed in June 1994, found certain performance, operational
and management deficiencies at Palisades. The NRC acknowledged that the
new Palisades senior management team, in place since early 1994, had
recognized and begun to address the problems at Palisades. The NRC did
not place Palisades on either the NRC's "Troubled" or "Declining
Performance" list. In August 1994, Consumers filed its response to the
NRC's diagnostic evaluation report which included both short- and long-
term enhancements planned for Palisades to improve performance. Attaining
and maintaining acceptable performance at Palisades will require
continuing performance improvements and additional expenditures at the
plant, which have been included in Consumers' total planned level of
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 and Consumers' use
of the casks are now pending at the U.S. Sixth Circuit Court of Appeals
where oral argument was held during October 1994. If Consumers is unable
to continue to use the casks as planned, significant costs could be
incurred, including replacement power costs during any resulting plant
shutdown and costs to remove the spent fuel from the dry casks. If
Consumers cannot store fuel on-site in the dry casks, and if no off-site
storage is available, Palisades could be forced to cease operation as
early as mid-1995, when all fuel must be off-loaded for a ten-year
inspection of the reactor vessel. In order to address concerns raised
subsequent to the initial cask loading, Consumers and the NRC analyzed the
effects of seismic and other natural hazards on the support pad on which
the casks are placed, and concluded that the pad location is acceptable to
support the casks.
Consumers is required by NRC regulations to calculate and report to the
NRC, values relating to the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life. Preliminary analysis of more recent data from
testing of similar materials indicates that the Palisades reactor vessel
could exceed, prior to 2004, a temperature screening criterion established
in the regulations. Consumers is continuing to analyze this data and will
report its conclusions to the NRC in late November. Consumers is also
continuing to analyze alternative means to permit continued operation of
Palisades to the end of its license life in the year 2007. Consumers
cannot predict the outcome of these efforts. For further information
regarding Palisades, see Note 4.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. For further information
on nuclear decommissioning, see Note 4.
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. At
October 31, 1994, Consumers had 88 separate stray voltage lawsuits pending
(see Note 4).
Some of Consumers' larger industrial customers are exploring the
possibility, or have announced the intention, of constructing and
operating their own on-site generating facilities. Certain other
customers are also considering municipalization options. Consumers is
actively working with these customers to develop rate and service
alternatives designed to compete with these options. 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 most recent electric rate case, the MPSC reduced the level of
rate subsidization of residential customers by commercial and industrial
customers so as to further improve rate competitiveness for its largest
customers. Consumers has also requested MPSC authorization to offer
special rates to attract industrial and commercial customers into its
service territory and to retain certain customers using high amounts of
electricity that have expressed an intention and have the ability to
acquire energy from other sources (see Note 3).
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 does not expect this experiment to have a
material impact on its financial position or results of operations.
In July 1994, the FERC approved new 40-year licenses for 11 of Consumers'
hydroelectric plants, confirming planned environmental expenditures. In
issuing the licenses, the FERC approved, with modifications, a settlement
agreement signed by Consumers, the Attorney General, the DNR and other
state and federal officials. The agreement requires Consumers to make
payments and investments which could total $30 million over the license
periods for such things as environmental safeguards and fishery habitat
improvements.
Gas Utility Operations
Comparative Results of Operations
Gas Pretax Operating Income for the quarters ended September 30, 1994 and
1993: During the third quarter of 1994 gas pretax operating income
increased $2 million from the 1993 level. This increase reflects the
reversal of a gas cost contingency that was favorably resolved, partially
offset by lower gas sales, and higher gas operating costs which include
$7.5 million of SFAS 106 costs related to the gas settlement with the MPSC
(see Gas Utility Rates).
Gas Pretax Operating Income for the nine months ended September 30, 1994
and 1993: The $9 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and the favorable resolution of a previously
recorded gas cost contingency, partially offset by higher depreciation and
gas operating costs which include $7.5 million of SFAS 106 costs related
to the gas settlement with the MPSC (see Gas Utility Rates).
Gas Pretax Operating Income for the 12 months ended September 30, 1994 and
1993: The $26 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and the favorable resolution of a previously
recorded gas cost contingency. Increased operating costs reflect $7.5
million of SFAS 106 costs related to the gas settlement with the MPSC (see
Gas Utility Rates).
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended September 30:
In Millions
Impact on Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1994 Compared 1994 Compared 1994 Compared
to 1993 to 1993 to 1993
- ------------------------------------------------------------------------
Deliveries $(1) $12 $17
Regulatory recovery
of gas cost 13 14 21
O&M, general taxes
and depreciation (9) (14) (6)
Other (1) (3) (6)
-----------------------------------------
Total change $ 2 $ 9 $26
========================================================================
Gas Deliveries: Gas sales and gas transported during the third quarter of
1994 totaled 50.6 bcf, a 1.9 percent decrease from the corresponding 1993
level. For the nine months ended September 30, 1994, gas sales and gas
transported totaled 298.3 bcf, a 5.8 percent increase from the
corresponding 1993 level due largely to record cold winter weather. For
the 12 months ended September 30, 1994, gas sales and gas transported
totaled 424.2 bcf, a 5.4 percent increase from the corresponding 1993
level, also reflecting record cold winter weather.
The following table quantifies gas deliveries by customer type for the
periods ended September 30:
Gas Sales Thousands of Mcf
Quarter ended Nine months ended 12 months ended
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------
Residential 11,501 12,846 123,179 117,508 180,528 172,780
Commercial 3,405 3,547 39,642 37,357 58,165 55,344
Industrial 1,145 1,124 10,214 9,456 14,676 13,728
Other 21 73 262 182 311 248
---------------------------------------------------
Gas sales 16,072 17,590 173,297 164,503 253,680 242,100
Transportation
deliveries 12,559 12,257 51,946 49,787 72,636 69,186
Transportation for MCV 18,901 18,770 58,227 54,313 77,318 71,211
Off-system trans-
portation service 3,043 2,927 14,844 13,380 20,536 20,123
---------------------------------------------------
Total deliveries 50,575 51,544 298,314 281,983 424,170 402,620
==========================================================================
Cost of Gas Sold: The utility cost of gas sold for the third quarter of
1994 decreased $7 million from the 1993 level as a result of reduced
deliveries and lower costs per mcf. The utility cost of gas sold for the
nine months ended September 30 increased $2 million from the corresponding
1993 level. This increase reflects higher deliveries partially offset by
lower costs per mcf. The cost of gas sold for the 12 months ended
September 30 decreased $18 million from the corresponding 1993 level. 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
termination and expiration of high-cost contracts with certain Michigan
gas producers.
Gas Utility Rates
In July 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been resolved. The dispute revolved around
whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
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 $27 million of new plant
additions in 1993 and began collecting the revised rates designed to
provide annual revenues of $22 million, subject to refund and a hearing in
February 1994. In June 1994, the FERC approved a stipulation and
agreement in full settlement of the rate proceeding, which provides
Michigan Gas Storage with estimated annual revenues of $20 million. For
further information regarding gas utility rates, see Note 3.
Gas Capital Expenditures
CMS Energy estimates capital expenditures, including new lease
commitments, related to Consumers' gas utility operations of $132 million
for 1994, $125 million for 1995 and $115 million for 1996. These amounts
include an attributed portion of anticipated capital expenditures for
plant and equipment common to both the electric and gas utility
businesses.
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 manufactured gas plant 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 findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal.
However, Consumers does not believe that a single site is representative
of all of the sites. Data available to Consumers and its continued
internal review have resulted in an estimate for all costs related to
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At September 30,
1994, Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in 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 are recoverable 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. In
order to be recovered in rates, prudent costs must be approved in a rate
case. Any costs amortized in years prior to filing a rate case may not be
recoverable. The MPSC stated that the length of the amortization 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. Consumers has initiated discussions with
certain insurance companies regarding coverage for some or all of the
costs which may be incurred for these sites. Consumers plans to seek
recovery of remedial action costs in its gas rate case to be filed in
1994.
Oil and Gas Exploration and Production
Pretax Operating Income
Pretax operating income for the three months ended September 30, 1994
increased $7 million from the same period in 1993 reflecting the gain from
assignment of a gas supply contract, higher gas sales volumes and lower
international write-offs, partially offset by lower average market prices
for oil and gas. Pretax operating income for the nine months ended
September 30, 1994 increased $3 million from September 30, 1993 primarily
for the same reasons stated above. The twelve months ended September 30,
1994 pretax operating income decrease of $2 million from the comparable
period in 1993 reflects lower average market prices for oil and gas.
Capital Expenditures
In June 1994, NOMECO acquired for $22.5 million a working interest in the
Espinal block in Colombia, South America, from Sun Company, Inc. The
block is operated by LASMO Oil (Colombia) Limited. The other interest
holder is Empresa Colombiana de Pelroleos (Ecopetrol), the Colombian State
Oil Company. The block which includes 250,000 acres is currently
producing 5,000 barrels of oil per day and is expected to exceed 8,500
barrels per day later this year. NOMECO estimates the block to contain at
least 75 million barrels of proven oil reserves of which NOMECO's share is
nine million barrels, a 12.4 percent interest.
In September 1994, a consortium in which NOMECO is a 29 percent
participant was awarded the right to enter in to an agreement with
Maraven, S.A., a unit of the Venezuelan state oil company to develop the
Colon block in the Maracaibo basin of western Venezuela. The consortium
will spend at least $160 million over the next three years in a
development program involving reworking, re-equipping and re-entering
wells, and drilling new wells to optimize production from existing proved
reserves and to develop additional probable and possible reserves. Total
production from block is expected to exceed 30,000 barrels per day by
1997.
The 1994 capital expenditures also reflect pipeline and road construction
and development drilling in Ecuador. Production commenced in June 1994 and
is now averaging 23,000 barrels of oil per day from block 16 and the
adjoining Tivacuno block. Because of pipeline capacity constraints
production proration is in effect, and the blocks are currently officially
allocated approximately 12,000 barrels per day of pipeline capacity;
however, because of under utilization of pipeline capacity by other
producers, production has remained at 23,000 barrels per day and is not
expected to drop below that volume. Further, the Ministry of Energy and
Mines in Ecuador has recently informed NOMECO and other consortium members
that the Ministry will seek to renegotiate the Risk Service Contract and
other contracts governing the project. NOMECO cannot predict the outcome
of these negotiations. NOMECO holds a 14% working interest in block 16
and the Tivacuno block.
CMS Energy currently plans to invest $347 million for the years 1994
through 1996 in its oil and gas exploration and production operations.
These anticipated capital expenditures primarily reflect continued
development of Ecuador and Colombia oil, Michigan Antrim gas and further
reserve acquisition.
Independent Power Production
Pretax Operating Income
Pretax operating income for the three months ended September 30, 1994
increased $6 million from the 1993 period primarily reflecting higher
capacity sales from the MCV partnership, as well as additional equity
earnings by the CMS Generation subsidiaries due to the addition of new
electric generating capacity. Pretax operating income increased $7
million and $16 million for the nine and twelve months ended September 30,
1994, respectively over the comparable 1993 periods. These increases
reflect increases in subsidiary earnings and the addition of new electric
generating capacity.
Capital Expenditures
CMS Energy continued expansion of its independent power production segment
during the first nine months of 1994. In January, S.T./CMS Electric Co.,
an affiliate of CMS Generation, entered into 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 $450 million plant is currently scheduled to
begin in early 1995 with commercial operation scheduled in 1998.
CMS Generation will be the project manager and plant operator and will
hold a 40 percent ownership interest.
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.
In May 1994, CMS Generation 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 Electricity 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 currently expected
to begin in early 1995, with completion scheduled by early 1997. The
project is estimated to cost $300 million.
Also in May 1994, CMS Generation announced it had acquired a 25 percent
ownership interest in Magellan Utility Development Corporation, which is
developing a 300 MW coal-fired power project at Pinamucan in Batangas
Province, the Philippines. CMS Generation will be the project manager and
plant operator. Magellan Utility Development Corporation has signed a 25-
year power purchase agreement with the Manila Electric Company, the
largest private electric utility in the Philippines, for the plant's
entire electric output. Construction of the project is scheduled to begin
in early 1995. The plant is scheduled to be completed by year-end 1997 at
a cost of $300 million. The project has the potential to be expanded to
600 MW.
In June 1994, CMS Generation acquired a 41 percent ownership interest in
the Centrales Termicas Mendoza electric generating plant in western
Argentina's Mendoza Province. CMS Generation is the lead developer and
will become the plant operator. With major retrofitting and maintenance,
this facility has the potential to produce 382 MW of generating capacity
from oil and natural gas and currently sells 135 MW of capacity on the
Argentine wholesale electric market. Takeover of the plant occurred on
November 1, 1994.
In October 1994, CMS Generation entered into an agreement with Niagara
Mohawk Power Corporation for the acquisition of HYDRA-CO. HYDRA-CO holds
ownership in six major operating electric generating facilities and a
number of smaller plants totaling 835 MW of gross capacity and 285 MW of
net capacity. HYDRA-CO's plants are fueled by coal, natural gas, waste
wood and water (hydro). CMS Generation will acquire 100 percent of HYDRA-
CO's stock for cash using a combination of equity and bank or capital
market financing. The purchase price is between $200 and $215 million,
including approximately $50 million of current assets. Closing is
expected by the end of the year.
CMS Generation holds a 32.5 percent ownership interest in Toledo Power
Company which acquired two operating power plants totaling 135 MW of
generating capacity located on the island of Cebu in the Philippines.
CMS Generation is the plant operator of a consortium which purchased the
plants, and has become the operator of the 93 MW coal- and oil-fueled
Sangi station and the 42 MW oil-fired Carmen station.
CMS Energy currently plans to invest $498 million relating to its
independent power production operations for the years 1994 through 1996,
primarily in domestic and international subsidiaries and partnerships.
Natural Gas Pipeline Storage and Marketing
Pretax Operating Income
Pretax operating income remained constant for the three months ended
period September 1994 as compared to the comparable period for 1993 and
increased $2 million and $1 million for nine and twelve months ended
September 30, 1994 as compared to the 1993 periods, reflecting earnings
growth from gas pipeline and storage projects and gas marketed to end-
users.
Capital Expenditures
CMS Energy continued its expansion of its natural gas pipeline, storage
and marketing segment during 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. In October 1994,
Moss Bluff Gas Storage Systems completed an expansion of its storage
capacity creating an additional 0.5 bcf of working storage. CMS Gas
Transmission has also agreed to develop an additional 2.5 bcf salt cavern
at Moss Bluff which is expected to be in service by the beginning of the
winter of 1995-1996.
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.
In August 1994, CMS Gas Marketing acquired Natural Gas Services, Inc., an
Owensboro, Kentucky-based independent marketer of natural gas. Natural
Gas Services has been active since 1988 in Tennessee, Indiana, Illinois,
Ohio, South Carolina and Kentucky, providing gas marketing and consulting
services to a variety of end-users and natural gas utilities. CMS Gas
Marketing has acquired all of Natural Gas Services' assets and contracts.
In October 1994, CMS Gas Transmission reached a revised agreement with
MichCon to provide a gas treating service for up to 260 million cubic feet
per day of Antrim gas. Under the agreement CMS Gas Transmission, which
currently owns a 60 percent interest in two existing carbon dioxide
treating facilities, will purchase the remaining 40 percent interest in
the treating facilities from MCN Investment Corporation. CMS Gas
Transmission currently plans to expand this existing 120 million cubic
feet per day treating complex to accommodate new Antrim production. The
construction is scheduled to be completed in two phases, with phase I in
service by June 1995 and the final phase in service by December 1995.
This $22 million expansion will treat gas connected to a number of
gathering lines including CMS Gas Transmission's South Chester gathering
system and deliver gas to MichCon's Northern Michigan pipeline network.
Also in October 1994, CMS Gas Transmission announced that Peoples Gas
Light and Coke Company of Chicago have agreed to become storage customers
of the Grand Lacs Market Center under a five-year agreement commencing in
April 1995. The Grand Lacs Market Center, located in southeastern
Michigan's St. Clair County, will provide natural gas storage services,
peaking storage, wheeling, parking and other related natural gas services.
Under the agreement with Peoples Gas, Grand Lacs Market Center will
provide up to 150 million cubic feet per day of Michigan-based firm
storage service.
CMS Energy currently plans to invest $89 million for the years 1994
through 1996 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: Other income decreased $17 million and $35 million for the
third quarter of 1994 and the first nine months of 1994, respectively,
when compared to the corresponding 1993 periods, reflecting the impact of
the sale of the remaining MCV Bonds. The $311 million improvement in
Other Income when comparing the 12 months ended September 30, 1994 to the
corresponding 1993 period reflects the impact of the March, 1993
Settlement Order related to power purchases from the MCV Partnership. The
12 months ended September 30, 1993 included an after-tax $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.
New Accounting Standards: In October 1994, the FASB issued SFAS 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures, and SFAS 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. CMS Energy is
studying these statements, which are effective for year-end 1994 financial
statements, but does not expect either statement will have a material
impact on CMS Energy's financial position or results of operations.
(This page intentionally left blank)
<PAGE>
<PAGE> 44
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS
Energy Corporation) and subsidiaries as of September 30, 1994 and 1993,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month, nine-month and twelve-month
periods then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 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 LLP
Detroit, Michigan,
November 10, 1994.
<PAGE>
<PAGE> 45
<TABLE>
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1994 1993 1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric $ 573 $ 578 $1,667 $1,556 $2,188 $2,015
Gas 126 123 837 809 1,188 1,172
Other 6 1 9 4 11 -
---------------------------------------------------------
Total operating revenue 705 702 2,513 2,369 3,387 3,187
---------------------------------------------------------
OPERATING EXPENSES AND TAXES
Operation
Fuel for electric generation 80 83 230 224 299 294
Purchased power - related parties 119 124 359 344 482 469
Purchased and interchange power 37 53 134 105 177 134
Cost of gas sold 48 55 475 473 680 698
Other 145 121 408 367 556 506
---------------------------------------------------------
Total operation 429 436 1,606 1,513 2,194 2,101
Maintenance 45 51 136 149 190 203
Depreciation, depletion and amortization 75 72 243 233 327 319
General taxes 39 42 133 145 176 187
---------------------------------------------------------
Total operating expenses 588 601 2,118 2,040 2,887 2,810
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 107 98 281 231 336 249
Gas 5 3 106 96 156 130
Other 5 - 8 2 8 (2)
---------------------------------------------------------
Total pretax operating income 117 101 395 329 500 377
INCOME TAXES 30 31 109 92 132 106
---------------------------------------------------------
NET OPERATING INCOME 87 70 286 237 368 271
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
MCV Bond income - 8 - 24 8 33
Dividends from affiliates 4 4 12 12 17 16
Accretion income 3 4 10 11 13 15
Accretion expense (Note 2) (8) (9) (27) (27) (36) (27)
Loss on MCV power purchases - settlement - - - - - (520)
Other income taxes, net 3 9 10 19 16 199
Other, net 1 6 1 3 (1) (1)
---------------------------------------------------------
Total other income (deductions) 3 22 6 42 17 (285)
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 34 41 101 116 138 152
Other interest 4 6 9 16 16 24
Capitalized interest - - (1) (1) (1) (1)
---------------------------------------------------------
Net interest charges 38 47 109 131 153 175
---------------------------------------------------------
Net Income (Loss) 52 45 183 148 232 (189)
Preferred Stock Dividends 7 3 17 8 19 11
---------------------------------------------------------
NET INCOME (LOSS) AFTER DIVIDENDS ON PREFERRED STOCK $ 45 $ 42 $ 166 $ 140 $ 213 $ (200)
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 46
<TABLE>
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30 September 30
1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 183 $ 148 $ 232 $(189)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $37, $36,
$48 and $47, respectively) 243 233 327 319
Capital lease and other amortization 24 21 33 32
Deferred income taxes and investment tax credit 56 62 42 (155)
Accretion expense (Note 2) 27 27 36 27
Accretion income - abandoned Midland project (10) (11) (13) (15)
MCV power purchases - settlement (Note 2) (71) (64) (90) (64)
Loss on MCV power purchases - settlement (Note 2) - - - 520
Other (8) (2) (8) (6)
Changes in other assets and liabilities (95) (267) 47 (102)
------ ------ ------ ------
Net cash provided by operating activities 349 147 606 367
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (313) (321) (443) (474)
Investments in nuclear decommissioning trust funds (37) (36) (48) (47)
Deferred demand-side management costs (5) (42) (15) (54)
Cost to retire property, net (25) (24) (33) (25)
Sale of subsidiary - (14) - (14)
Other 2 (1) 1 (2)
Proceeds from sale of property 10 1 10 11
Proceeds from Midland-related assets - 13 309 13
Proceeds from loan to affiliate - - - 50
Proceeds from Bechtel settlement - - - 46
------ ------ ------ ------
Net cash used in investing activities (368) (424) (219) (496)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank loans (141) - (172) -
Retirement of bonds and other long-term debt (133) (640) (133) (640)
Payment of common stock dividends (113) (79) (167) (79)
Payment of capital lease obligations (23) (17) (30) (27)
Payment of preferred stock dividends (12) (8) (15) (11)
Proceeds from preferred stock 193 - 193 -
Increase (decrease) in notes payable, net 142 349 (164) 230
Contribution from stockholder 100 - 100 -
Proceeds from bonds - 644 - 644
------ ------ ------ ------
Net cash provided by (used in) financing activities 13 249 (388) 117
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (6) (28) (1) (12)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 13 36 8 20
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 7 $ 8 $ 7 $ 8
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 47
<TABLE>
Consumers Power Company
Consolidated Balance Sheets
<CAPTION>
September 30 September 30
1994 December 31 1993
(Unaudited) 1993 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Electric $5,523 $5,347 $5,225
Gas 1,894 1,837 1,774
Other 294 253 225
-----------------------------------
7,711 7,437 7,224
Less accumulated depreciation, depletion and amortization 3,751 3,550 3,509
-----------------------------------
3,960 3,887 3,715
Construction work-in-progress 279 248 363
----------------------------------
4,239 4,135 4,078
-----------------------------------
INVESTMENTS
Stock of affiliates (Note 7) 313 291 291
First Midland Limited Partnership (Note 2) 216 213 211
Midland Cogeneration Venture Limited Partnership (Note 2) 71 67 67
Other 8 6 8
-----------------------------------
608 577 577
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 7 13 8
Accounts receivable and accrued revenue, less
allowances of $4, $4 and $4, respectively (Note 8) 72 110 75
Accounts receivable - related parties 65 12 48
Inventories at average cost
Gas in underground storage 271 228 284
Materials and supplies 79 73 75
Generating plant fuel stock 33 41 30
Trunkline settlement (Note 3) 30 31 32
Postretirement benefits 25 25 25
Deferred income taxes 22 17 -
Investment in MCV Bonds - - 309
Prepayments and other 56 156 62
-----------------------------------
660 706 948
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 484 485 478
Nuclear decommissioning trust funds (Note 4) 204 165 152
Abandoned Midland project (Note 3) 151 162 165
Trunkline settlement (Note 3) 63 86 93
Other 309 235 223
-----------------------------------
1,211 1,133 1,111
-----------------------------------
TOTAL ASSETS $6,718 $6,551 $6,714
===================================
/TABLE
<PAGE>
<PAGE> 48
<TABLE>
<CAPTION>
September 30 September 30
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 (Note 8) 491 391 391
Revaluation capital (Note 7) 11 - -
Retained earnings since December 31, 1992 107 54 61
-----------------------------------
1,450 1,286 1,293
Preferred stock (Note 8) 356 163 163
Long-term debt 1,701 1,839 1,992
Non-current portion of capital leases 109 106 104
-----------------------------------
3,616 3,394 3,552
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 226 355 235
Accounts payable 137 148 147
Accounts payable - related parties 47 49 53
Notes payable 401 259 564
Accrued taxes 77 171 23
MCV power purchases - settlement (Note 2) 82 82 81
Accrued refunds 37 28 19
Accrued interest 27 39 32
Deferred income taxes - - 16
Other 180 183 166
-----------------------------------
1,214 1,314 1,336
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 545 485 418
Postretirement benefits 538 527 520
MCV power purchases - settlement (Note 2) 345 391 402
Deferred investment tax credit 182 190 191
Trunkline settlement (Note 3) 63 86 93
Regulatory liabilities for income taxes, net 20 6 51
Other (Note 4) 195 158 151
-----------------------------------
1,888 1,843 1,826
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,718 $6,551 $6,714
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 49
<TABLE>
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1994 1993 1994 1993 1994 1993
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
---------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 491 391 391 391 391 965
Quasi-reorganization (Note 8) - - - - - (574)
Stockholder's contribution (Note 8) - - 100 - 100 -
---------------------------------------------------------
At end of period 491 391 491 391 491 391
---------------------------------------------------------
REVALUATION CAPITAL (Note 7)
At beginning of period 11 - - - - -
Implementation of SFAS 115 - January 1, 1994 - - 20 - 20 -
Change in unrealized loss, net of tax - - (9) - (9) -
---------------------------------------------------------
At end of period 11 - 11 - 11 -
---------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period 93 41 54 - 61 (234)
Net income (loss) 52 45 183 148 232 (189)
Common stock dividends declared (31) (22) (113) (79) (167) (79)
Preferred stock dividends declared (7) (3) (17) (8) (19) (11)
Quasi-reorganization (Note 8) - - - - - 574
---------------------------------------------------------
At end of period 107 61 107 61 107 61
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,450 $1,293 $1,450 $1,293 $1,450 $1,293
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 50
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.
In September 1994, management announced that Consumers is being internally
reorganized into separate electric utility and gas utility strategic
business units. The restructuring, effective January 1, 1995, while not
affecting Consumers' consolidated financial statements or corporate legal
form, is designed to sharpen management focus, improve efficiency and
accountability in both business segments and better position Consumers for
growth in the gas market and to meet increased competition in the electric
power market. Management believes that the strategic business unit
structure will allow each unit to focus more on its own profitability and
growth potential, and will ultimately, in the long term, result in lower
overall costs.
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 September 30, 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' obligations for purchase of contract capacity from the MCV
Partnership under the PPA since 1992 follows:
1995 and
Year 1992 1993 1994 thereafter
- ---- ---- ----- ----- ----------
MW 915 1,023 1,132 1,240
Prior to 1993, the MPSC 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 cost 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 to third parties the remaining contract capacity, the
cost of which Consumers is currently not authorized to recover from retail
customers.
The PPA provides that Consumers is 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 which is 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 variable 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. Because the calculation
of the 1992 loss depended in part upon estimates of future unregulated
sales of energy to third parties, a more conservative or risk-free
investment rate of 7 percent was used to calculate $188 million of the
total $343 million after-tax loss. The remaining portion of the loss was
calculated using an 8.5 percent discount rate reflecting Consumers'
incremental borrowing rate as required by SFAS 90, Regulated Enterprises-
Accounting for Abandonments and Disallowances of Plant Costs. The after-
tax expense for the time value of money for the loss is estimated to be
$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 (in connection with a
dispute with the MCV Partnership discussed below), which are being
escrowed, totaled $51 million for the first nine months 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 $65 $65 $62 $61 $ 8
Possible additional
underrecoveries and losses (a) $ 5 $20 $20 $22 $72
======================================================================
(a) If unable to sell any capacity above the MPSC's authorized level.
At December 31, 1993, and September 30, 1994, the after-tax, present value
of the Settlement Order liability totaled $307 million and $277 million,
respectively. The reduction in the Settlement Order liability during 1994
reflects after-tax cash underrecoveries related to capacity totaling $47
million, partially offset by after-tax accretion expense of $17 million.
The PPA, while providing for 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 and
hearings are being conducted. 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.
At September 30, 1994, $25 million has been escrowed by Consumers and is
included as a non-current asset in Consumers' financial statements. 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 in connection with 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 the arbitration between the
MCV Partnership and Consumers discussed above. 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. It appears from the complaint 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. While
management believes that the possibility of the alleged damages being
awarded is remote, CMS Energy and Consumers are unable to predict the
outcome of this issue. In addition, CMS Holdings has filed a lawsuit in
the circuit court of Jackson, Michigan, seeking reimbursement of $7
million of certain tax indemnification payments made to its partners in
the FMLP and owed to CMS Holdings. Consumers is unable to predict the
outcome of this issue.
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. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility being developed by
Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to
substitute 65 MW of less expensive contract capacity from the MCV Facility
which Consumers is currently not authorized to recover from retail
customers. The proposed substitution of capacity which would start in
1997, the year the coal-fired cogeneration facility was scheduled to begin
operations, represents significant savings to Consumers' customers,
compared to the cost approved by the MPSC for a coal-fired cogeneration
facility. As a result, Consumers recorded a regulatory asset of $30
million, which it believes will ultimately be recoverable in rates.
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. The MPSC subsequently confirmed the recovery of MCV-related costs
consistent with the Settlement Order as part of the 1993 and 1994 PSCR
plan case orders.
3: Rate Matters
Electric Rate Case
In May 1994, the MPSC issued an order, granting Consumers a $58 million
annual increase in its retail electric rates. 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. Consequently, residential
customers were allocated $40 million, which is 70 percent of the rate
increase.
In November 1994, Consumers filed a request with the MPSC which could
increase its retail electric rates in a range from $104.4 million to
$139.5 million, depending upon the ratemaking treatment afforded sales
losses to competition and the treatment of the MCV contract capacity above
915 MW. The request includes recognition of increased expenditures
related to continuing construction activities and capital additions aimed
at maintaining and improving system reliability and increases in financing
costs. The filing addresses the ratemaking effect of jurisdictional sales
losses by assuming adoption of a proposed special nonjurisdictional rate
to large, qualifying industrial customers as requested by Consumers in an
earlier June 1994 filing with the MPSC. An alternative approach presented
would use the MCV contract capacity above 915 MW for jurisdictional
electric customers and offer discounted jurisdictional tariffs. Consumers
has also requested that the MPSC eliminate the rate cross-subsidization of
residential rates in a two-step adjustment. In addition, Consumers
proposes to eliminate all DSM expenditures after April 1995 and further
requests MPSC approval to recover all jurisdictional costs associated with
the proposed settlement of the proceedings concerning the operation of
Ludington.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. Certain other parties have subsequently
filed various alternative proposals. The MPSC has adopted a hearing
schedule that calls for briefs to be filed in December 1994. A final
order is expected in the first quarter of 1995.
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, filed claims of appeal with the
Court of Appeals regarding MPSC orders issued in 1991 that specified the
recovery of abandoned investment. Oral arguments took place before the
Court of Appeals in October 1994.
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. The estimated revenue
effects of the potential adjustment range from an $11 million increase to
a $22 million decrease. The proceedings before the MPSC have started and
based on the criteria set out in the demand-side management settlement
agreement approved by the MPSC in 1992, Consumers has achieved all the
agreed-upon objectives. Consumers believes that the MPSC will ultimately
allow collection of the full $11 million incentive. Accordingly, during
the second quarter of 1994, Consumers recognized $11 million in revenue,
related to its demand-side management program. A final order from the
MPSC is expected by mid-1995.
In October 1993, Consumers completed the customer participation portion of
these DSM 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 $65 million. 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 September 30, 1994 was $71
million.
PSCR Issues
On November 9, 1994, the ALJ presiding over the 1993 PSCR reconciliation
proceeding issued a proposal for decision in this case. Several issues
were included in this proposal for decision including issues related to a
planned refueling and maintenance outage which Consumers began at
Palisades in June 1993. Following several required, unanticipated repairs
that extended the outage, the plant returned to service in early November.
In addition, from mid-February through mid-June 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 were reviewed during the 1993
PSCR reconciliation of actual costs and revenues to determine the prudency
of actions taken during the outages. The 1994 outages will be reviewed as
part of that years reconciliation proceedings. Net replacement power
costs during the outages were approximately $180,000 per day above the
cost of fuel Consumers would have otherwise incurred when the plant is
operating. Consumers had conceded that one day of the 1993 outage was
inappropriate, while the MPSC staff has recommended a 20-day disallowance.
The ALJ proposed a disallowance of 22 days of outage totaling $4.2
million. CMS Energy had previously established a reserve for this
potential disallowance. See Note 4 for information regarding the NRC's
review of Palisades' performance.
Gas Rates
In July 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
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 $13 million of gas
supply costs incurred prior to February 8, 1993. Consumers previously had
accrued a loss for this issue in excess of the disallowed amount. 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 1992,
Consumers 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 September 30,
1994, Consumers' remaining liability and regulatory asset were $93
million.
Other
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been resolved. The dispute revolved around
whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
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
In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR
and certain other parties, signed an agreement in principle designed to
resolve all legal issues associated with fish mortality at Ludington. The
proposed settlement, which allows for the continued operation of the plant
through the end of its FERC license, will require Consumers and Detroit
Edison to continue using a seasonal barrier net as well as monitoring new
technology which may further reduce fish loss at the plant. The proposed
settlement also requires Consumers to make annual payments to the Great
Lakes Fishery Trust, develop and improve recreational areas and convey
undeveloped land to the State of Michigan and the Great Lakes Fishery
Trust. Upon approval of the settlement agreement, Consumers will transfer
land (with an original cost of $9 million and a fair market value in
excess of $20 million), make an initial payment of approximately $3
million and incur approximately $1 million of expenditures related to
recreational improvements. Future annual payments of approximately $1
million are also anticipated over the next 24 years and are intended to
enhance the fishery resources of the Great Lakes. The agreement is
subject to MPSC approval of Consumers being permitted to recover all such
settlement costs from electric customers, and approval by the FERC.
The proposed settlement would resolve a lawsuit filed by the Attorney
General in 1986 on behalf of the State of Michigan in the Circuit Court of
Ingham County, seeking damages from Consumers and Detroit Edison for
injuries to fishery resources because of the operation of the Ludington
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. Since 1986 the parties have continued to
dispute, in various courts, the amount of actual damages as well as the
best alternative to mitigate future damages.
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 manufactured gas plant 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 findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal.
However, Consumers does not believe that a single site is representative
of all of the sites. Data available to Consumers and its continued
internal review have resulted in an estimate for all costs related to
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At September 30,
1994, Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in 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 are recoverable 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.
In order to be recovered in rates, prudent costs must be approved in a
rate case. Any costs amortized in years prior to filing a rate case may
not be recoverable. The MPSC stated that the length of the amortization
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. Consumers has initiated
discussions with certain insurance companies regarding coverage for some
or all of the costs which may be incurred for these sites. Consumers
plans to seek recovery of remedial action costs in its gas rate case to be
filed in 1994.
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 current
regulations. Management believes that Consumers' annual operating costs
will not be materially affected.
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 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 in excess of $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. Consumers believes that the various claims are
different enough to warrant separate trials, and that the circuit court's
denial of class-action status will be upheld. A number of individuals who
would have been part of the class action have refiled their claims as
separate lawsuits. At October 31, 1994, Consumers had 88 separate stray
voltage lawsuits pending.
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 procedural requirements of the Atomic Energy Act and
the National Environmental Policy Act. 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 where oral argument was held during
October 1994. As of October 31, 1994, Consumers had loaded seven dry
storage casks with spent nuclear fuel and expects to load six additional
casks prior to Palisades' 1995 refueling. If Consumers is unable to
continue to use the casks as planned, significant costs could be incurred,
including replacement power costs during any resulting plant shutdown and
costs to remove the spent fuel from the dry casks. If Consumers cannot
store fuel on-site in the dry casks, and if no off-site storage is
available, Palisades could be forced to cease operation as early as mid-
1995, when all fuel must be off-loaded for a ten-year inspection of the
reactor vessel. In order to address concerns raised subsequent to the
initial cask loading, Consumers and the NRC each analyzed the effects of
seismic and other natural hazards on the support pad on which the casks
are placed, and concluded that the pad location is acceptable to support
the casks.
In August 1994, Consumers announced that it would unload and replace one
of the dry fuel storage casks at Palisades that contain spent nuclear
fuel. In examining radiographs during a review of the cask manufacturer's
quality assurance program, Consumers detected indications of minor flaws
in welds in the steel liner of one of the loaded casks. Although testing
has not disclosed any leakage from the cask, Consumers has nevertheless
decided to remove the spent fuel from this cask and insert it in another
cask. Consumers has examined the radiographs for all of its casks,
including the casks containing spent fuel, and has found all other welds
to be acceptable.
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 after the planned
outage showed a decline in performance ratings for the plant. In order to
provide NRC senior management with a more in-depth assessment of plant
performance, the NRC conducted a diagnostic evaluation inspection at
Palisades. The inspection evaluated all aspects of nuclear plant
operation and management. The inspection, completed in June 1994, found
certain performance, operational and management deficiencies at Palisades.
The NRC acknowledged that the new Palisades senior management team, in
place since early 1994, had recognized and begun to address the problems
at Palisades. The NRC did not place Palisades on either the NRC's
"Troubled" or "Declining Performance" list. In August 1994, Consumers
filed its response to the NRC's diagnostic evaluation report, which
included both short- and long-term enhancements planned for Palisades to
improve performance. Attaining and maintaining acceptable performance at
Palisades will require continuing performance improvements and additional
expenditures at the plant, which have been included in Consumers' total
planned levels of expenditures.
As the holder of a license to operate a pressurized-water reactor nuclear
power plant, Consumers is required by NRC regulations to calculate and
report to the NRC, values relating to the continuing ability of the
Palisades reactor vessel to withstand postulated "pressurized thermal
shock" events during its remaining license life, in light of the
embrittlement of reactor vessel materials over time due to operation in a
radioactive environment. If the results of the calculation indicate that
a temperature screening criterion established in the regulations will be
exceeded, Consumers must submit a safety analysis to determine what, if
any, plant modifications are necessary to prevent potential reactor vessel
failure as a result of postulated pressurized thermal shock events if
continued operation beyond the screening criterion value is allowed, and
the NRC will then decide whether to permit continued operation in excess
of the criterion. Consumers had previously submitted a calculation
indicating that the Palisades reactor vessel would not exceed the
screening criterion before the year 2004. Preliminary analysis of more
recent data from testing of similar materials indicates that the Palisades
reactor vessel could exceed the screening criterion prior to 2004.
Consumers is continuing to analyze this data and will report its
conclusions to the NRC in late November. Consumers is also continuing to
analyze alternative means to permit continued operation of Palisades to
the end of its license life in the year 2007. Consumers cannot predict
the outcome of these efforts.
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 $45 million annually. Consumers
currently estimates decommissioning costs of $220 million and $423
million, in 1994 dollars, for the Big Rock and Palisades nuclear plants,
respectively. Amounts collected from electric retail customers and
deposited in trusts, and earnings on the trusts, which are credited to
accumulated depreciation, are estimated to accumulate $425 million and
$1.2 billion for decommissioning Big Rock and Palisades, respectively.
The trust funds, which are estimated to earn 7.1 percent, will be used for
decommissioning Big Rock and Palisades at the end of their respective
license periods in 2000 and 2007. In order to meet NRC requirements for
decommissioning, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades which assumed that each plant site
will be restored to conform with the adjacent landscape, and that all
contaminated equipment will be disassembled and disposed of in a licensed
burial facility. Consumers is currently updating those estimates, and
expects that the decommissioning costs may increase, principally due to
the unavailability of low- and high-level radioactive waste disposal
facilities. The lack of an available disposal site could result in the
need to maintain the facilities in a mothballed state for a significant
period of time after retirement. Consumers expects to file updated
decommissioning estimates with the MPSC on or before March 31, 1995. At
September 30, 1994, Consumers had an investment in nuclear decommissioning
trust funds of $204 million for future decommissioning.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. In response to these
questions, the FASB has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed: annual
provisions for decommissioning could increase; estimated costs for
decommissioning could be recorded as a liability rather than as
accumulated depreciation; and trust fund income from the external
decommissioning trusts could be reported as investment income rather than
as a reduction to decommissioning expense.
Nuclear Insurance
Consumers, as a member of NML and NEIL and through the purchase of other
forms of nuclear insurance, maintains coverage against property damage,
debris removal, personal injury liability and other losses for damages
that could be incurred at its nuclear generating facilities. In the event
of covered losses at its own or any other participating nuclear facility,
Consumers could be subject to the following maximum assessments: $18
million in any one year under the NML and NEIL policies; $79 million per
incident under other forms of nuclear insurance and financial protection,
limited to a maximum payment of $10 million per incident in any one year;
and $6 million in the event of claims under insurance provisions of the
master workers program. Consumers considers the possibility of these
assessments to be remote. For further information regarding Consumers'
nuclear insurance, see Item 1. Business, contained in the 1993 Form 10-K
of Consumers.
Commitments for Coal and Gas Supplies
Consumers has entered into coal supply contracts with various suppliers
for its coal-fired generating stations. These contracts have expiration
dates that range from 1994 to 2004. Generally, Consumers contracts for
approximately 70% of its annual coal requirements which in 1993 totalled
approximately $260 million. Consumers supplements its long-term contracts
with spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1994 to 1999. Generally, Consumers contracts for approximately
75% of its annual gas requirements which in 1993 totalled approximately
$680 million. Consumers supplements its long-term contracts with spot-
market purchases to fulfill its gas needs.
Capital Expenditures
Consumers estimates capital expenditures, including demand-side management
and new lease commitments, of $479 million for 1994, $458 million for 1995
and $370 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.
Estimated losses for certain contingencies discussed in this note have
been accrued. 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: Effects of the Ratemaking Process
Consumers is subject to the provisions of SFAS 71, Accounting for the
Effects of Certain Types of Regulation. Regulatory assets represent
probable future revenue to Consumers associated with certain incurred
costs as these costs are recovered through the ratemaking process. The
following regulatory assets (liabilities) which include both current and
non-current amounts, are reflected in the Consolidated Balance Sheets:
In Millions
Sept. 30, 1994 Dec. 31, 1993 Sept. 30, 1993
- ----------------------------------------------------------------------
Postretirement benefits $ 509 $ 510 $ 503
Income taxes 180 189 154
Abandoned Midland project 151 162 165
Trunkline settlement 93 117 125
Demand-side management
- deferred costs 71 71 63
Environmental clean-up 40 - -
DOE - decommissioning
uranium enrichment facility 32 33 33
Power purchase termination 30 - -
Other 32 39 39
--------------------------------------
Total regulatory assets $1,138 $1,121 $1,082
======================================================================
Income taxes $ (199) $ (195) $ (205)
Demand-side management
- deferred revenue (19) (17) (17)
Other (1) - -
--------------------------------------
Total regulatory liabilities $ (219) $ (212) $ (222)
======================================================================
Consumers has MPSC orders to recover virtually all of its regulatory
assets through future rates and anticipates MPSC approval for recovery of
the remaining amounts.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with original maturities of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1994 1993 1994 1993
- ----------------------------------------------------------------------
Cash transactions
Interest paid (net
of amounts capitalized) $117 $144 $150 $190
Income taxes paid
(net of refunds) 64 125 30 55
Non-cash transactions
Nuclear fuel placed
under capital lease $ 18 $ 23 $ 24 $ 27
Other assets placed
under capital leases 11 28 12 46
Capital leases refinanced - 42 - 42
Assumption of debt - - - 15
======================================================================
7: 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 are recorded at fair
value, with any unrealized gains or losses included in earnings if the
securities are for trading purposes or as a separate component of
stockholders' equity if the securities are 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 (losses) for
available-for-sale securities at September 30, 1994, are as follows:
In Millions
Gross
Amortized Fair Unrealized
Available-for-sale securities Cost Value Gain (Loss)
- ----------------------------------------------------------------------
Common stock of CMS Energy $ 43 $ 64 $ 21
Nuclear decommissioning and
SERP investments 221 217 (4)
======================================================================
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.
8: Capitalization and Other
Debt
In October 1994, the FERC granted Consumers' request for authorization to
issue or guarantee up to $900 million of short-term debt through December
31, 1996. This is the same amount of short-term debt currently authorized
through 1994. Consumers has a $470 million facility to finance seasonal
working capital requirements and unsecured, committed lines of credit
aggregating $185 million. At September 30, 1994, Consumers had $300
million and $101 million, respectively, 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 applicable state and federal law. In the first quarter of 1994,
Consumers redeemed first mortgage bonds totaling $100 million. These
redemptions completed Consumers' commitment to the MPSC, under the 1993
authorization to issue first mortgage bonds, to refinance certain long-
term debt.
In January 1993, Consumers entered into an interest rate swap agreement,
exchanging variable-rate interest for a fixed-rate interest of 5.2 percent
on the latest maturing $250 million of the then remaining $500 million
obligation under its long-term credit agreement. The swap agreement has
the same term as the debt agreement and had the effect of increasing the
weighted average interest rate to 4.8 percent from 3.9 percent for the 12
month period ended December 31, 1993. The swap agreement will amortize
beginning in February 1995 and terminate in May 1996. At September 30,
1994, the outstanding balance of Consumers' long-term credit agreement
totaled $328 million. In November 1994, subsequent to MPSC authorization,
Consumers entered into a new $400 million unsecured, variable rate, five-
year term loan and subsequently used the proceeds to refinance the long-
term credit agreement discussed above and to reduce short-term borrowings.
Other
Consumers has an established $500 million trade receivables purchase and
sale program. At September 30, 1994, receivables sold under the agreement
totaled $210 million as compared to $285 million at December 31, 1993.
Accounts receivable and accrued revenue in the Consolidated Balance Sheets
have been reduced to reflect receivables sold.
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 rate of 8.32 percent. Net proceeds to Consumers
were $193 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.
In May 1994, Consumers received a $100 million equity investment from CMS
Energy. The investment was consistent with CMS Energy's plan to improve
Consumers' capital structure and was recognized and included in the
capitalization structure employed by the MPSC as part of Consumers' most
recent electric rate order.
At 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 during 1993. Consumers has continued paying common stock
dividends in 1994, including $16 million attributable to 1993 earnings,
and $97 million, attributable to current year earnings through September
30, 1994. In addition, in October 1994, Consumers declared a $36 million
common stock dividend payable in November 1994.
In January 1994, Consumers amended its nuclear fuel lease to include fuel
previously owned at Big Rock and further increased the maximum amount of
nuclear fuel that could be leased to $80 million. At September 30, 1994,
$61 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.
In October 1994, the FASB issued SFAS 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures, which amends SFAS
114, Accounting by Creditors for Impairment of a Loan. SFAS 114 provided
two alternatives for income recognition to be used for changes in the net
carrying amount of an impaired loan subsequent to the initial measure of
impairment. The creditor could recognize all changes in the net carrying
amount of the loan as an adjustment to bad-debt expense, or the creditor
could accrue interest on the net carrying amount of the impaired loan and
recognize other changes as an adjustment to bad-debt expense. SFAS 118
allows the use of any existing methods for recognizing interest income on
impaired loans.
In October 1994, the FASB also issued SFAS 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,
which requires added disclosures about the amounts, nature and terms of
derivatives. Derivatives are financial agreements whose returns are
linked to or derived from the performance of underlying assets such as
bonds, currencies or commodities.
Consumers is continuing to study SFAS 118 and SFAS 119, which are
effective for year-end 1994 financial statements, but does not expect
either statement will have a material impact on Consumers' financial
position or results of operations.
<PAGE>
<PAGE> 64
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.
In September 1994, management announced that Consumers is being internally
reorganized into separate electric utility and gas utility strategic
business units. The restructuring, effective January 1, 1995, while not
affecting Consumers' consolidated financial statements or corporate legal
form, is designed to sharpen management focus, improve efficiency and
accountability in both business segments and better position Consumers for
growth in the gas market and to meet increased competition in the electric
power market. Management believes that the strategic business unit
structure will allow each unit to focus more on its own profitability and
growth potential, and will ultimately, in the long term, result in lower
overall costs.
Consolidated earnings for the quarters ended September 30, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $45
million for the third quarter of 1994, compared to $42 million for the
corresponding third quarter of 1993. The increased net income reflects
increased electric sales resulting from Michigan's continuing economic
growth and increased revenue from the May 1994 electric rate increase.
Consolidated earnings for the nine months ended September 30, 1994 and
1993
Consolidated net income after dividends on preferred stock totaled $166
million for the nine months ended September 30, 1994, compared to $140
million for the nine months ended September 30, 1993. The increased net
income reflects increased electric sales resulting from increased motor
vehicle production, increased levels of employment and the overall strong
economic expansion in Consumers' service territory. Also, the increased
net income reflects increased gas deliveries due largely to record cold
winter weather. In addition, net income benefited from a mid-May 1994
electric rate increase.
Consolidated earnings for the 12 months ended September 30, 1994 and 1993
Consolidated net income after dividends on preferred stock totaled $213
million for the 12 months ended September 30, 1994, compared to a net loss
of $200 million for the 12 months ended September 30, 1993. The increased
net income reflects the impact of the 1993 Settlement Order related to the
cost recovery for power purchases from the MCV Partnership, the benefit of
increased electric sales and gas deliveries, and the impact of a mid-May
1994 electric rate increase.
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 generation, sale
and transmission of electricity. Cash from operations for the first nine
months of 1994 reflects the benefits of increased electric sales and
significantly higher gas deliveries.
Financing Activities
As a result of the 1992 quasi-reorganization (see Note 8 of the Condensed
Notes to Consolidated Financial Statements), and subsequent accumulated
earnings, Consumers resumed paying common stock dividends during 1993.
Consumers has continued paying common stock dividends in 1994, including
$16 million attributable to 1993 earnings, and $97 million attributable to
current year earnings through September 30, 1994. In October 1994,
Consumers declared a $36 million common stock dividend payable in November
1994.
During February and March 1994, Consumers continued to reduce its future
interest charges by retiring $100 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 $193 million from
the sale are being used for general corporate purposes, including debt
retirement and improvements to Consumers' distribution systems.
In November 1994, Consumers entered into a new $400 million unsecured,
variable rate, five-year term loan and subsequently used the proceeds to
refinance its long-term credit agreement (see Note 8) and to reduce short-
term borrowings.
Investing Activities
Capital expenditures (excluding assets placed under capital lease) and
deferred demand-side management costs totaled $318 million for the first
nine months of 1994 as compared to $363 million for the first nine months
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 $1.3 billion over the next three years.
Cash generated by operations is expected to satisfy a substantial portion
of these capital expenditures. The following estimates reflect Consumers'
current outage schedules for its nuclear plants and construction
expenditures to be included in its electric and gas rate requests which
are expected to be filed with the MPSC in late 1994.
In Millions
Years Ended December 31 1994 1995 1996
- ----------------------------------------------------------------------
Consumers
Construction (including DSM) $442 $402 $343
Nuclear fuel lease 4 37 4
Capital leases other than nuclear fuel 27 14 15
Michigan Gas Storage 6 5 8
------------------------
$479 $458 $370
======================================================================
Consumers' short-term sources of credit include a $470 million working
capital facility and unsecured, committed lines of credit totaling $185
million. At September 30, 1994, Consumers had $300 million and $101
million, respectively, outstanding under these facilities. Consumers has
also received FERC authorization to issue or guarantee up to $900 million
in short-term debt through December 31, 1996. This is the same amount of
short-term debt authorized through 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. At September 30, 1994, receivables sold totaled $210
million as compared to $285 million at December 31, 1993.
Electric Utility Operations
Comparative Results of Operations
Electric Pretax Operating Income for the quarters ended September 30, 1994
and 1993: During the third quarter of 1994, electric pretax operating
income increased $9 million from the 1993 level. This increase reflects
higher electric system sales related to economic growth, and the impact of
the May 1994 electric rate increase.
Electric Pretax Operating Income for the nine months ended September 30,
1994 and 1993: The $50 million improvement in 1994 electric pretax
operating income compared to 1993 primarily is the result of increased
electric system sales due in large part to Michigan's increased levels of
employment and overall economic expansion and the May 1994 electric rate
increase. Also, during the second quarter of 1994, Consumers recognized
$11 million in revenue, related to DSM, based on having achieved all
objectives agreed-upon with the MPSC (see Note 3).
Electric Pretax Operating Income for the 12 months ended September 30,
1994 and 1993: The $87 million improvement in 1994 electric pretax
operating income compared to 1993 primarily is the result of the 1993
resolution of the recoverability of MCV power purchase costs under the
PPA, increased electric system sales and the May 1994 electric rate
increase, partially offset by higher electric operating costs and
depreciation.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended
September 30:
In Millions
Impact on Pretax Operating Income
---------------------------------
Quarter ended Nine months ended 12 months ended
1994 Compared 1994 Compared 1994 Compared
to 1993 to 1993 to 1993
- ------------------------------------------------------------------------
Sales $7 $31 $37
Resolution of MCV
power cost issues - - 34
Rate increases and
other regulatory issues 11 29 39
O&M, general taxes
and depreciation (9) (10) (23)
----------------------------------------
Total change $ 9 $50 $87
========================================================================
Electric Sales: Electric system sales during the third quarter of 1994
totaled 8.5 billion kWh, a 3.0 percent increase from 1993 levels. During
the third quarter of 1994, residential sales decreased .2 percent,
commercial sales increased 1.6 percent, and industrial sales increased 7.9
percent, compared to the corresponding period in 1993. Consumers'
electric sales have benefited from improved employment and economic
conditions. Electric system sales during the nine months ended September
30, 1994 totaled 24.8 billion kWh, a 4.8 percent increase from 1993
levels. During the nine month 1994 period, residential and commercial
sales increased 2.7 percent and 3.0 percent respectively, while industrial
sales increased 7.6 percent. The industrial segments of chemicals,
primary metals, and transportation equipment contributed approximately
one-fourth of the total Company electric sales growth this year. Electric
system sales during the 12 months ended September 30, 1994 totaled 32.8
billion kWh, a 4.2 percent increase from 1993 levels. During the 12
months ended 1994 period, residential and commercial sales increased 2.0
percent and 2.8 percent respectively, while industrial sales increased 7.5
percent. Growth in the industrial sales was the strongest in the
automotive and chemical sectors.
The following table quantifies electric sales by customer type for the
periods ended September 30:
Electric Sales Millions of kWh
Quarter ended Nine months ended 12 months ended
1994 1993 1994 1993 1994 1993
- ------------------------------------------------------------------------
Residential 2,596 2,602 7,753 7,549 10,271 10,073
Commercial 2,487 2,449 6,920 6,718 9,110 8,866
Industrial 3,158 2,926 9,159 8,515 12,185 11,330
Sales for resale 304 316 964 869 1,237 1,201
------------------------------------------------------
System sales (a) 8,545 8,293 24,796 23,651 32,803 31,470
========================================================================
(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 September 30,
1994 totaled $236 million, a $24 million decrease from the corresponding
1993 period. This decrease primarily reflects increased generation at
Consumers' nuclear power plants and the corresponding reduction in
purchased power. Power costs for the nine-month period ending September
30, 1994 totaled $723 million, a $50 million increase from the
corresponding 1993 period. Power costs for the 12-month period ending
September 30, 1994 totaled $958 million, a $61 million increase from the
corresponding 1993 period.
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. This loss included all fixed energy
amounts at issue in the arbitration proceedings discussed below. 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 $51
million for the first nine months of 1994. Consumers estimates that its
after-tax cash underrecoveries will total $65 million in 1994 and 1995,
decreasing slightly for 1996 and 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 are
estimated to be $5 million in 1994, $20 million in 1995, increasing
slightly for 1996 and 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. At September
30, 1994, Consumers has escrowed $25 million related to this issue.
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. It appears from the complaint 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. While management believes
that the possibility of the alleged damages being awarded is remote,
CMS Energy and Consumers are unable to predict the outcome of this issue.
In addition, CMS Holdings has filed a lawsuit in a local circuit court
seeking reimbursement of $7 million of certain tax indemnification
payments made to its partners in the FMLP and owed to CMS Holdings.
Consumers is unable to predict the outcome of this issue.
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. The amount in
dispute, which relates to the period beginning in 1990 and continuing
through the term of the PPA, is estimated by the MCV Partnership to total
$8 million annually. The parties are in the process of selecting an
arbitrator and establishing a schedule for arbitration. Consumers cannot
predict the timing and outcome of these proceedings. For further
information regarding power purchases from the MCV Partnership, see Note
2.
In July 1994, Consumers paid $30 million to terminate a power purchase
agreement with a 65 MW coal-fired cogeneration facility being developed by
Michigan Cogeneration Partners. Consumers plans to seek MPSC approval to
substitute 65 MW of less expensive contract capacity from the MCV Facility
which Consumers is currently not authorized to recover from retail
customers. For further information, see Note 2.
PSCR Issues: Consumers experienced an extended refueling and maintenance
outage at Palisades during 1993. From mid-February through mid-June 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. On November 9, 1994, the ALJ presiding over
the 1993 PSCR reconciliation proceeding issued a proposal for decision
that recommended a disallowance to Consumers related to the Palisades
outage of $4.2 million. CMS Energy had previously established a reserve
for this potential disallowance. For more information on the potential
impact of the outages, see Note 3.
Electric Rate Case: In May 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 filed a request with the MPSC on November 10, 1994,
to increase its retail electric rates in a range from $104.4 million to
139.5 million annually. For further information, see Note 3.
Special Rates: In June 1994, Consumers also filed a request with the
MPSC, seeking approval of a plan to offer competitive, special rates to
certain large qualifying customers. Consumers proposes to offer the new
rates to customers using high amounts of electricity that have expressed
an intention to or are capable of terminating purchases of electricity
from Consumers and have the ability to acquire energy from alternative
sources. To serve these customers, Consumers would use power purchases
from the MCV Partnership which exceed the 915 MW currently recoverable
from electric retail customers. The MPSC has adopted a hearing schedule
that calls for briefs to be filed in December 1994. A final order is
expected in the first quarter of 1995.
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. The proceedings before the MPSC
have started and based on the criteria set out in the demand-side
management settlement agreement approved by the MPSC in 1992, Consumers
has achieved all the agreed-upon objectives. Consumers believes that the
MPSC will ultimately allow collection of the full $11 million incentive.
Accordingly, during the second quarter of 1994, Consumers recognized $11
million in revenue, related to its demand-side management program. A
final order from the MPSC is expected by mid-1995. 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 $347 million for 1994, $333 million for 1995 and
$255 million for 1996. These amounts include an attributed portion of
Consumers' anticipated capital expenditures for plant and equipment common
to both the electric and gas utility businesses.
Electric 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.
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 request, it has agreed to a 10-year retirement
period for certain equipment included in the EPA's request. Consumers
does not anticipate that any significant additional costs will be incurred
as a result of this agreement. For further information regarding electric
environmental matters, see Note 4.
Electric Outlook
In late 1993, the NRC completed a review of Consumers' performance at
Palisades that showed a decline in performance. To provide NRC senior
management with a more in-depth assessment of plant performance, the NRC
conducted a diagnostic evaluation inspection at Palisades. The inspection
evaluated all aspects of nuclear plant operation and management. The
inspection, completed in June 1994, found certain performance, operational
and management deficiencies at Palisades. The NRC acknowledged that the
new Palisades senior management team, in place since early 1994, had
recognized and begun to address the problems at Palisades. The NRC did
not place Palisades on either the NRC's "Troubled" or "Declining
Performance" list. In August 1994, Consumers filed its response to the
NRC's diagnostic evaluation report which included both short- and long-
term enhancements planned for Palisades to improve performance. Attaining
and maintaining acceptable performance at Palisades will require
continuing performance improvements and additional expenditures at the
plant, which have been included in Consumers' total planned level of
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 and Consumers' use
of the casks are now pending at the U.S. Sixth Circuit Court of Appeals
where oral argument was held during October 1994. If Consumers is unable
to continue to use the casks as planned, significant costs could be
incurred, including replacement power costs during any resulting plant
shutdown and costs to remove the spent fuel from the dry casks. If
Consumers cannot store fuel on-site in the dry casks, and if no off-site
storage is available, Palisades could be forced to cease operation as
early as mid-1995, when all fuel must be off-loaded for a ten-year
inspection of the reactor vessel. In order to address concerns raised
subsequent to the initial cask loading, Consumers and the NRC analyzed the
effects of seismic and other natural hazards on the support pad on which
the casks are placed, and concluded that the pad location is acceptable to
support the casks.
Consumers is required by NRC regulations to calculate and report to the
NRC, values relating to the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life. Preliminary analysis of more recent data from
testing of similar materials indicates that the Palisades reactor vessel
could exceed, prior to 2004, a temperature screening criterion established
in the regulations. Consumers is continuing to analyze this data and will
report its conclusions to the NRC in late November. Consumers is also
continuing to analyze alternative means to permit continued operation of
Palisades to the end of its license life in the year 2007. Consumers
cannot predict the outcome of these efforts. For further information
regarding Palisades, see Note 4.
The staff of the SEC has questioned certain accounting practices of the
electric utility industry, including Consumers, regarding the recognition,
measurement and classification of decommissioning costs for nuclear
generating stations in the financial statements. For further information
on nuclear decommissioning, see Note 4.
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. At
October 31, 1994, Consumers had 88 separate stray voltage lawsuits pending
(see Note 4).
Some of Consumers' larger industrial customers are exploring the
possibility, or have announced the intention, of constructing and
operating their own on-site generating facilities. Certain other
customers are also considering municipalization options. Consumers is
actively working with these customers to develop rate and service
alternatives designed to compete with these options. 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 most recent electric rate case, the MPSC reduced the level of
rate subsidization of residential customers by commercial and industrial
customers so as to further improve rate competitiveness for its largest
customers. Consumers has also requested MPSC authorization to offer
special rates to attract industrial and commercial customers into its
service territory and to retain certain customers using high amounts of
electricity that have expressed an intention and have the ability to
acquire energy from other sources (see Note 3).
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 does not expect this experiment to have a
material impact on its financial position or results of operations.
In July 1994, the FERC approved new 40-year licenses for 11 of Consumers'
hydroelectric plants, confirming planned environmental expenditures. In
issuing the licenses, the FERC approved, with modifications, a settlement
agreement signed by Consumers, the Attorney General, the DNR and other
state and federal officials. The agreement requires Consumers to make
payments and investments which could total $30 million over the license
periods for such things as environmental safeguards and fishery habitat
improvements.
Gas Utility Operations
Comparative Results of Operations
Gas Pretax Operating Income for the quarters ended September 30, 1994 and
1993: During the third quarter of 1994 gas pretax operating income
increased $2 million from the 1993 level. This increase reflects the
reversal of a gas cost contingency that was favorably resolved, partially
offset by lower gas sales, and higher gas operating costs which include
$7.5 million of SFAS 106 costs related to the gas settlement with the MPSC
(see Gas Utility Rates).
Gas Pretax Operating Income for the nine months ended September 30, 1994
and 1993: The $10 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and the favorable resolution of a previously
recorded gas cost contingency, partially offset by higher depreciation and
gas operating costs which include $7.5 million of SFAS 106 costs related
to the gas settlement with the MPSC (see Gas Utility Rates).
Gas Pretax Operating Income for the 12 months ended September 30, 1994 and
1993: The $26 million improvement in 1994 gas pretax operating income
compared to 1993 reflects higher gas deliveries (both sales and
transportation volumes) and the favorable resolution of a previously
recorded gas cost contingency. Increased operating costs reflect $7.5
million of SFAS 106 costs related to the gas settlement with the MPSC (see
Gas Utility Rates).
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended September 30:
In Millions
Impact on Pretax Operating Income
---------------------------------
Quarter ended Nine months ended 12 months ended
1994 Compared 1994 Compared 1994 Compared
to 1993 to 1993 to 1993
- ------------------------------------------------------------------------
Deliveries $(1) $12 $17
Regulatory recovery
of gas cost 13 14 21
O&M, general taxes
and depreciation (9) (14) (6)
Other (1) (2) (6)
----------------------------------------
Total change $ 2 $10 $26
========================================================================
Gas Deliveries: Gas sales and gas transported during the third quarter of
1994 totaled 50.6 bcf, a 1.9 percent decrease from the corresponding 1993
level. For the nine months ended September 30, 1994, gas sales and gas
transported totaled 298.3 bcf, a 5.8 percent increase from the
corresponding 1993 level due largely to record cold winter weather. For
the 12 months ended September 30, 1994, gas sales and gas transported
totaled 424.2 bcf, a 5.4 percent increase from the corresponding 1993
level, also reflecting record cold winter weather.
The following table quantifies gas deliveries by customer type for the
periods ended September 30:
Gas Sales Thousands of Mcf
Quarter ended Nine months ended 12 months ended
1994 1993 1994 1993 1994 1993
- ------------------------------------------------------------------------
Residential 11,501 12,846 123,179 117,508 180,528 172,780
Commercial 3,405 3,547 39,642 37,357 58,165 55,344
Industrial 1,145 1,124 10,214 9,456 14,676 13,728
Other 21 73 262 182 311 248
-------------------------------------------------------
Gas sales 16,072 17,590 173,297 164,503 253,680 242,100
Transportation
deliveries 12,559 12,257 51,946 49,787 72,636 69,186
Transportation
for MCV 18,901 18,770 58,227 54,313 77,318 71,211
Off-system
transportation
service 3,043 2,927 14,844 13,380 20,536 20,123
-------------------------------------------------------
Total deliveries 50,575 51,544 298,314 281,983 424,170 402,620
========================================================================
Cost of Gas Sold: The cost of gas sold for the third quarter of 1994
decreased $7 million from the 1993 level as a result of reduced deliveries
and lower costs per mcf. The cost of gas sold for the nine months ended
September 30 increased $2 million from the corresponding 1993 level. This
increase reflects higher deliveries partially offset by lower costs per
mcf. The cost of gas sold for the 12 months ended September 30 decreased
$18 million from the corresponding 1993 level. 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 termination and
expiration of high-cost contracts with certain Michigan gas producers.
Gas Utility Rates
In July 1994, the MPSC approved an agreement previously reached between
the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits computed under SFAS 106 against earnings over the
last six months of 1994. This charge against earnings will partially
offset costs related to state property taxes which have been reduced. The
agreement was reached in response to an assertion by the MPSC staff that
gas utility business earnings for 1993 were in excess of the currently
authorized level. The agreement also provides for an additional $4
million of 1995-related SFAS 106 costs to be charged against 1995 earnings
instead of being deferred. As part of the agreement, Consumers committed
to file a gas rate case before December 31, 1994, that will, among other
things, incorporate cost increases, including costs for postretirement
benefits computed under SFAS 106, into its retail gas rates. A final
order should be received approximately 9 to 12 months after the request is
filed. No assurance can be given as to the level of rates which will be
authorized by the MPSC. Consumers' gas distribution business is currently
authorized to earn a 13.25 percent rate of return on equity. Consumers'
most recent rate filing for its electric utility business resulted in an
approved rate of return on equity of 11.75 percent.
A dispute involving pricing under contracts Consumers had with eight
direct gas suppliers has been resolved. The dispute revolved around
whether the price Consumers pays Trunkline for gas was the proper
reference price for these eight gas supply contracts. Consumers and seven
of the suppliers have agreed to enter into new contracts, at negotiated
rates, with initial terms ranging from one to three years. Consumers and
the remaining supplier agreed to terminate their existing contract.
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 $27 million of new plant
additions in 1993 and began collecting the revised rates designed to
provide annual revenues of $22 million, subject to refund and a hearing in
February 1994. In June 1994, the FERC approved a stipulation and
agreement in full settlement of the rate proceeding, which provides
Michigan Gas Storage with estimated annual revenues of $20 million. 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 $132 million for 1994, $125
million for 1995 and $115 million for 1996. These amounts include an
attributed portion of Consumers' anticipated capital expenditures for
plant and equipment common to both the electric and gas utility
businesses.
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 manufactured gas plant 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 findings for the first remedial investigation indicate that the
expenditures for remedial action at this site are likely to be minimal.
However, Consumers does not believe that a single site is representative
of all of the sites. Data available to Consumers and its continued
internal review have resulted in an estimate for all costs related to
remedial action for all 23 sites of between $40 million and $140 million.
These estimates are based on undiscounted 1994 costs. At September 30,
1994, Consumers has accrued a liability for $40 million, representing the
minimum amount in the range. Any significant change in 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 are recoverable 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. In
order to be recovered in rates, prudent costs must be approved in a rate
case. Any costs amortized in years prior to filing a rate case may not be
recoverable. The MPSC stated that the length of the amortization 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. Consumers has initiated discussions with
certain insurance companies regarding coverage for some or all of the
costs which may be incurred for these sites. Consumers plans to seek
recovery of remedial action costs in its gas rate case to be filed in
1994.
Other
Other Income: Other income decreased $19 million and $36 million for the
third quarter of 1994 and the first nine months of 1994, respectively,
when compared to the corresponding 1993 periods, reflecting the impact of
the sale of the remaining MCV Bonds. The $302 million improvement in
Other Income when comparing the 12 months ended September 30, 1994 to the
corresponding 1993 period reflects the impact of the March, 1993
Settlement Order related to power purchases from the MCV Partnership. The
12 months ended September 30, 1993 included an after-tax $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.
New Accounting Standards: In October 1994, the FASB issued SFAS 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures, and SFAS 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. Consumers is
studying these statements, which are effective for year-end 1994 financial
statements, but does not expect either statement will have a material
impact on Consumers' financial position or results of operations.
<PAGE>
<PAGE> 76
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of developments that have
occurred in various judicial and administrative proceedings, many of which
are more fully described in CMS Energy's and Consumers' 1993 Forms 10-K
and in the Forms 10-Q for the quarter ended June 30, 1994. 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, 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. In August 1994, the MPSC denied
petitions for rehearing filed by Consumers and the Attorney General.
(b) 1994 Electric Rate Case Filing. In November 1994, Consumers filed a
request with the MPSC which could increase its retail electric rates in a
range from $104.4 million to $139.5 million, depending upon the ratemaking
treatment afforded sales losses to competition and the treatment of the
MCV contract capacity above 915 MW. The request includes recognition of
increased expenditures related to continuing construction activities and
capital additions aimed at maintaining and improving system reliability
and increases in financing costs. The filing addresses the ratemaking
effect of jurisdictional sales losses by assuming adoption of a proposed
special nonjurisdictional rate to large, qualifying industrial customers
as requested by Consumers in an earlier June 1994 filing with the MPSC.
An alternative approach presented would use the MCV contract capacity
above 915 MW for jurisdictional electric customers and offer discounted
jurisdictional tariffs. Consumers has also requested that the MPSC
eliminate the rate cross-subsidization of residential rates in a two-step
adjustment. In addition, Consumers proposes to eliminate all DSM
expenditures after April 1995 and further requests MPSC approval to
recover all jurisdictional costs associated with the proposed settlement
of the proceedings concerning the operation of Ludington.
(c) 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 (the "MCV Fixed Energy
Charge Arbitration"). 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 meaning of Exhibit C
to the PPA. That exhibit sets forth the methodology for calculation of
the energy charge payable under the PPA. This same exhibit is included in
many of Consumers' power purchase agreements with qualifying facilities
and has been consistently applied to all agreements. The MCV Partnership
maintains that Consumers has misapplied or misinterpreted Exhibit C since
commercial operation in March 1990 and has estimated that beginning in
1995 it should receive an increase in energy charge revenues of at least
$8 million on an annual basis. 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. The parties are in the process of selecting an
arbitrator and establishing a schedule. Consumers cannot predict the
timing or outcome of this arbitration.
(d) 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, Consumers commenced a lawsuit in State
Circuit Court in Midland County, Michigan seeking declaratory and
injunctive relief with respect to interpretation of the PPA. On July 26,
1994, at the request of the parties, the federal district court in New
York transferred the case to the suspense docket pending completion of the
MCV Fixed Energy Charge Arbitration. While management believes the
possibility of the alleged damages being awarded in this suit is remote,
CMS Energy and Consumers are unable to predict the outcome of this action.
In addition, on March 23, 1994, CMS Holdings filed suit in Circuit Court
in Jackson County, Michigan to obtain a refund of tax indemnity payments
owed to CMS Holdings by the other partners in First Midland Limited
Partnership pursuant to a partnership tax indemnification agreement. In
the suit CMS Holdings is 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. One of the partners in First Midland
Limited Partnership has paid approximately $1 million of the $8 million
originally in dispute, but the remaining partners have failed to pay their
proportional parts of 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 federal court action. Consumers is
unable to predict the outcome of this action.
(e) Retail Wheeling Proceedings. 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. Under the schedule currently set for
proceedings on the appropriate retail wheeling rates and charges, the
utilities filed their direct cases in August 1994. Cross examination
began in November 1994. Under this schedule, a proposal for decision
would not be issued before mid-1995.
(f) 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.
Subsequent to the filing of this appeal and the submission of the
plaintiffs brief on this issue, the Court of Appeals on its own motion
issued an order which decided that since the lead case in the class action
suit had not been dismissed, the trial court's decision to deny class
certification was an interlocutory order and therefore not ripe for
appeal. The Court of Appeals Order also found that the trial court's
decision that the other named plaintiffs had been misjoined was final and
ripe for appeal. This issue had not been raised in the plaintiffs appeal
or brief. Consumers has addressed both issues in its brief filed with the
Court of Appeals on July 14, 1994 in support of the trial court's
decision. A number of individuals who would have been part of the class
action have refiled their claims as separate lawsuits. At November 4,
1994, Consumers had 84 separate stray voltage cases pending.
(g) Request for Approval of a Competitive "Rate K" Tariff. On June 15,
1994, Consumers filed an application with the MPSC seeking approval of a
competitive contract service tariff. This tariff would allow Consumers to
negotiate special rates with certain large customers who would otherwise
be likely to terminate or reduce their purchases of electricity from
Consumers in favor of some alternative source of power. The tariff would
also allow Consumers to sell all or some portion of the 325 MW block of
capacity Consumers is obligated to purchase from the MCV Partnership in
excess of the 915 MW for which the MPSC has allowed cost recovery.
Consumers requested in its application that the sale of the 325 MW block
be treated for accounting and ratemaking purposes on a non-jurisdictional
basis. On June 30, 1994, the MPSC adopted a hearing schedule for the
Rate K request, which has subsequently been extended. In accordance with
the current schedule, Consumers filed its direct case on July 21, 1994 and
cross-examination of all witnesses is to commence on November 21, 1994.
The schedule would allow for a final order in the first quarter of 1995.
(h) Palisades Plant - Spent Nuclear Fuel Storage. In April 1993, the NRC
amended its regulations, effective May 7, 1993, to license the design of
the dry spent fuel storage casks to be 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 procedural requirements of
the Atomic Energy Act and the National Environmental Policy Act. The
courts have declined to prevent such use and have refused to issue
temporary restraining orders or stays. Several appeals related to this
matter are now pending at the U.S. Sixth Circuit Court of Appeals where
oral argument was held during October 1994. As of October 31, 1994,
Consumers had loaded seven dry storage casks with spent nuclear fuel and
expects to load six additional casks prior to Palisades' 1995 refueling
outage.
On August 2, 1994 Consumers announced that it will unload and replace one
of the four dry storage casks previously loaded because of minor flaws
detected in the welds in the liner of the cask. Although testing
following cask loading did not disclose any leakage from the cask,
Consumers has nevertheless decided to remove the spent fuel from the cask
and insert it in another cask. Consumers has examined the radiographs for
all of the casks fabricated for it to date, and has found all other welds
acceptable.
(i) Ludington Pumped Storage Plant. In October 1994, Consumers, Detroit
Edison, the Attorney General, the DNR and certain other parties, signed an
agreement in principle designed to resolve all legal issues associated
with fish mortality at Ludington. The proposed settlement, which allows
for the continued operation of the plant through the end of its FERC
license, will require Consumers and Detroit Edison to continue using a
seasonal barrier net as well as monitoring new technology which may
further reduce fish loss at the plant. The proposed settlement also
requires Consumers to make annual payments to the Great Lakes Fishery
Trust, develop and improve recreational areas and convey undeveloped land
to the State of Michigan and the Great Lakes Fishery Trust. Upon approval
of the settlement agreement, Consumers will transfer land (with an
original cost of $9 million and a fair market value in excess of $20
million), make an initial payment of approximately $3 million and incur
approximately $1 million of expenditures related to recreational
improvements. Future annual payments of approximately $1 million are also
anticipated over the next 24 years and are intended to enhance the fishery
resources of the Great Lakes. The agreement is subject to MPSC approval
of Consumers being permitted to recover all such settlement costs from
electric customers, and approval by the FERC.
The proposed settlement would resolve a lawsuit filed by the Attorney
General in 1986 on behalf of the State of Michigan in the Circuit Court of
Ingham County, seeking damages from Consumers and Detroit Edison for
injuries to fishery resources because of the operation of the Ludington
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. Since 1986 the parties have continued to
dispute, in various courts, the amount of actual damages as well as the
best alternative to mitigate future damages.
(j) 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. In the Step 3A appeal, the Attorney
General and ABATE contend that Consumers did not fully comply with the
financial stabilization orders. Oral arguments were held on the appeals
from the May 7 Sept 3A order in December 1993 and on the Step 3B appeal on
October 19, 1994. A decision on the Step 3A appeals has been held in
abeyance until a decision is rendered in the Step 3B appeals.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15) - CMS Energy: Letter of independent public accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(b) Reports on Form 8-K
Current Reports on Form 8-K dated August 18, 1994 and October 5, 1994
(CMS Energy Corporation and Consumers Power Company) covering matters
pursuant to "Item 5. Other Events".
<PAGE>
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
-------------------------
(Registrant)
Date: November 14, 1994 By A M Wright
-------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer
and Treasurer
CONSUMERS POWER COMPANY
-------------------------
(Registrant)
Date: November 14, 1994 By A M Wright
-------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE>
EXHIBIT (12)<PAGE>
<PAGE>
<TABLE>
CMS ENERGY CORPORATION EXHIBIT (12)
Ratio of Earnings to Fixed Charges
(Millions of Dollars)
<CAPTION>
Nine Months
Ended Years Ended December 31
Sept. 30, 1994 1993 1992 1991 1990 1989
-------------- ------ ------ ------ ------ ------
(b) (c)(d) (e)
<S> <C> <C> <C> <C> <C> <C>
Earnings as defined (a)
- -----------------------
Net income $ 148 $ 155 $(297) $(262) $(494) $ 312
Income taxes 88 75 (146) (94) 25 170
Exclude equity basis subsidiaries (12) (6) 10 10 13 1
Fixed charges as defined, adjusted to
exclude capitalized interest of $5,
$5, $3, $5, $38 and $177 million for
the nine months ended September 30, 1994
and for the years ended December 31,
1993, 1992, 1991, 1990 and 1989,
respectively 173 245 228 364 317 207
------ ------ ------ ------ ------ ------
Earnings as defined $ 397 $ 469 $(205) $ 18 $(139) $ 690
====== ====== ====== ====== ====== ======
Fixed charges as defined (a)
Interest on long-term debt $ 142 $ 204 $ 169 $ 274 $ 293 $ 314
Estimated interest portion of lease rental 9 12 16 17 18 15
Other interest charges 10 23 35 68 33 33
Include equity basis subsidiaries - - - - - 3
Preferred stock dividend 26 17 16 15 17 28
------ ------ ------ ------ ------ ------
Fixed charges as defined $ 187 $ 256 $ 236 $ 374 $ 361 $ 393
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges 2.12 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>
Exhibit (15)
ARTHUR ANDERSEN LLP
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
its Registration Statements No. 33-51877, No. 33-55805, No. 33-9732, No.
33-29681, No. 33-47629, and No. 33-64044 its Form 10-Q for the quarter
ended September 30, 1994, which includes our report dated November 8,
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 LLP
Detroit, Michigan,
November 10, 1994.
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET AND
STATEMENT OF STOCKHOLDERS' EQUITY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000811156
<NAME> CMS ENERGY CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,216
<OTHER-PROPERTY-AND-INVEST> 1,004
<TOTAL-CURRENT-ASSETS> 670
<TOTAL-DEFERRED-CHARGES> 1,271
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,161
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 1,695
<RETAINED-EARNINGS> (608)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,085
0
356
<LONG-TERM-DEBT-NET> 2,014
<SHORT-TERM-NOTES> 401
<LONG-TERM-NOTES-PAYABLE> 364
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 200
0
<CAPITAL-LEASE-OBLIGATIONS> 118
<LEASES-CURRENT> 38
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,582
<TOT-CAPITALIZATION-AND-LIAB> 7,161
<GROSS-OPERATING-REVENUE> 2,705
<INCOME-TAX-EXPENSE> 88
<OTHER-OPERATING-EXPENSES> 2,297
<TOTAL-OPERATING-EXPENSES> 2,394
<OPERATING-INCOME-LOSS> 311
<OTHER-INCOME-NET> (8)
<INCOME-BEFORE-INTEREST-EXPEN> 312
<TOTAL-INTEREST-EXPENSE> 147
<NET-INCOME> 165
17
<EARNINGS-AVAILABLE-FOR-COMM> 148
<COMMON-STOCK-DIVIDENDS> 49
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 424
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<PAGE>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND
STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000201533
<NAME> CONSUMERS POWER COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,216
<OTHER-PROPERTY-AND-INVEST> 631
<TOTAL-CURRENT-ASSETS> 660
<TOTAL-DEFERRED-CHARGES> 1,211
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,718
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 491
<RETAINED-EARNINGS> 107
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,450
0
356
<LONG-TERM-DEBT-NET> 1,556
<SHORT-TERM-NOTES> 401
<LONG-TERM-NOTES-PAYABLE> 145
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 189
0
<CAPITAL-LEASE-OBLIGATIONS> 109
<LEASES-CURRENT> 37
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,486
<TOT-CAPITALIZATION-AND-LIAB> 6,718
<GROSS-OPERATING-REVENUE> 2,513
<INCOME-TAX-EXPENSE> 99
<OTHER-OPERATING-EXPENSES> 2,118
<TOTAL-OPERATING-EXPENSES> 2,227
<OPERATING-INCOME-LOSS> 286
<OTHER-INCOME-NET> (4)
<INCOME-BEFORE-INTEREST-EXPEN> 292
<TOTAL-INTEREST-EXPENSE> 109
<NET-INCOME> 183
17
<EARNINGS-AVAILABLE-FOR-COMM> 166
<COMMON-STOCK-DIVIDENDS> 113
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 349
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<PAGE>
</TABLE>
<PAGE>
- --------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION
AND
CONSUMERS POWER COMPANY
FORM 10-Q
EXHIBITS
FOR QUARTER ENDED SEPTEMBER 30, 1994
- --------------------------------------------------------------------------
<PAGE>
<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 accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
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