<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS POWER COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-0550
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common
stock at October 31, 1995:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 91,130,675
CMS Energy Class G Common Stock, no par value 7,586,724
Consumers Power Company, $10 par value, privately
held by CMS Energy 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, 1995
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. . . . . . . . . . . . . . . . . 24
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . . . . 40
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 42
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 43
Consolidated Statements of Common Stockholder's Equity. . . . . . . . 45
Condensed Notes to Consolidated Financial Statements. . . . . . . . . 46
Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 55
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 66
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 69
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
<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
Antrim. . . . . . . . . . . . . . . Antrim Limited Partnership
Attorney General. . . . . . . . . . The Michigan Attorney General
bcf . . . . . . . . . . . . . . . . Billion cubic feet
Board of Directors. . . . . . . . . Board of Directors of CMS Energy
Class G Common Stock. . . . . . . . One of two classes of common stock of
CMS Energy, no par value, which
reflects the separate performance of
the Consumers Gas Group
Clean Air Act . . . . . . . . . . . Federal Clean Air Act as amended on
November 15, 1990
CMS Energy. . . . . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . . . . One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas Transmission. . . . . . . . CMS Gas Transmission and Storage
Company, a subsidiary of Enterprises
CMS Generation. . . . . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . . . . CMS Midland Holdings Company, a
subsidiary of Consumers
CMS Midland . . . . . . . . . . . . CMS Midland Inc., a subsidiary of
Consumers
CMS NOMECO. . . . . . . . . . . . . CMS NOMECO Oil & Gas Co., a wholly
owned subsidiary of Enterprises
CMS NOMECO Common Stock . . . . . . Common Stock of CMS NOMECO
Common Stock. . . . . . . . . . . . Common Stock of CMS Energy, including
CMS Energy Common Stock and Class G
Common Stock
Consumers . . . . . . . . . . . . . Consumers Power Company, a subsidiary
of CMS Energy
Consumers Gas Group . . . . . . . . The gas distribution, storage and
transportation businesses currently
conducted by Consumers and Michigan
Gas Storage
Court of Appeals. . . . . . . . . . Michigan Court of Appeals
Credit Facility . . . . . . . . . . $400 million unsecured revolving
credit and letter of credit facility
dated as of July 29, 1994
Detroit Edison. . . . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . . . Michigan Department of Natural
Resources
DSM . . . . . . . . . . . . . . . . Demand-side management
Enterprises . . . . . . . . . . . . CMS Enterprises Company, a subsidiary
of CMS Energy
Environmental Response Act. . . . . Michigan Environmental Response Act
FASB. . . . . . . . . . . . . . . . Financial Accounting Standards Board
FERC. . . . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . . . Gas cost recovery
HYDRA-CO. . . . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a
subsidiary of CMS Generation and
former independent power production
subsidiary of Niagara Mohawk Power
Corporation
kWh . . . . . . . . . . . . . . . . Kilowatt-hour
Ludington . . . . . . . . . . . . . Ludington pumped storage plant,
jointly owned by Consumers and Detroit
Edison
MCV . . . . . . . . . . . . . . . . Midland Cogeneration Venture
MCV Facility. . . . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the
MCV Partnership
MCV Partnership . . . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . . . . Management's Discussion and Analysis
MichCon . . . . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage. . . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
MMcf/d. . . . . . . . . . . . . . . Million cubic feet per day
MMCG. . . . . . . . . . . . . . . . Michigan Municipal Cooperative Group
MPSC. . . . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . . . Megawatts
NEIL. . . . . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NML . . . . . . . . . . . . . . . . Nuclear Mutual Ltd.
NOPR. . . . . . . . . . . . . . . . Notice of proposed rulemaking
North Michigan. . . . . . . . . . . North Michigan Land & Oil
NRC . . . . . . . . . . . . . . . . Nuclear Regulatory Commission
O&M . . . . . . . . . . . . . . . . Other operation and maintenance
expense
Palisades . . . . . . . . . . . . . Palisades nuclear plant, owned by
Consumers
PPA . . . . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with
a 35-year term commencing in March
1990
Preferred Stock . . . . . . . . . . CMS Energy preferred stock
PSCR. . . . . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . . . . Public Utility Holding Company Act of
1935
Restated Articles of
Incorporation. . . . . . . . . . . CMS Energy's restated Articles of
Incorporation as filed with the
Michigan Department of Commerce June
6, 1995 authorizing the Class G Common
Stock and increasing the authorized
capital stock
Retained Interest Shares. . . . . . The interest in the businesses
attributed to the Consumers Gas Group
that is not held by the holders of the
outstanding shares of Class G Common
Stock
SEC . . . . . . . . . . . . . . . . Securities and Exchange Commission
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
SGP Partnership . . . . . . . . . . Specialty gas processors limited
partnership composed of CMS Gas
Transmission and Nitrotec Helium
Corporation
SFAS. . . . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Terra . . . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas
exploration and production company
located in Traverse City, Michigan
TGN . . . . . . . . . . . . . . . . CMS Gas Transmission's 25 percent
ownership in Argentina's
Transportadora de Gas del Norte S. A.
Walter. . . . . . . . . . . . . . . Walter International, Inc., an oil and
gas exploration and production company
located in Houston, Texas
<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, 1995 and 1994, 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, 1994, 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
31, 1995 (except with respect to certain matters discussed in Notes 2, 3,
7 and 13 to the consolidated financial statements as to which the date is
June 9, 1995), 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, 1994, 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 9, 1995
<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
1995 1994 1995 1994 1995 1994
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 640 $ 573 $1,723 $1,667 $2,246 $2,188
Gas utility 122 126 801 837 1,116 1,188
Oil and gas exploration and production 26 25 82 59 101 76
Independent power production 25 13 71 30 87 37
Natural gas transmission, storage and marketing 52 28 133 106 171 143
Other 4 1 11 2 13 3
---------------------------------------------------------
Total operating revenue 869 766 2,821 2,701 3,734 3,635
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 74 80 208 230 284 299
Purchased power - related parties 124 119 369 359 492 482
Purchased and interchange power 72 37 154 134 182 177
Cost of gas sold 93 71 536 566 755 803
Other 168 163 491 456 656 632
---------------------------------------------------------
Total operation 531 470 1,758 1,745 2,369 2,393
Maintenance 48 46 139 138 192 193
Depreciation, depletion and amortization 96 85 302 272 410 372
General taxes 45 40 143 138 189 182
---------------------------------------------------------
Total operating expenses 720 641 2,342 2,293 3,160 3,140
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 125 107 295 281 346 335
Gas utility 2 4 110 106 139 156
Oil and gas exploration and production 5 7 27 11 24 6
Independent power production 13 8 40 13 48 13
Natural gas transmission, storage and marketing 4 2 9 8 10 9
Other - (3) (2) (11) 7 (24)
---------------------------------------------------------
Total pretax operating income 149 125 479 408 574 495
---------------------------------------------------------
INCOME TAXES 32 26 111 97 118 100
---------------------------------------------------------
NET OPERATING INCOME 117 99 368 311 456 395
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 3 3 9 10 12 13
Accretion expense (Note 2) (7) (8) (23) (27) (32) (36)
Other income taxes, net 3 3 8 9 10 7
Other, net (1) 2 6 9 17 18
---------------------------------------------------------
Total other income (deductions) (2) - - 1 7 2
---------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 55 49 168 142 218 191
Other interest 8 5 17 10 25 18
Capitalized interest (2) (2) (4) (5) (5) (6)
Preferred dividends 7 7 21 17 28 19
---------------------------------------------------------
Net fixed charges 68 59 202 164 266 222
---------------------------------------------------------
NET INCOME $ 47 $ 40 $ 166 $ 148 $ 197 $ 175
=========================================================
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS
CMS ENERGY $ 48 $ 40 $ 167 $ 148 $ 198 $ 175
=========================================================
CLASS G $ (1) $ - $ (1) $ - $ (1) $ -
=========================================================
AVERAGE COMMON SHARES OUTSTANDING
CMS ENERGY 89 86 88 86 88 85
=========================================================
CLASS G 7 - 7 - 7 -
=========================================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
CMS ENERGY $ .54 $ .46 $ 1.90 $ 1.73 $ 2.26 $ 2.05
=========================================================
CLASS G $ (.17) $ - $ (.17) $ - $ (.17) $ -
=========================================================
DIVIDENDS DECLARED PER COMMON SHARE
CMS ENERGY $ .24 $ .21 $ .66 $ .57 $ .87 $ .75
=========================================================
CLASS G $ .28 $ - $ .28 $ - $ .28 $ -
=========================================================
<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
1995 1994 1995 1994
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166 $ 148 $ 197 $ 175
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $38, $37,
$51 and $48, respectively) 302 272 410 372
Capital lease and other amortization 26 25 37 34
Debt discount amortization 24 28 33 38
Deferred income taxes and investment tax credit 65 61 60 40
Accretion expense 23 27 32 36
Accretion income - abandoned Midland project (9) (10) (12) (13)
MCV power purchases - settlement (Note 2) (102) (71) (118) (90)
Other (35) (13) (46) (15)
Changes in other assets and liabilities (71) (43) (16) 85
------ ------ ------ ------
Net cash provided by operating activities 389 424 577 662
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (527) (415) (687) (584)
Investments in partnerships and unconsolidated subsidiaries (174) (40) (187) (66)
Investments in nuclear decommissioning trust funds (38) (37) (51) (48)
Cost to retire property, net (28) (25) (41) (33)
Deferred demand-side management costs (7) (5) (11) (15)
Proceeds from sale of property 1 10 11 10
Reduction of investments in MCV Bonds - - - 309
Other (7) (5) (6) (8)
------ ------ ------ ------
Net cash used in investing activities (780) (517) (972) (435)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 211 178 733 186
Issuance of common stock 148 24 154 148
Increase (decrease) in notes payable, net 135 142 74 (163)
Payment of common stock dividends (60) (49) (78) (64)
Retirement of bonds and other long-term debt (44) (228) (95) (228)
Payment of capital lease obligations (26) (24) (37) (31)
Repayment of bank loans (14) (143) (344) (278)
Retirement of common stock (1) (2) (1) (2)
Issuance of preferred stock - 193 - 193
------ ------ ------ ------
Net cash provided by (used in) financing activities 349 91 406 (239)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (42) (2) 11 (12)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 79 28 26 38
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 37 $ 26 $ 37 $ 26
====== ====== ====== ======
<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
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT AND PROPERTY (At Cost)
Electric $6,007 $5,771 $5,671
Gas 2,180 2,102 2,052
Oil and gas properties (full-cost method) 1,074 934 925
Other 56 61 69
-----------------------------------
9,317 8,868 8,717
Less accumulated depreciation, depletion and amortization 4,578 4,299 4,240
-----------------------------------
4,739 4,569 4,477
Construction work-in-progress 222 245 279
-----------------------------------
4,961 4,814 4,756
-----------------------------------
INVESTMENTS
Independent power production 277 152 131
First Midland Limited Partnership (Note 2) 222 218 216
Natural gas transmission, storage and marketing 186 40 36
Midland Cogeneration Venture Limited Partnership (Note 2) 98 74 71
Other 21 16 14
-----------------------------------
804 500 468
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 37 79 26
Accounts receivable and accrued revenue, less
allowances of $4, $5 and $4, respectively (Note 7) 202 156 112
Inventories at average cost
Gas in underground storage 263 235 271
Materials and supplies 77 75 79
Generating plant fuel stock 28 37 33
Trunkline settlement 30 30 30
Deferred income taxes 18 34 20
Prepayments and other 87 186 99
-----------------------------------
742 832 670
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 472 484 490
Nuclear decommissioning trust funds 283 213 204
Abandoned Midland project (Note 3) 135 147 151
Trunkline settlement 33 55 63
Other 426 339 363
-----------------------------------
1,349 1,238 1,271
-----------------------------------
TOTAL ASSETS $7,856 $7,384 $7,165
===================================
</TABLE>
<PAGE>
<PAGE> 10
<TABLE>
<CAPTION>
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION (Note 7)
Common stockholders' equity $1,439 $1,107 $1,087
Preferred stock of subsidiary 356 356 356
Long-term debt 2,763 2,709 2,378
Non-current portion of capital leases 101 108 118
-----------------------------------
4,659 4,280 3,939
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 207 64 238
Notes payable 474 339 401
Accounts payable 214 194 152
Accrued taxes 106 216 102
MCV power purchases - settlement (Note 2) 95 95 82
Accounts payable - related parties 49 50 46
Accrued interest 32 40 29
Accrued refunds 31 25 37
Other 172 198 189
-----------------------------------
1,380 1,221 1,276
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 628 582 567
Postretirement benefits 553 550 556
MCV power purchases - settlement (Note 2) 244 324 345
Deferred investment tax credit 173 181 184
Regulatory liabilities for income taxes, net 38 16 20
Trunkline settlement 33 55 63
Other 148 175 215
-----------------------------------
1,817 1,883 1,950
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,856 $7,384 $7,165
===================================
<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
1995 1994 1995 1994 1995 1994
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 1,740 1,688 1,701 1,672 1,694 1,548
Common stock reacquired (1) (1) (1) (2) (1) (2)
Common stock issued 195 7 234 24 240 148
Common stock reissued 1 - 1 - 2 -
------- ------- ------- ------- ------- -------
At end of period 1,935 1,694 1,935 1,694 1,935 1,694
------- ------- ------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period 1 - - - - -
SFAS 115 - unrealized loss,
net of tax (9) - (8) - (8) -
------- ------- ------- ------- ------- -------
At end of period (8) - (8) - (8) -
------- ------- ------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (513) (630) (595) (707) (608) (719)
Net income 47 40 166 148 197 175
Common stock dividends declared
CMS Energy (21) (18) (58) (49) (76) (64)
Class G (2) - (2) - (2) -
------- ------- ------- ------- ------- -------
At end of period (489) (608) (489) (608) (489) (608)
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,439 $1,087 $1,439 $1,087 $1,439 $1,087
======= ======= ======= ======= ======= =======
<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 1994 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 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 domestic and international
energy-related businesses including: 1) oil and gas exploration and
production, 2) development and operation of independent power production
facilities, 3) electric and gas marketing services to utility, commercial
and industrial customers, and 4) storage and transmission of natural gas.
CMS Energy uses the equity method of accounting for investments in
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
income. For the three, nine and twelve month periods ended September 30,
1995, equity earnings were $19 million, $47 million and $60 million,
respectively and $10 million, $21 million and $25 million for the three,
nine and twelve month periods ended September 30, 1994.
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.
At September 30, 1995, 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' annual obligation
for purchase of contract capacity from the MCV Partnership under the PPA
increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC
issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity. Capacity and energy purchases from the MCV Partnership
above the 915 MW level can be utilized to satisfy customers' power needs
but the MPSC would determine the levels of recovery from retail customers
at a later date. The Settlement Order also provides Consumers the right
to remarket to third parties the remaining contract capacity. At the
request of the MPSC, the MCV Partnership confirmed that it did not object
to the Settlement Order. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity and the prescribed energy charges associated with the scheduled
deliveries within certain hourly availability limits, whether or not those
deliveries are scheduled on an economic basis. For all economic energy
deliveries above the availability limits to 915 MW, Consumers is allowed
to recover 1/2 cent per kWh capacity payment in addition to the variable
energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. If Consumers is unable to sell any capacity above the
current MPSC-authorized level, future additional after-tax losses and
after-tax cash underrecoveries would be incurred. Consumers' estimates of
its future after-tax cash underrecoveries, and possible losses for 1995
and the next four years are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $ 5 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the recovery of MCV capacity above
the MPSC's currently authorized level. For further information regarding
this proposed settlement, see Note 3.
At September 30, 1995 and December 31, 1994, the after-tax present value
of the Settlement Order liability totaled $220 million and $272 million,
respectively. The reduction in the liability since December 31, 1994,
reflects after-tax cash underrecoveries of $66 million, partially offset
by after-tax accretion expense of $14 million. The undiscounted after-tax
amount associated with the liability totaled $623 million at September 30,
1995.
Consumers and the MCV Partnership engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In 1994, Consumers paid $30 million to terminate a power purchase
agreement with a proposed 65 MW coal-fired cogeneration facility.
Additionally, in 1995, Consumers paid $15 million to terminate a power
purchase agreement with a proposed 44 MW wood and chipped-tire facility.
Consumers plans to seek MPSC approval to utilize less-expensive contract
capacity from the MCV Facility which Consumers is currently not authorized
to recover from retail customers. Cost recovery for this contract
capacity would start in late 1996, the year the coal-fired cogeneration
facility was scheduled to begin operations. This proposal represents
significant savings to Consumers' customers, compared to the cost approved
by the MPSC for the canceled facilities. As a result, Consumers has
recorded a regulatory asset of $45 million, which it believes will
ultimately be recoverable in rates. In April 1995, an ALJ issued a
proposal for decision related to the 1995 PSCR case that agreed with
objections, raised by certain parties, as to the inclusion of the 65 MW of
MCV capacity as part of the five year forecast included in the plan case.
Although recovery of the costs relating to the MCV capacity was not being
requested in this case, the ALJ concluded that additional capacity should
be competitively bid and recommended that the MPSC state in its order that
cost recovery for the MCV capacity absent a competitive bid is unlikely to
be approved. Consumers has filed exceptions to the ALJ's recommendation.
If the MPSC adopts the ALJ's recommendation, the status of the regulatory
asset will be reviewed for recoverability.
MCV-related 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. The MPSC confirmed the
recovery of certain MCV-related costs as part of the 1993 and 1994 plan
case orders. ABATE or the Attorney General has appealed these plan case
orders to the Court of Appeals.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV, and instead allocated those costs to non-
jurisdictional customers and reduced recovery from PSCR customers.
Consumers believes this is contrary to the terms of the Settlement Order
and has appealed the February 23 order on this issue.
3: Rate Matters
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. In late 1994, Consumers
filed a request with the MPSC which could further increase its retail
electric rates as much as $104 million to $140 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
a proposed increase in Consumers' authorized rate of return on equity to
13 percent from the current 11.75 percent, recognition of increased
expenditures related to continuing construction activities and capital
additions aimed at maintaining and improving system reliability and
increases in financing costs. Consumers requested that the MPSC eliminate
subsidization of residential rates in a two-step adjustment, eliminate all
DSM expenditures after April 1995 (see Electric DSM) and allow recovery of
all jurisdictional costs associated with the proposed settlement of the
proceedings concerning the operation of Ludington (see Note 4).
In response to Consumers' requested rate increase, the MPSC staff
initially recommended a final annual increase of $45 million to Consumers'
base rates and suggested several options for cost recovery of 325 MW of
MCV capacity. However, on motions filed by ABATE and the Attorney
General, the ALJ struck portions of the MPSC staff's testimony relating to
the cost of this capacity. In May 1995, the MPSC affirmed the ALJ's
decision to strike the MPSC staff's testimony and stated that the
remaining 325 MW of MCV capacity will be considered only as part of a
competitive capacity solicitation, and not as part of the electric rate
case. Consumers has filed a petition for rehearing of this order with the
MPSC.
The MPSC staff subsequently recommended a $43 million increase in
Consumers' base rates. This position reflects a different sales forecast
than Consumers', as well as a 12- percent return on equity and a lower
equity ratio than that included in Consumers' proposed capital structure.
The MPSC staff also recommends the elimination of all rate subsidization
by industrial and large commercial customers. In August 1995, the ALJ
issued a proposal for decision in this case that recommends a $46 million
rate increase. The ALJ generally adopted the MPSC staff's position with
adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ
also recommended the elimination of rate subsidization. In August 1995,
Consumers filed exceptions to the ALJ's proposal. If Consumers' revised
position on all issues is adopted, retail electric rates would increase by
$88 million.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers (see Special Rates
discussion in the MD&A).
In January 1995, Consumers filed a request with the MPSC, seeking to
adjust its depreciation rates and to reallocate certain portions of its
electric production plant to transmission accounts which, if approved,
would result in a net decrease in depreciation expense of $7 million for
ratemaking purposes. For further information, see Electric Rate Case
discussion in the MD&A.
In September 1995, Consumers and the MPSC staff reached a settlement
agreement that, if approved by the MPSC, would resolve several outstanding
regulatory issues currently before the MPSC in separate proceedings.
Specifically, the agreement would: resolve the current electric rate case
and provide for a $50 million annual increase in revenue; substantially
reduce rate subsidization by large industrial customers; provide for cost
recovery of the 325 MW of uncommitted MCV capacity; implement provisions
for incentive ratemaking; resolve the special competitive services and
depreciation rate cases; implement a limited direct access program; enable
Consumers to negotiate rates for certain large industrial customers; and
accelerate recovery of nuclear plant investment. The MPSC subsequently
issued an order requiring Consumers to publish a new notice of hearing
regarding the proposed settlement. The order also established a
prehearing conference for late November 1995.
Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of
the abandoned Midland project and Consumers began collecting $35 million
pretax annually for the next 10 years. In December 1994, the Court of
Appeals upheld the MPSC orders allowing recovery of the abandoned
investment. In October 1995, the Michigan Supreme Court denied all
parties leave to appeal the Court of Appeals' decision.
Electric DSM: In June 1995, the MPSC authorized Consumers to collect an
$11 million incentive for past DSM program performance. As part of the
same order, the MPSC authorized Consumers to discontinue future DSM
program expenditures and cease all new programs. During 1994, Consumers
recognized the $11 million in revenue. Consumers is deferring and
amortizing past program costs over the period these costs are being
recovered from customers in accordance with an MPSC accounting order. The
unamortized balance of deferred costs totaled $69 million at September 30,
1995.
Gas Rates: In 1994, the MPSC approved an agreement previously reached
between the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits against 1994 earnings. The agreement was reached
in response to a claim that gas utility business earnings for 1993 were
excessive. This charge against earnings partially offsets savings related
to reduced state property taxes. The agreement also provides for an
additional $4 million of postretirement benefit costs to be charged
against 1995 earnings instead of being deferred. As part of the
agreement, Consumers filed a gas rate case in December 1994. Consumers
requested an increase in its gas rates of $21 million annually. The
request, among other things, incorporates cost increases, including costs
for postretirement benefits and costs related to Consumers' former
manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13 percent rate of return on equity, instead of the currently authorized
rate of 13.25 percent. In June 1995, the MPSC staff filed its position in
this case, recommending an $11 million rate decrease. The MPSC staff's
recommendation included a lower rate base, a lower return on common
equity, a revised capital structure and a lower operating cost forecast
than Consumers had projected. In November 1995, the ALJ issued a proposal
for decision that essentially adopted the MPSC staff's position and
recommended a $12 million rate decrease. Consumers expects an MPSC
decision in early 1996.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced. As a result, Consumers
was not allowed to recover $13 million of costs. Consumers accrued a loss
prior to 1993 in excess of the disallowed amount. In March 1995,
management concluded that the intrastate producers' pending appeals of the
MPSC order would not be successful and accordingly reversed $23 million
(pretax) of the previously accrued loss, which represented the portion in
excess of the disallowed amount. In June 1995, the Court of Appeals
affirmed the MPSC's prior decision. The producers filed a motion for
rehearing with the Court of Appeals. That motion was denied and the
producers have petitioned the Michigan Supreme Court for review.
In April 1995, an ALJ issued a proposal for decision in a proceeding that
had been initiated by Consumers regarding a $44 million (excluding any
interest) gas supply contract pricing dispute with certain intrastate
producers. The ALJ found that the market-based pricing provisions
required specific MPSC approval before Consumers could apply those prices
to purchases under the contracts and found that such approval had not
previously been given. Consumers did not agree with the ALJ's findings
and filed exceptions with the MPSC. In October 1995, the MPSC issued an
order stating that Consumers was not obligated to seek prior approval of
price reductions that were implemented under the contracts in question.
The producers will undoubtedly continue to pursue companion civil
litigation for amounts owed under the producers' theories for previously
purchased gas. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
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 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 allows for continued
operation of the plant through the end of its FERC license. 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) to the state of Michigan and the Great Lakes Fishery Trust, 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 definitive settlement documents have been completed and
were filed with the appropriate Michigan courts and state and federal
agencies. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by
the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, reduced only upon
installation of "adequate" fish barriers and other changed conditions. In
the other lawsuit, the Attorney General sought to have Ludington's
bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although
Superfund liability is joint and several, along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability for the significant
sites will average less than 4 percent of the estimated total site
remediation costs, and such liability is expected to be less than $9
million. At September 30, 1995, Consumers has accrued a liability for its
estimated losses. Consumers and CMS Energy believe 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur investigation and remedial action costs at a
number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or
no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites and the Michigan Department of
Environmental Quality (formerly the DNR) has approved three of four plans
submitted by Consumers. 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, since there is limited knowledge of
manufactured gas plant contamination at these sites at this time. Data
available to Consumers and its continued internal review have resulted in
an estimate for all costs related to investigation and remedial action for
all 23 sites of between $48 million and $112 million. These estimates are
based on undiscounted 1994 costs. At September 30, 1995, Consumers has
accrued a liability of $48 million and has established a regulatory asset
for approximately the same amount. Any significant change in assumptions
such as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial action
costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers
believes that remedial action costs are properly recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recoverable 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 has approved similar deferred
accounting requests by several other similar Michigan utilities relative
to investigation and remedial action costs. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance
companies regarding coverage for some or all of the costs which may be
incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require emissions monitoring.
Consumers' coal-fueled electric generating units burn low-sulfur coal and
are presently operating at or near the sulfur dioxide emission limits
which will be effective in the year 2000. The Clean Air Act's provisions
required Consumers to make capital expenditures totaling $25 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and possible modifications at other
coal-fired units to be an additional $50 million by the year 2000. Final
acid rain program nitrogen oxide regulations specifying the limits
applicable to the other coal-fired units are not expected earlier than
1996. Management believes that Consumers' annual operating costs will not
be materially affected.
Capital Expenditures: CMS Energy estimated capital expenditures,
including investment in unconsolidated subsidiaries and new lease
commitments, of $1,067 million for 1995, $766 million for 1996 and $729
million for 1997. Capital expenditures for 1995 include approximately
$201 million for acquisitions which commenced in 1994 but did not close
until 1995.
Guarantees and Letters of Credit: As of September 30, 1995 CMS Energy and
Enterprises have guaranteed up to $143.1 million in contingent obligations
of unconsolidated affiliates of Enterprises' subsidiaries.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. 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 could 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. The SEC has not taken action on this matter.
In June 1995, the SEC released a staff report that recommended three
legislative options to Congress in regards to PUHCA. For further
information, see the Public Utility Holding Company Act Exemption
discussion in the MD&A.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when
necessary, modifying the grounding of the customer's service. At
September 30, 1995, Consumers had 43 separate stray voltage lawsuits
awaiting trial court action. Consumers and CMS Energy do not expect the
ultimate resolution of these lawsuits to have a material impact on its
financial position or results of operations.
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. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's financial position or results of
operations.
5: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. In January 1995, the U.S. Sixth
Circuit Court of Appeals upheld the NRC's rulemaking action. The court
found that the NRC's environmental assessment satisfied National
Environmental Policy Act requirements, and that a site-specific
environmental analysis concerning the use and operation of the storage
casks at Palisades was not required. In June 1995, the U.S. Supreme Court
refused to hear an appeal of this decision as requested by the Attorney
General and other parties. As of September 30, 1995, Consumers had loaded
13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks.
In 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, Consumers has nevertheless decided to remove the spent fuel and
insert it in another cask. Consumers has examined radiographs for all of
its casks and has found all other welds acceptable. 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 confirmed that the pad
location is acceptable to support the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan and Consumers has been storing low-
level waste at its nuclear plant sites. Recently, a site in South
Carolina became available for accepting low-level waste. Consumers began
shipping its low-level waste to this site during the third quarter of
1995.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs for the major portion of prolonged accidental
outages for 12 months after a 21 week exclusion with reduced coverage to
approximately 80 percent for two additional years. If certain loss events
occur at its own or other nuclear plants similarly insured, Consumers
could be required to pay maximum assessments of: $33 million in any one
year to NML and NEIL; $79 million per event under the nuclear liability
secondary financial protection program, limited to $10 million per event
in any one year; and $6 million in the event of nuclear workers claiming
bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicates that
the Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal of an action plan
to provide for operation of the plant beyond 1999. Consumers is
developing plans to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million. This repair would allow for operation of
the plant to the end of its license life in the year 2007. Consumers
cannot predict whether the studies being conducted as part of the
development plans will support Consumers' proposal to anneal.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. 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
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $159 $126 $195 $163
Income taxes paid (net
of refunds) 25 24 37 19
Non-cash transactions
Nuclear fuel placed under
capital lease $ 24 $ 18 $ 27 $ 24
Other assets placed under
capital leases 3 11 7 12
Common Stock issued to
acquire companies 86 - 86 -
Assumption of Debt 15 - 15 -
7: Capitalization and Other
CMS Energy
On March 21, 1995, CMS Energy received shareholders' approval to amend its
Articles of Incorporation and authorize a new class of Common Stock of
CMS Energy, designated Class G Common Stock which reflects the separate
performance of the gas distribution, storage and transportation
businesses currently conducted by Consumers and Michigan Gas Storage (such
businesses, collectively, will be attributed to the "Consumers Gas
Group"). The existing CMS Energy Common Stock continues to be outstanding
and is intended to reflect the performance of all of the businesses of
CMS Energy and its subsidiaries, including the business of the Consumers
Gas Group, except for the interest in the Consumers Gas Group attributable
to the outstanding shares of the Class G Common Stock.
Prior to the approval of the amendment to the Articles of Incorporation on
March 21, 1995, CMS Energy was permitted to issue up to 250 million shares
of common stock, $.01 par value and up to 5 million shares of preferred
stock, $.01 par value. The filing of the Restated Articles of
Incorporation with the Michigan Department of Commerce increased the
number of authorized shares of capital stock from 255 million shares to
320 million shares, consisting of 250 million shares of CMS Energy Common
Stock, par value $.01 per share, 60 million shares of Class G Common
Stock, no par value, and 10 million shares of Preferred Stock, par value
$.01 per share.
CMS Energy filed a shelf-registration statement with the SEC on February
15, 1995 covering the issuance of up to $200 million of securities
encompassing Common Stock of CMS Energy (including Class G Common Stock),
Preferred Stock of CMS Energy or of a special purpose affiliate of
CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually
evaluates the capital markets and may offer such securities from time to
time, at terms to be determined at or prior to the time of the sale. In
the third quarter 1995, CMS Energy received net proceeds of approximately
$123 million from the issuance of 7.52 million shares of Class G Common
Stock at a price to the public of $17.75 per share initially representing
23.5% of the common stockholder's equity value attributed to the Consumers
Gas Group. All of the proceeds will be invested in the businesses and
used for general corporate purposes of CMS Energy. Initially, such
proceeds were used to repay a portion of CMS Energy's indebtedness under
the Credit Facility, none of which is attributable to the Consumers Gas
Group. The issuance of additional shares, during the third quarter,
increased the common stockholder's equity value attributed to the
Consumers Gas Group, represented by the outstanding shares of Class G
Common Stock, to 23.6% as of September 30, 1995.
Consumers Power
Debt
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. At September 30, 1995,
Consumers had an unsecured $425 million facility and unsecured, committed
lines of credit aggregating $135 million that are used to finance seasonal
working capital requirements. At September 30, 1995 and 1994, Consumers
had a total of $474 million and $401 million outstanding under these
facilities, respectively.
Other
Consumers has an established $500-million trade receivables purchase and
sale program. At September 30, 1995 and 1994, receivables sold under the
agreement totaled $210 million. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100
million of preferred stock or subordinate debentures. In November 1995,
Consumers filed a registration statement with the SEC for the possible
future sale of $100 million of Trust Originated Preferred Securities
through a business trust affiliated with Consumers. The trust was formed
for the sole purpose of issuing preferred securities and investing the
proceeds in subordinated notes which will be unsecured obligations of
Consumers. The payment of dividends and redemption of the preferred
securities are guaranteed by Consumers.
In September 1995, Consumers extended its nuclear fuel leasing arrangement
an additional year to November 1997. At September 30, 1995, $67 million
of nuclear fuel was under lease.
CMS NOMECO
In February 1995, CMS Energy acquired Walter International, Inc., a
Houston-based independent oil company, for approximately $46 million
subject to post-closing adjustments. Walter was merged with a wholly-
owned subsidiary of CMS NOMECO. In connection with the acquisition,
CMS Energy delivered $24 million of CMS Energy Common Stock and CMS NOMECO
assumed $12 million of project financing debt and incurred $7 million of
intercompany debt to CMS Energy.
In August 1995, CMS Energy acquired 100% of the common stock of Terra
Energy Ltd., a gas exploration company, located in Traverse City, Michigan
for $63.6 million. Terra has become a wholly owned subsidiary of CMS
Nomeco. In connection with the acquisition, CMS Energy has delivered
$62.3 million of CMS Energy Common Stock and is expected to deliver an
additional $1.3 million of CMS Energy Common Stock, subject to post-
closing adjustments.
CMS NOMECO's existing revolving bank credit line, which converts to term
loans maturing from November 1996 through November 1999, was increased
from $110 million at December 31, 1994 to $130 million at September 30,
1995. $113 million of revolving credit debt was outstanding at a weighted
average interest rate of 7.20 percent at September 30, 1995.
Senior serial notes amounting to $28 million, with a weighted average
interest rate of 9.40 percent, were repaid in full on August 10, 1995. In
connection with this early extinguishment of debt, CMS NOMECO incurred a
$1.5 million prepayment penalty. The notes were retired with available
proceeds from the bank credit line.
In October 1995, CMS NOMECO filed a registration statement with the SEC
covering the issuance of not more than 20 percent of CMS NOMECO Common
Stock. Proceeds from the issuance and sale would be used to improve CMS
NOMECO's capital structure by reducing existing debt.
CMS Generation
In January 1995, CMS Generation entered into a one-year $118 million
bridge credit facility with an outstanding amount of $110 million as of
September 30, 1995, for the acquisition of HYDRA-CO. CMS Energy is
currently evaluating permanent financing options which are expected to be
in place by the end of 1995.
8: Earnings Per Share and Dividends
Earnings (Loss) per share attributable to CMS Energy Common Stock and
Class G Common Stock, for the three, nine and twelve month periods ended
September 30, 1995 reflect the initial issuance of Class G Common Stock
during the third quarter of 1995. The Class G Common Stock participates
in earnings and dividends from the issue date. The allocation of earnings
(loss) attributable to each class of common stock and the related amounts
per share are computed by considering the weighted average number of
shares outstanding.
Earnings (Loss) attributable to outstanding Class G Common Stock is equal
to Consumers Gas Group net income (loss) multiplied by a fraction, the
numerator of which is the weighted average number of shares of Class G
Common Stock outstanding during the period and the denominator of which
represents the weighted average number of Outstanding Shares and Retained
Interest Shares during the period. The seasonal (loss) attributable to
Class G Common Stock on a per share basis, for the periods ended September
30, 1995, is determined based on 23.17 percent of the (loss) of the
Consumers Gas Group.
Earnings per share for Class G Common Stock are omitted from the
statements of income for the periods reported prior to the periods ended
September 30, 1995, since the Class G Common Stock was not part of the
equity structure of CMS Energy. For purpose of analysis, following are
pro forma data for the nine months ended September 30, 1995 and 1994 and
the year ended December 31, 1994 which give effect to the issuance and
sale of 7.52 million shares of Class G Common Stock (representing 23.5% of
the equity attributable to the Consumers Gas Group) as if the sale of all
these shares had occurred on January 1, 1994.
In Millions, Except Per Share Amounts
Pro Forma Pro Forma
Nine Months Ended Year Ended
September 30 December 31
1995 1994 1994
----- ----- -----
Net Income $ 166 $ 148 $ 179
Net Income attributable to CMS Energy
Common Stock $ 156 $ 137 $ 167
Net Income attributable to outstanding
Class G Common Stock $ 10 $ 11 $ 12
Average shares outstanding:
CMS Energy Common Stock 88.021 85.742 85.888
Class G Common Stock 7.521 7.520 7.520
Earnings per share attributable to
CMS Energy Common Stock $1.76 $1.60 $1.94
Earnings per share attributable to
outstanding Class G Common Stock $1.38 $1.41 $1.66
Holders of Class G Common Stock have no direct rights in the equity or
assets of the Consumers Gas Group, but rather have rights in the equity
and assets of CMS Energy as a whole. In the sole discretion of its Board
of Directors, dividends may be paid exclusively to the holders of Class G
Common Stock, exclusively to the holders of CMS Energy Common Stock, or to
the holders of both classes in equal or unequal amounts. The Board of
Directors has stated its intentions to declare and pay dividends on the
CMS Energy Common Stock based primarily on the earnings and financial
condition of CMS Energy. Dividends on the Class G Common Stock are paid
at the discretion of the Board of Directors based primarily upon the
earnings and financial condition of the Consumers Gas Group, and to a
lesser extent, CMS Energy as a whole. It is the Board of Directors'
current intention that the declaration or payment of dividends with
respect to the Class G Common Stock will not be reduced, suspended or
eliminated as a result of factors arising out of or relating to the
electric utility business or the non-utility businesses of CMS Energy
unless such factors also require, in the Board of Directors' sole
discretion, the omission of the declaration or reduction in payment of
dividends on both the CMS Energy Common Stock and the Class G Common
Stock.
Dividends declared in July, 1995, of 24 cents per share and 28 cents per
share on CMS Energy Common Stock and Class G Common Stock respectively,
were paid in August, 1995. In October 1995, the Board of Directors
declared a quarterly dividend of 24 cents per share and 28 cents per share
on CMS Energy Common Stock and Class G Common Stock respectively.
<PAGE>
<PAGE> 24
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1994 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 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 domestic and international non-
utility energy-related businesses including: 1) oil and gas exploration
and production, 2) development and operation of independent power
production facilities, 3) electric and gas marketing services to utility,
commercial and industrial customers, and 4) storage and transmission of
natural gas.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, 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, in
the long term, allow Consumers to be more competitive.
In the third quarter 1995, CMS Energy received net proceeds of
approximately $123 million from the issuance of 7.52 million shares of
Class G Common Stock at a price to the public of $17.75 per share,
initially representing 23.5% of the common stockholder's equity value
attributed to the Consumers Gas Group. All of the proceeds will be
invested in the businesses and used for general corporate purposes of
CMS Energy. Initially, such proceeds were used to repay a portion of
CMS Energy's indebtedness under the Credit Facility, none of which is
attributable to the Consumers Gas Group. For further information, see
Note 7.
Consolidated earnings for the quarters ended September 30, 1995 and 1994
Consolidated net income totaled $47 million comprised of $48 million of
net income attributable to CMS Energy Common Stock and $(1) million net
loss attributable to Class G Common Stock for the third quarter of 1995
compared to $40 million or $.46 per share for the third quarter of 1994.
Earnings per share, for the third quarter of 1995 are $.54 per share
attributable to CMS Energy Common Stock and $(.17) per share attributable
to Class G Common Stock. The increase in net income reflects an increase
in electric utility sales and gas utility deliveries, increased revenue
from the May 1994 electric rate increase and the growth of the non-utility
businesses. This increase was offset, however, by reduced gas revenue in
1995 compared to 1994, and higher depreciation and general tax expenses
during 1995. For further information, see the Electric and Gas Utility
and the individual non-utility Results of Operations sections.
Consolidated earnings for the nine months ended September 30, 1995 and
1994
Consolidated net income totaled $166 million comprised of $167 million of
net income attributable to CMS Energy Common Stock and $(1) million net
loss attributable to Class G Common Stock for the nine months ended
September 30, 1995, compared to $148 million or $1.73 per share for the
nine months ended September 30, 1994. Earnings per share, for the nine
months ended September 30, 1995 are $1.90 per share attributable to
CMS Energy Common Stock and $(.17) per share attributable to Class G
Common Stock. The increase in net income primarily reflects increased
electric utility sales, an electric rate increase, reversal of losses
previously recorded for gas contingencies (see Note 3), and
additional earnings reflecting improved operating results from Consumers'
interest in the MCV Facility, and the growth of the non-utility
businesses. Partially offsetting these increases were a decrease in gas
utility deliveries, higher operating expenses during the 1995 period, and
DSM incentive revenue recorded in the second quarter of 1994. For further
information, see the Electric and Gas Utility and the individual non-
utility Results of Operations sections.
Consolidated earnings for the 12 months ended September 30, 1995 and 1994
Consolidated net income totaled $197 million comprised of $198 million of
net income attributable to CMS Energy Common Stock and $(1) million net
loss attributable to Class G Common Stock for the 12 months ended
September 30, 1995, compared to $175 million or $2.05 per share for the 12
months ended September 30, 1994. Earnings per share, for the 12 months
ended September 30, 1995 are $2.26 per share attributable to CMS Energy
Common Stock and $(.17) per share attributable to Class G Common Stock.
The increase in net income reflects higher electric kWh sales, an electric
rate increase, and the reversal of losses previously recorded for gas
contingencies and the growth of the non-utility business, partially offset
by lower gas utility deliveries during 1995, DSM incentive revenue
recorded in the 1994 period, and higher operating expenses during 1995.
For further information, see the Electric and Gas Utility and the
individual non-utility Results of Operations sections.
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 continues to primarily
reflect Consumers' sale and transportation of natural gas and the
generation, sale and transmission of electricity and CMS NOMECO's sale of
oil and natural gas. Consolidated cash from operations for the first nine
months of 1995 primarily reflects Consumers' increased electric sales and
increased electric rates which were approved by the MPSC in mid-1994,
offset by Consumers' greater underrecoveries for power costs, primarily
associated with the increased 108 MW of contractual capacity purchased
from the MCV.
Financing and Investing Activities: Capital expenditures, including
assets placed under capital lease, deferred DSM costs and investment in
unconsolidated subsidiaries totaled $735 million for the first nine months
of 1995 compared with $489 million for the first nine months of 1994.
These amounts primarily represent CMS Energy's continued expansion of the
non-utility business segments, and capital investments in the electric and
gas utility business units. Capital expenditures for 1995 include
approximately $201 million for acquisitions which commenced in 1994 but
did not close until 1995. CMS Energy's expenditures for the first nine
months of 1995 for its utility and non-utility businesses were $312
million and $423 million, respectively.
In the third quarter of 1995, CMS Energy received net proceeds of
approximately $123 million from the issuance of 7.52 million shares of
Class G Common Stock (see Note 7).
In January, May and August 1995, CMS Energy paid $18 million, $19 million
and $21 million, respectively, in cash dividends to holders of CMS Energy
Common Stock. In August 1995, CMS Energy paid $2 million in cash
dividends to holders of Class G Common Stock. In the second quarter of
1995, CMS Energy received a $70 million common dividend from Consumers.
In October 1995, the Board of Directors declared a quarterly dividend of
28 cents per share on Class G Common Stock and a quarterly dividend of 24
cents per share on CMS Energy Common Stock.
In October 1995, CMS NOMECO filed a registration statement with the SEC
for an initial public offering of not more than 20 percent of CMS NOMECO
Common Stock. Proceeds from the issuance and sale would be used by
CMS NOMECO to improve its capital structure by reducing existing debt.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures, including new lease commitments, will total approximately
$2.6 billion for the years 1995 through 1997. Cash generated by
operations is expected to satisfy a substantial portion of capital
expenditures. Additionally, CMS Energy will continue to evaluate capital
markets in 1995 as a potential source of financing its subsidiaries'
investing activities.
In Millions
Years Ended December 31 1995 1996 1997
------ ------ ------
Electric utility $ 333 $ 295 $ 252
Gas utility 128 119 101
Oil and gas exploration and production (a) 188 120 135
Independent power production (b) 236 165 173
Natural gas pipeline, storage and marketing (c) 176 67 68
------ ------ ------
$1,061 $ 766 $ 729
====== ====== ======
(a)(b) 1995 capital expenditures include requirements of approximately
(a)$46 million and (b)$155 million for acquisitions which commenced in
1994 but did not close until 1995.
(c) 1995 capital expenditures include requirements of approximately $136
million for the acquisition of TGN.
At September 30, 1995, Consumers had several available sources of credit
including unsecured, committed lines of credit totaling $135 million and a
$425 million unsecured working capital facility. In July 1995, Consumers
signed a new four-year, unsecured working capital facility in an aggregate
amount of $425 million replacing a $470 million facility, which expired by
its own terms. Consumers has FERC authorization to issue or guarantee up
to $900 million in short-term debt through December 31, 1996. Consumers
uses short-term borrowings to finance working capital, gas in storage 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.
Consumers is continuing efforts toward its goal of increasing the equity
portion of its capital structure. In November 1995, Consumers filed a
registration statement with the SEC for the possible future sale of $100
million of Trust Originated Preferred Securities (see Note 7).
In August 1995, in response to an MPSC staff proposal, Consumers
temporarily suspended its common dividends to CMS Energy in lieu of
CMS Energy making a direct equity infusion of cash into Consumers. Any
reduction in cash dividends from Consumers as a result of this action will
be offset by a reduction in the cash outflows for potential equity
infusions from CMS Energy to Consumers.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended September 30, 1995
and 1994: During the third quarter of 1995, electric pretax operating
income increased $18 million from the 1994 level. This increase resulted
primarily from higher electric kWh sales (see Electric Sales section).
The increased load was due to a combination of hot weather and the
resulting increased usage of air conditioning equipment and continued
economic growth. The increase was partially offset by higher
depreciation, general taxes and operation and maintenance expenses during
1995.
Electric Pretax Operating Income for the nine months ended September 30,
1995 and 1994: Electric pretax operating income for the nine months ended
September 30, 1995 increased $14 million from the comparable 1994 period.
This increase primarily reflects higher electric kWh sales (see Electric
Sales section) and the impact of the May 1994 electric rate increase,
which included the recovery of higher postretirement benefit costs. The
increase was partially offset by higher operating expenses during 1995,
which included $10 million of additional postretirement benefit costs,
along with the impact of 1994 DSM incentive revenue.
Electric Pretax Operating Income for the 12 months ended September 30,
1995 and 1994: The $11 million improvement in electric pretax operating
income for the 12 months ended September 30, 1995 compared with the
corresponding 1994 level is primarily the result of the impact of
increased electric kWh sales (see Electric Sales section), and the May
1994 electric rate increase, which included the recovery of the higher
postretirement benefit costs. The increases were partially offset by
higher operating expenses during 1995, which included $20 million of
additional postretirement benefit costs, along with the impact of 1994 DSM
incentive revenue.
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
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Sales $ 34 $43 $41
Rate increases and other
regulatory issues 0 5 16
O&M, general taxes
and depreciation (16) (34) (46)
----- ----- -----
Total change $18 $14 $11
===== ===== =====
Electric Sales: Electric sales during the third quarter of 1995 totaled
9.5 billion kWh, a 5.5 percent increase from 1994 levels. During the
third quarter of 1995, residential, commercial, and industrial sales
increased 15.1 percent, 8.7 percent and 1.9 percent, respectively.
Consumers' electric sales have benefited from warmer-than-normal
temperatures in July and August and a continuing strong Michigan economy.
August 1995 was the third warmest August on record. Electric sales during
the nine months ended September 30, 1995 totaled 26.7 billion kWh, a 3.3
percent increase from 1994 levels. This increase reflects continued
strength in the industrial and commercial sectors, and warmer weather.
During the nine months ended 1995 period, residential, commercial and
industrial sales increased 4.6 percent, 5.3 percent and 3.4 percent
respectively. Electric sales during the 12 months ended September 30,
1995 totaled 35.3 billion kWh, a 3.6 percent increase from 1994 levels.
During the 12 months ended 1995 period, residential, commercial and
industrial sales increased 3.0 percent, 4.7 percent and 3.7 percent
respectively. The chemicals and transportation equipment segments
accounted for the largest share of the growth in industrial kWh sales.
Power Costs: Power costs for the three month period ended September 30,
1995 totaled $270 million, an increase of $34 million from the
corresponding 1994 period. This increase primarily reflects higher
purchased power costs resulting from the warmer temperatures in July and
August 1995. Power costs for the nine month period ended September 30,
1995 totaled $731 million, an $8 million increase from the corresponding
1994 period. Power costs for the 12 month period ended September 30, 1995
totaled $958 million, unchanged from the corresponding 1994 period as
increased volumes of both generated and purchased power were offset by
lower prices. Combined, the average cost of power per kWh for system
sales requirements decreased to 2.52 cents from 2.60 cents.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership increased to 1,240 MW
in 1995. In 1993, the MPSC issued the Settlement Order that has allowed
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 the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries totaled $66
million for the first nine months of 1995. Estimated future after-tax
cash underrecoveries, and possible losses for 1995 and the next four years
are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $ 5 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the recovery of MCV capacity above
the MPSC's currently authorized level. For further information regarding
the settlement, see Note 3.
Consumers and the MCV Partnership engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. Consumers plans to seek MPSC
approval to utilize 109 MW of less expensive contract capacity from the
MCV Facility which Consumers is currently not authorized to recover from
retail customers. In April 1995, an ALJ issued a proposal for decision
related to the 1995 PSCR case that agreed with objections, raised by
certain parties, as to the inclusion of 65 MW of MCV capacity as part of
the five year forecast included in the plan case. Although recovery of
the costs relating to the MCV capacity was not being requested in this
case, the ALJ concluded that additional capacity should be competitively
bid and recommended that the MPSC state in its order that cost recovery
for the MCV capacity absent a competitive bid is unlikely to be approved.
Consumers has filed exceptions to the ALJ's recommendation. For further
information, see Note 2.
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. Consumers filed a request
with the MPSC in late 1994, to further increase its retail electric rates.
As part of this case, in May 1995, the MPSC stated that the remaining 325
MW of MCV capacity will be considered only as part of a competitive
capacity solicitation, and not as part of the electric rate case. This
ruling is subject to rehearing. In August 1995, the ALJ recommended a
final annual rate increase of $46 million. Consumers' currently seeks an
increase of $88 million. For further information regarding Consumers'
request and the staff's recommendation, see Note 3.
Additionally, in January 1995, Consumers filed a request with the MPSC,
seeking approval to increase its traditional depreciation expense by $21
million and reallocate certain portions of its utility plant from
production to transmission, resulting in a $28 million decrease. If both
aspects of the request are approved, the net result would be a decrease in
electric depreciation expense of $7 million for ratemaking purposes. In
April 1995, the MPSC staff's filing did not support Consumers' requested
increase in depreciation expense, but instead proposed a decrease of $24
million. In addition, the MPSC staff also did not support the
reallocation of plant investment as proposed by Consumers but suggested
several alternatives which could partially address this issue. In
September 1995, the ALJ issued a proposal for decision that essentially
supported the MPSC staff's position regarding depreciation expense and
recommended that the MPSC reject both Consumers' and the MPSC staff's
positions regarding the reallocation of Consumers' depreciation reserve
and plant investment. A final order is expected in late 1995.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues, including Consumers' current electric rate
case, depreciation case, special rate case (discussed below) and cost
recovery of 325 MW of uncommitted MCV capacity. The MPSC subsequently
issued an order requiring Consumers to publish a new notice of hearing
regarding the proposed settlement. The order also established a
prehearing conference for late November 1995. For more information
regarding the settlement, see Note 3.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates
to certain large qualifying customers. Consumers had proposed 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 that have the ability to acquire energy
from alternative sources. Consumers subsequently filed a new, simplified
proposal with the MPSC which would allow Consumers a certain level of
rate-pricing flexibility, and allow use of MCV contract capacity above the
level currently authorized by the MPSC, to respond to customers'
alternative energy options. In May 1995, the MPSC issued an order stating
that it has legal authority to approve a range of rates under which
Consumers could negotiate prices with customers that have competitive
energy alternatives. However, the MPSC dismissed from consideration, in
this proceeding, the issues related to Consumers' proposed use of the
additional 325 MW of MCV contract capacity to serve these customers. In
June 1995, Consumers filed a petition for rehearing of this decision with
the MPSC. As of September 30, 1995, all parties have filed briefs and
reply briefs in these proceedings.
Electric Conservation Efforts: In June 1995, the MPSC issued an order
that authorized Consumers to collect an $11 million incentive related to
Consumers' achievement of certain DSM program objectives. The MPSC also
authorized Consumers to discontinue future DSM program expenditures and
cease all new programs. Consumers recognized the $11 million in revenue
during 1994. For further information, see Note 3.
Electric Capital Expenditures: CMS Energy estimates capital expenditures,
including new lease commitments, related to Consumers' electric utility
operations of $333 million for 1995, $295 million for 1996 and $252
million for 1997. 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 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur costs at a number of sites. Consumers believes
costs incurred for both investigation and required remedial actions are
properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Electric Outlook
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6 percent
per year over the next five years. Economic growth and an increasing
customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing increased competitive pressures which may result in a
negative impact on Consumers' sales growth. The primary sources of this
competition include: the installation of cogeneration or other self-
generation facilities by Consumers' larger industrial customers; the
formation of municipal utilities which would displace retail service by
Consumers to an entire community; and competition from neighboring
utilities which offer flexible rate arrangements designed to encourage
movement to their respective service areas. Several of Consumers'
industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow
Consumers to offer special competitive service rates to current industrial
customers which have demonstrated an ability to seek alternate electric
supplies and to attract new customers which are considering locating or
expanding facilities in Michigan. In an effort to meet the challenge of
competition, Consumers signed a sales contract in mid-October 1995 with
its largest customer, General Motors Corporation, which provides that
Consumers will be the sole provider of approximately 450 MW of electricity
for 19 manufacturing facilities currently located in Michigan. Under the
contract, Consumers will serve certain facilities at least five years and
other facilities at least 10 years in exchange for competitively
discounted electric rates. Certain facilities will have the option of
taking retail wheeling service (if available) during the first five years
of the contract. The contract was approved by the MPSC in late October
1995.
As part of its current electric rate case, Consumers has requested that
the MPSC eliminate the rate subsidization of residential customers. If
approved, commercial and industrial customers' electric costs would
decrease by a total of approximately $80 million, or approximately 6
percent, per year. Consumers is committed to holding operation and
maintenance expenses level and continuing to improve customer service.
Consumers is also working with large customers to identify ways to improve
the efficiency with which energy is used.
In 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. The program becomes effective upon Consumers' next
solicitation for capacity. In June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers and ABATE sought rehearing regarding a number of issues included
in the order. In September 1995, the MPSC denied the rehearing requests.
Consumers, ABATE and the Dow Chemical Company have filed claims of appeal
of the MPSC's retail wheeling orders. Consumers anticipates that these
appeals will be consolidated with appeals previously filed by Detroit
Edison and the Attorney General. Consumers does not expect this short-
term experiment to have a material impact on its financial position or
results of operations.
In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose
changes in the wholesale electric industry. Among the most significant
proposals, is a requirement that utilities provide open access to the
domestic interstate transmission grid. Under the FERC's proposal, all
utilities would be required to use these tariffs for their own wholesale
sales of electric energy, and the utilities would be allowed the
opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations). Consumers is unable to
predict what (if any) final rules that may be issued by the FERC related
to this proposal. However, management believes that Consumers is well-
positioned to conform to open access as it has been voluntarily providing
this transmission service since 1992.
Nuclear Matters: In July 1995, the NRC issued its Systematic Assessment
of Licensee Performance report for Palisades. The report recognized
improved performance at the plant, specifically in the areas of
Engineering and Plant Operations. In the report, the NRC noted areas
which continue to require management's attention, but also recognized the
development and implementation of plans for corrective action designed to
address previously identified weak areas. The report noted that
performance in the areas of Maintenance and Plant Support was good and
remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consumers is using NRC-approved dry casks, which are steel and
concrete vaults, for temporary on-site storage. In January 1995, the U.S.
Sixth Circuit Court of Appeals issued a decision, effectively allowing
Consumers to continue using dry cask storage at Palisades. In June 1995,
the U.S. Supreme Court refused to hear an appeal of this decision as
requested by the Attorney General and other parties.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan and Consumers has been storing low-
level waste at its nuclear plant sites. Recently, a site in South
Carolina became available for accepting low-level waste. Consumers began
shipping its low-level waste to this site during the third quarter of
1995.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is developing plans to anneal the reactor vessel in 1998
at an estimated cost of $20 million to $30 million. This repair would
allow for operation of the plant to the end of its license life in the
year 2007. Consumers cannot predict whether the studies being conducted
as a part of the development plans will support Consumers' proposal to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At September
30, 1995, Consumers had 43 separate stray voltage lawsuits awaiting trial
court action. Consumers believes that the resolution of these lawsuits
will not have a material impact on its financial position or results of
operations. For further information, see Note 4.
Consumers Gas Group Results of Operations
Gas Pretax Operating Income for the quarters ended September 30, 1995 and
1994: During the third quarter of 1995, gas pretax operating income
decreased $2 million from the 1994 level. The decreased operating income
reflects lower gas revenue in 1995 compared to 1994 as a result of a
cumulative revenue adjustment recorded in 1994 which increased revenues
for that year, and higher depreciation expense during 1995. Partially
offsetting this decrease was an 11.4 percent increase in gas deliveries
(see Gas Deliveries section), and lower operation, maintenance and general
tax expenses during 1995.
Gas Pretax Operating Income for the nine months ended September 30, 1995
and 1994: The $4 million increase in gas pretax operating income for the
nine months ended September 30, 1995 compared with the same 1994 period
reflects the reversal of losses previously recorded for gas contingencies
(see Note 3) and lower general tax and gas operation and maintenance
expenses. Partially offsetting this increase were lower gas deliveries
(see Gas Deliveries section) and higher depreciation.
Gas Pretax Operating Income for the 12 months ended September 30, 1995
and 1994: The $17 million decrease in 1995 gas pretax operating income
compared with 1994 reflects lower gas deliveries (see Gas Deliveries
section) and higher depreciation and general taxes, partially offset by
the reversal of losses previously recorded for gas contingencies and lower
operation and maintenance expenses.
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
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Deliveries $ 1 $(13) $(29)
Recovery of gas costs and
other regulatory issues (9) 17 14
O&M, general taxes
and depreciation 6 - (2)
---- ---- ----
Total change $ (2) $ 4 $(17)
==== ==== ====
Gas Deliveries: During the third quarter of 1995, gas sales and gas
transported, excluding transport to the MCV and off-system transportation,
totaled 31.9 bcf, an 11.4 percent increase from the corresponding 1994
level. Gas sales and gas transported increased 1.0 bcf and 2.2 bcf,
respectively, with the majority of the change attributable to increased
usage. For the nine months ended September 30, 1995, gas sales and gas
transported for all customer classes totaled 273.1 bcf, an 8.5 percent
decrease from the corresponding 1994 level. Gas sales decreased 8.6 bcf
while transport deliveries increased 4.7 bcf. The decrease in firm sales
occurred primarily due to warmer temperatures. For the 12 months ended
September 30, 1995, gas sales and gas transported for all customer classes
totaled 383.7 bcf, a 9.5 percent decrease from the corresponding 1994
level, reflecting record cold winter weather during the 12 months ended
September 30, 1994 and significantly warmer weather during the 12 months
ended September 30, 1995 period.
Cost of Gas Sold: The utility cost of gas sold for the third quarter
of 1995 increased $5 million from the 1994 level. The utility cost of gas
sold for the nine months ended September 30, 1995 decreased $40 million
from the 1994 level as a result of reduced deliveries and the reversal of
a gas supplier loss contingency. The utility cost of gas sold for the 12
months ended September 30, 1995 decreased $58 million from the
corresponding 1994 level which was also the result of reduced gas
deliveries and the gas supplier loss contingency reversal.
Consumers Gas Group Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested
increase in revenue reflects increased expenditures, including those
associated with postretirement benefits, and proposes a 13 percent return
on equity. In June 1995, the MPSC staff filed its position in this case,
recommending an $11 million rate decrease. In November 1995 the ALJ issued
a proposal for decision that essentially adopted the MPSC staff's position
and recommended a $12 million rate decrease. A final order from the MPSC
is expected in early 1996. For further information regarding Consumers'
current gas rate case, see Note 3.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-pass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Issues: In April 1995, an ALJ issued a proposal for decision in a
proceeding that had been initiated by Consumers regarding a $44 million
(excluding any interest) gas supply contract pricing dispute with certain
intrastate producers. The ALJ found that the market-based pricing
provisions required specific MPSC approval before Consumers could apply
those prices to purchases under the contracts and found that such approval
had not previously been given. Consumers did not agree with the ALJ's
findings and filed exceptions with the MPSC. In October 1995, the MPSC
issued an order stating that Consumers was not obligated to seek prior
approval of price reductions that were implemented under the contracts in
question. The producers will undoubtedly continue to pursue companion
civil litigation for amounts owed under the producers' theories for
previously purchased gas. Consumers believes the MPSC order supports its
position that the producers' theories are without merit and intends to
vigorously oppose any claims they may raise but cannot predict the outcome
of this issue.
Gas Capital Expenditures: CMS Energy estimates capital expenditures,
including new lease commitments, related to Consumers' gas utility
operations of $128 million for 1995, $119 million for 1996 and $101
million for 1997. 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: The Michigan Natural Resources and
Environmental Protection Act (formerly the Environmental Response Act) was
substantially amended in June 1995. The Michigan law bears similarities
to the federal Superfund law. The purpose of the 1995 amendments was
generally to encourage development of industrial sites and to remove
liability from some parties who were not responsible for activities
causing contamination. Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including
some that formerly housed manufactured gas plant facilities. Data
available to Consumers and its continued internal review of these former
manufactured gas plant sites have resulted in an estimate for all costs
related to investigation and remedial action of between $48 million and
$112 million. These estimates are based on undiscounted 1994 costs. At
September 30, 1995, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could impact the
estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recovered in rates, prudent costs must be
approved in a rate case. The MPSC has approved similar deferred
accounting requests by several other Michigan utilities relative to
investigation and remedial action costs. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance
companies regarding coverage for some or all of the costs which may be
incurred for these sites. For further information, see Note 4.
Consumers Gas Group Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.0
percent per year (excluding MCV transportation and off-system deliveries)
over the next five years, primarily due to a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increased efforts to promote natural gas to both current and potential
customers that are using other fuels for space and water heating.
Consumers plans additional capital expenditures to construct new gas mains
that are expected to expand Consumers' system.
New technologies being developed on a national level, such as the emerging
use of natural gas vehicles, also provide Consumers with sales growth
opportunities. In addition, as air quality standards continue to become
more stringent, management believes that greater opportunities exist for
converting industrial boiler load and other processes to natural gas.
Low Income Home Energy Assistance Program funding currently provides
approximately $71 million in heating assistance to approximately 400,000
Michigan households, with approximately 18 percent of funds going to
Consumers' customers. However, recent actions by the U. S. House of
Representatives Committee on Appropriations has put restoration of funding
for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to
maintain this funding.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended September 30, 1995 decreased $2 million from the same period
in 1994, reflecting a $2 million U.S. cost center write-down due to low
gas and oil prices recorded in the third quarter of 1995 and the
recognition of a $4.8 million gain from the disposition of a gas sales
contract in the third quarter of 1994. The comparison of the quarter's
results also reflects higher oil and gas sales volumes, partially offset
by lower average market prices for gas. Pretax operating income for the
nine and twelve months ended September 30, 1995 increased $16 million and
$18 million, respectively, over the comparable 1994 periods primarily due
to gains from the assignment of gas supply contracts ($9.9 million in
March 1995 and $4.8 million in July 1994) and higher sales volumes and oil
sales prices, partially offset by lower average market prices for gas.
Capital Expenditures: In February 1995, CMS NOMECO closed on the
acquisition of Walter International, Inc. for approximately $46 million,
consisting of approximately $24 million of CMS Energy Common Stock and $22
million in both cash and assumed debt. Post-closing adjustments may
result in the issuance of approximately $3 million of additional
CMS Energy Common Stock. CMS NOMECO's acquisition of Walter added net
production of 5,500 barrels per day in 1995 and proven reserves of
approximately 20 million barrels of oil.
In August 1995, CMS NOMECO acquired Terra Energy Ltd. with $62.3 million
of CMS Energy Common Stock. Post-closing adjustments may result in the
issuance of approximately $1.3 million of additional CMS Energy Common
Stock. Terra Energy Ltd added about 92 bcf of proven gas reserves.
Other capital expenditures for the nine months ended September 30, 1995
approximated $48 million, primarily for development of existing oil and
gas reserves. These expenditures were made both domestically ($16
million) and internationally ($32 million), including $12 million in
Ecuador development drilling and facilities construction.
CMS Energy currently plans to invest $443 million, including the Walter
and Terra acquisitions, from 1995 to 1997 relating to its oil and gas
exploration and production operations. These capital expenditures will be
concentrated in North and South America and offshore west Africa.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three months
ended September 30, 1995 increased $5 million over the comparable 1994
period, primarily reflecting higher capacity sales from the MCV
partnership, as well as additional equity earnings by CMS Generation
subsidiaries primarily due to additional electric generating capacity.
Pretax operating income increased $27 million and $35 million for the nine
and twelve months ended September 30, 1995, respectively, as compared to
the comparable 1994 periods, primarily reflecting additional electric
generating capacity and improved equity earnings and operating
efficiencies.
Capital Expenditures: In January 1995, CMS Generation completed its
acquisition of HYDRA-CO. CMS Generation purchased 100 percent of HYDRA-
CO's stock for $207 million, including approximately $52 million of
current assets. With the acquisition, CMS Generation assumed ownership
in 735 MW of gross capacity and 224 MW of net ownership. CMS Generation
will manage and operate eight plants previously managed by HYDRA-CO and
will also assume construction management responsibility for a 60 MW
diesel-fueled plant which has begun in Jamaica. The plant is scheduled to
go into service in the third quarter of 1996. CMS Generation partially
financed the acquisition with a one year $118 million bridge credit
facility supplied by a consortium of four banks led by Union Bank of
California, of which $110 million remains outstanding as of
September 30, 1995. CMS Energy is currently evaluating permanent
financing options which are expected to be in place by the end of 1995.
The Moroccan government has selected a consortium of CMS Generation and
Asea Brown Boveri Energy Ventures to exclusively negotiate a definitive
agreement for the privatization and expansion of a Moroccan power plant.
The privatization of the coal-fired Jorf Lasfar plant, Southwest of
Casablanca, includes the transfer of possession and the right to operate
two 330 MW generating units which are nearing completion, and the
construction and operation of another two 330 MW units. The output of the
plants will be sold to
the Moroccan national utility. The operations of the existing facilities
acquired are expected to partially finance the construction of the two
additional units. Initial capital expenditures will approximate $300
million.
In April 1995, CMS Generation signed a letter of intent to divest its
interest in the Argentine thermal electric generation plant, Centrales
Termicas San Nicolas. The divestiture was completed in July 1995, under
which CMS Generation received securities, which contain an option to put,
exercisable in fifteen years and was repaid for funds CMS Generation
previously loaned to the plant.
In August 1995, CMS Generation and Empresa de Energia y Vapor reached an
agreement with YPF S.A., Argentina's largest oil company, to supply YPF
with electricity and steam from a 150 MW natural gas fueled plant to be
built at YPF's La Plata oil refinery in Buenos Aires Province, Argentina.
CMS Generation holds a 39 percent ownership interest in the project and
will serve as plant operator. Financing for the project is expected to be
complete in early 1996, with a two year construction period to begin
shortly thereafter.
In August 1995, CMS Generation increased its interest in Hidroelectrica El
Chocon, a 1,320 MW hydroelectric plant in Neuquen Province, Argentina,
from 14.75% to 17.23%.
CMS Energy currently plans to invest $574 million (including the HYDRA-CO
acquisition) relating to its independent power production operations
from 1995 to 1997. CMS Generation will pursue acquisitions and
development of electric generating plants in the United States, Latin
America, southern Asia and the Pacific Rim region.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three months
ended September 30, 1995 increased $2 million and for the nine and twelve
months ended September 30, 1995 increased $1 million, respectively, over
the same periods for 1994, reflecting earnings growth from existing and
new gas pipeline and storage projects and gas marketed to end-users.
Capital Expenditures: Effective January 1, 1995, CMS Gas Transmission
increased its ownership of the Antrim facilities to 100 percent by
acquiring the remaining 40 percent. Under a new agreement with MichCon,
CMS Gas Transmission will provide a gas treating service for up to 260
MMcf/d of Antrim gas. A 70 MMcf/d facility is currently under
construction with an expected in-service date of January 1996.
In July 1995, CMS Gas Transmission was the successful bidder in acquiring
a 25 percent ownership interest in TGN, an Argentine natural gas
transporter, for $136 million. TGN, which has current annual revenues of
approximately $150 million, owns and operates 2,600 miles of pipelines
that provide natural gas transmission service to the northern and central
parts of Argentina, with almost one bcf per day of existing pipeline
capacity.
Also in July 1995, CMS Gas Transmission received final regulatory approval
to construct, at a cost of $3 million, a 3.1 mile pipeline from its
natural gas transmission system to an interconnection with an existing
pipeline at the St. Clair River, south of Port Huron, Michigan.
Construction has commenced and an in-service date of December 1995 is
expected. The pipeline will provide significantly increased gas supply
flexibilities in the U.S. and Canada.
CMS Gas Transmission, through its 50 percent ownership in the SGP
Partnership, currently has two helium recovery plants under construction
and scheduled to be in service no later than the first quarter of 1996.
The total estimated capital cost for these two plants, located in Colorado
and Kansas, is $8.2 million. One helium recovery plant was placed in
service in October 1995. The partnership has also started construction on
a $5.2 million nitrogen facility in Texas.
CMS Energy currently plans to invest $311 million from 1995 to 1997
relating to its non-utility gas operations, continuing to pursue
development of natural gas storage and gathering and pipeline operations
both domestically and internationally. CMS Energy also plans to work
toward the development of a Midwest "market center" for natural gas
through strategic alliances and asset acquisition and development.
Other
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. In April 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. CMS Energy is opposing this
request and believes it will maintain its current exemption from
registration under PUHCA. The SEC has not taken action on this matter.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) a repeal of PUHCA, without condition; or
3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff
supported option 1 because it would achieve the benefits of unconditional
repeal, while preserving the ability of states to protect consumers. In
October, a bill was introduced in the U. S. Senate to transfer oversight
of public utility holding companies from the SEC to FERC.
New Accounting Standards: In March 1995, the FASB issued SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement, which is effective for 1996
financial statements, requires that an asset be reviewed for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that a loss be recognized
whenever a regulator excludes a portion of an asset's cost from a
company's rate base. CMS Energy does not expect the application of this
statement to have a material impact on its financial position or results
of operations.
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation, effective for 1996. This new standard encourages companies
to apply the fair-value method of accounting for stock compensation, but
permits continued use of the intrinsic-value method, with disclosure of
pro-forma net income and earnings per share as if the fair-value method
had been applied. CMS Energy does not believe that changing to the fair-
value method would have a material impact on its financial position or
results of operations.
<PAGE>
(This page intentionally left blank)
<PAGE>
<PAGE> 40
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, 1995 and 1994,
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, 1994, 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
31, 1995 (except with respect to certain matters discussed in Notes 2, 3,
7 and 13 to the consolidated financial statements as to which the date is
March 1, 1995), 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, 1994, 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 9, 1995
<PAGE>
<PAGE> 41
<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
1995 1994 1995 1994 1995 1994
In Millions
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric $ 640 $ 573 $1,723 $1,667 $2,246 $2,188
Gas 122 126 801 837 1,116 1,188
Other 10 6 30 9 36 11
---------------------------------------------------------
Total operating revenue 772 705 2,554 2,513 3,398 3,387
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 74 80 208 230 284 299
Purchased power - related parties 124 119 369 359 492 482
Purchased and interchange power 72 37 154 134 182 177
Cost of gas sold 53 48 435 475 622 680
Other 142 145 419 408 573 556
---------------------------------------------------------
Total operation 465 429 1,585 1,606 2,153 2,194
Maintenance 47 45 136 136 188 190
Depreciation, depletion and amortization 81 75 262 243 354 327
General taxes 43 39 138 133 183 176
---------------------------------------------------------
Total operating expenses 636 588 2,121 2,118 2,878 2,887
---------------------------------------------------------
PRETAX OPERATING INCOME
Electric 125 107 295 281 346 335
Gas 2 4 110 106 139 156
Other 9 6 28 8 35 9
---------------------------------------------------------
Total pretax operating income 136 117 433 395 520 500
INCOME TAXES 36 30 121 109 132 126
---------------------------------------------------------
NET OPERATING INCOME 100 87 312 286 388 374
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 13 12 17 17
Accretion income 3 3 9 10 12 13
Accretion expense (Note 2) (7) (8) (23) (27) (32) (36)
Other income taxes, net 3 3 9 10 11 10
Other, net 1 1 2 1 11 7
---------------------------------------------------------
Total other income 4 3 10 6 19 11
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 34 106 101 140 138
Other interest 7 4 16 9 24 16
Capitalized interest (1) - (2) (1) (2) (1)
---------------------------------------------------------
Net interest charges 41 38 120 109 162 153
---------------------------------------------------------
Net Income 63 52 202 183 245 232
Preferred Stock Dividends 7 7 21 17 28 19
---------------------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 56 $ 45 $ 181 $ 166 $ 217 $ 213
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 42
<TABLE>
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30 September 30
1995 1994 1995 1994
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 202 $ 183 $ 245 $ 232
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $38, $37,
$51 and $48, respectively) 262 243 354 327
Capital lease and other amortization 27 24 38 33
Deferred income taxes and investment tax credit 52 56 52 42
Accretion expense 23 27 32 36
Accretion income - abandoned Midland project (9) (10) (12) (13)
MCV power purchases - settlement (Note 2) (102) (71) (118) (90)
Other (24) (8) (31) (8)
Changes in other assets and liabilities (113) (95) 6 47
------ ------ ------ ------
Net cash provided by operating activities 318 349 566 606
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (278) (313) (411) (443)
Investments in nuclear decommissioning trust funds (38) (37) (51) (48)
Cost to retire property, net (28) (25) (41) (33)
Deferred demand-side management costs (7) (5) (11) (15)
Proceeds from sale of property 1 10 4 10
Other (5) 2 (5) 1
Proceeds from Midland-related assets - - - 309
------ ------ ------ ------
Net cash used in investing activities (355) (368) (515) (219)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net 135 142 74 (164)
Payment of common stock dividends (70) (113) (133) (167)
Payment of capital lease obligations (26) (23) (37) (30)
Payment of preferred stock dividends (21) (12) (28) (15)
Retirement of bonds and other long-term debt (1) (133) (1) (133)
Repayment of bank loans - (141) (328) (172)
Proceeds from preferred stock - 193 - 193
Contribution from stockholder - 100 - 100
Proceeds from bank loans - - 400 -
------ ------ ------ ------
Net cash provided by (used in) financing activities 17 13 (53) (388)
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (20) (6) (2) (1)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 13 7 8
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 5 $ 7 $ 5 $ 7
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 43
<TABLE>
Consumers Power Company
Consolidated Balance Sheets
<CAPTION>
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Electric $6,007 $5,771 $5,671
Gas 2,132 2,064 2,014
Other 30 30 26
-----------------------------------
8,169 7,865 7,711
Less accumulated depreciation, depletion and amortization 4,041 3,794 3,747
-----------------------------------
4,128 4,071 3,964
Construction work-in-progress 217 241 279
-----------------------------------
4,345 4,312 4,243
-----------------------------------
INVESTMENTS
Stock of affiliates 326 317 313
First Midland Limited Partnership (Note 2) 222 218 216
Midland Cogeneration Venture Limited Partnership (Note 2) 98 74 71
Other 8 8 8
-----------------------------------
654 617 608
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 5 25 7
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 78 100 72
Accounts receivable - related parties 49 12 65
Inventories at average cost
Gas in underground storage 263 235 271
Materials and supplies 73 75 79
Generating plant fuel stock 28 37 33
Trunkline settlement 30 30 30
Postretirement benefits 25 25 25
Deferred income taxes 20 35 22
Prepayments and other 47 143 56
-----------------------------------
618 717 660
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 466 478 484
Nuclear decommissioning trust funds 283 213 204
Abandoned Midland Project (Note 3) 135 147 151
Trunkline settlement 33 55 63
Other 283 270 309
-----------------------------------
1,200 1,163 1,211
-----------------------------------
TOTAL ASSETS $6,817 $6,809 $6,722
===================================
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 491 491 491
Revaluation capital 22 15 14
Retained earnings since December 31, 1992 191 80 107
-----------------------------------
1,545 1,427 1,453
Preferred stock 356 356 356
Long-term debt 1,921 1,953 1,701
Non-current portion of capital leases 101 108 109
-----------------------------------
3,923 3,844 3,619
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 88 45 226
Notes payable 474 339 401
Accounts payable 133 165 137
MCV power purchases - settlement (Note 2) 95 95 82
Accrued taxes 73 173 77
Accounts payable - related parties 53 51 47
Accrued refunds 31 25 37
Accrued interest 26 37 27
Other 161 187 180
-----------------------------------
1,134 1,117 1,214
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 593 568 546
Postretirement benefits 534 532 538
MCV power purchases - settlement (Note 2) 244 324 345
Deferred investment tax credit 172 179 182
Regulatory liabilities for income taxes, net 38 16 20
Trunkline settlement 33 55 63
Other (Note 4) 146 174 195
-----------------------------------
1,760 1,848 1,889
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,817 $6,809 $6,722
===================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 45
<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
1995 1994 1995 1994 1995 1994
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 491 491 491 391 491 391
Stockholder's contribution - - - 100 - 100
---------------------------------------------------------
At end of period 491 491 491 491 491 491
---------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 19 12 15 - 14 -
Implementation of SFAS 115 - January 1, 1994 - - - 20 - 20
Change in unrealized gain (loss), net of tax 3 2 7 (6) 8 (6)
---------------------------------------------------------
At end of period 22 14 22 14 22 14
---------------------------------------------------------
RETAINED EARNINGS
At beginning of period 135 93 80 54 107 61
Net income 63 52 202 183 245 232
Common stock dividends declared - (31) (70) (113) (133) (167)
Preferred stock dividends declared (7) (7) (21) (17) (28) (19)
---------------------------------------------------------
At end of period 191 107 191 107 191 107
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,545 $1,453 $1,545 $1,453 $1,545 $1,453
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 46
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 1994 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 the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
At September 30, 1995, 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' annual obligation
for purchase of contract capacity from the MCV Partnership under the PPA
increased to its maximum amount of 1,240 MW in 1995. In 1993, the MPSC
issued the Settlement Order that has allowed Consumers to recover
substantially all of the payments for its ongoing purchase of 915 MW of
contract capacity. Capacity and energy purchases from the MCV Partnership
above the 915 MW level can be utilized to satisfy customers' power needs
but the MPSC would determine the levels of recovery from retail customers
at a later date. The Settlement Order also provides Consumers the right
to remarket to third parties the remaining contract capacity. At the
request of the MPSC, the MCV Partnership confirmed that it did not object
to the Settlement Order. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kWh, a fixed energy
charge and a variable energy charge which is based primarily on Consumers'
average cost of coal consumed. The Settlement Order permits Consumers to
recover capacity charges averaging 3.62 cents per kWh for 915 MW of
capacity and the prescribed energy charges associated with the scheduled
deliveries within certain hourly availability limits, whether or not those
deliveries are scheduled on an economic basis. For all economic energy
deliveries above the availability limits to 915 MW, Consumers is allowed
to recover 1/2 cent per kWh capacity payment in addition to the variable
energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. If Consumers is unable to sell any capacity above the
current MPSC-authorized level, future additional after-tax losses and
after-tax cash underrecoveries would be incurred. Consumers' estimates of
its future after-tax cash underrecoveries, and possible losses for 1995
and the next four years are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $ 5 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the recovery of MCV capacity above
the MPSC's currently authorized level. For further information regarding
this proposed settlement, see Note 3.
At September 30, 1995 and December 31, 1994, the after-tax present value
of the Settlement Order liability totaled $220 million and $272 million,
respectively. The reduction in the liability since December 31, 1994,
reflects after-tax cash underrecoveries of $66 million, partially offset
by after-tax accretion expense of $14 million. The undiscounted after-tax
amount associated with the liability totaled $623 million at September 30,
1995.
Consumers and the MCV Partnership engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In 1994, Consumers paid $30 million to terminate a power purchase
agreement with a proposed 65 MW coal-fired cogeneration facility.
Additionally, in 1995, Consumers paid $15 million to terminate a power
purchase agreement with a proposed 44 MW wood and chipped-tire facility.
Consumers plans to seek MPSC approval to utilize less-expensive contract
capacity from the MCV Facility which Consumers is currently not authorized
to recover from retail customers. Cost recovery for this contract
capacity would start in late 1996, the year the coal-fired cogeneration
facility was scheduled to begin operations. This proposal represents
significant savings to Consumers' customers, compared to the cost approved
by the MPSC for the canceled facilities. As a result, Consumers has
recorded a regulatory asset of $45 million, which it believes will
ultimately be recoverable in rates. In April 1995, an ALJ issued a
proposal for decision related to the 1995 PSCR case that agreed with
objections, raised by certain parties, as to the inclusion of the 65 MW of
MCV capacity as part of the five year forecast included in the plan case.
Although recovery of the costs relating to the MCV capacity was not being
requested in this case, the ALJ concluded that additional capacity should
be competitively bid and recommended that the MPSC state in its order that
cost recovery for the MCV capacity absent a competitive bid is unlikely to
be approved. Consumers has filed exceptions to the ALJ's recommendation.
If the MPSC adopts the ALJ's recommendation, the status of the regulatory
asset will be reviewed for recoverability.
MCV-related 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. The MPSC confirmed the
recovery of certain MCV-related costs as part of the 1993 and 1994 plan
case orders. ABATE or the Attorney General has appealed these plan case
orders to the Court of Appeals.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV, and instead allocated those costs to non-
jurisdictional customers and reduced recovery from PSCR customers.
Consumers believes this is contrary to the terms of the Settlement Order
and has appealed the February 23 order on this issue.
3: Rate Matters
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. In late 1994, Consumers
filed a request with the MPSC which could further increase its retail
electric rates as much as $104 million to $140 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
a proposed increase in Consumers' authorized rate of return on equity to
13 percent from the current 11.75 percent, recognition of increased
expenditures related to continuing construction activities and capital
additions aimed at maintaining and improving system reliability and
increases in financing costs. Consumers requested that the MPSC eliminate
subsidization of residential rates in a two-step adjustment, eliminate all
DSM expenditures after April 1995 (see Electric DSM) and allow recovery of
all jurisdictional costs associated with the proposed settlement of the
proceedings concerning the operation of Ludington (see Note 4).
In response to Consumers' requested rate increase, the MPSC staff
initially recommended a final annual increase of $45 million to Consumers'
base rates and suggested several options for cost recovery of 325 MW of
MCV capacity. However, on motions filed by ABATE and the Attorney
General, the ALJ struck portions of the MPSC staff's testimony relating to
the cost of this capacity. In May 1995, the MPSC affirmed the ALJ's
decision to strike the MPSC staff's testimony and stated that the
remaining 325 MW of MCV capacity will be considered only as part of a
competitive capacity solicitation, and not as part of the electric rate
case. Consumers has filed a petition for rehearing of this order with the
MPSC.
The MPSC staff subsequently recommended a $43 million increase in
Consumers' base rates. This position reflects a different sales forecast
than Consumers', as well as a 12- percent return on equity and a lower
equity ratio than that included in Consumers' proposed capital structure.
The MPSC staff also recommends the elimination of all rate subsidization
by industrial and large commercial customers. In August 1995, the ALJ
issued a proposal for decision in this case that recommends a $46 million
rate increase. The ALJ generally adopted the MPSC staff's position with
adjustments to the MPSC staff's sales forecast and equity ratios. The ALJ
also recommended the elimination of rate subsidization. In August 1995,
Consumers filed exceptions to the ALJ's proposal. If Consumers' revised
position on all issues is adopted, retail electric rates would increase by
$88 million.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers (see Special Rates
discussion in the MD&A).
In January 1995, Consumers filed a request with the MPSC, seeking to
adjust its depreciation rates and to reallocate certain portions of its
electric production plant to transmission accounts which, if approved,
would result in a net decrease in depreciation expense of $7 million for
ratemaking purposes. For further information, see Electric Rate Case
discussion in the MD&A.
In September 1995, Consumers and the MPSC staff reached a settlement
agreement that, if approved by the MPSC, would resolve several outstanding
regulatory issues currently before the MPSC in separate proceedings.
Specifically, the agreement would: resolve the current electric rate case
and provide for a $50 million annual increase in revenue; substantially
reduce rate subsidization by large industrial customers; provide for cost
recovery of the 325 MW of uncommitted MCV capacity; implement provisions
for incentive ratemaking; resolve the special competitive services and
depreciation rate cases; implement a limited direct access program; enable
Consumers to negotiate rates for certain large industrial customers; and
accelerate recovery of nuclear plant investment. The MPSC subsequently
issued an order requiring Consumers to publish a new notice of hearing
regarding the proposed settlement. The order also established a
prehearing conference for late November 1995.
Abandoned Midland Project: In 1991, the MPSC ordered partial recovery of
the abandoned Midland project and Consumers began collecting $35 million
pretax annually for the next 10 years. In December 1994, the Court of
Appeals upheld the MPSC orders allowing recovery of the abandoned
investment. In October 1995, the Michigan Supreme Court denied all
parties leave to appeal the Court of Appeals' decision.
Electric DSM: In June 1995, the MPSC authorized Consumers to collect an
$11 million incentive for past DSM program performance. As part of the
same order, the MPSC authorized Consumers to discontinue future DSM
program expenditures and cease all new programs. During 1994, Consumers
recognized the $11 million in revenue. Consumers is deferring and
amortizing past program costs over the period these costs are being
recovered from customers in accordance with an MPSC accounting order. The
unamortized balance of deferred costs totaled $69 million at September 30,
1995.
Gas Rates: In 1994, the MPSC approved an agreement previously reached
between the MPSC staff and Consumers, to charge $10 million of costs for
postretirement benefits against 1994 earnings. The agreement was reached
in response to a claim that gas utility business earnings for 1993 were
excessive. This charge against earnings partially offsets savings related
to reduced state property taxes. The agreement also provides for an
additional $4 million of postretirement benefit costs to be charged
against 1995 earnings instead of being deferred. As part of the
agreement, Consumers filed a gas rate case in December 1994. Consumers
requested an increase in its gas rates of $21 million annually. The
request, among other things, incorporates cost increases, including costs
for postretirement benefits and costs related to Consumers' former
manufactured gas plant sites. Consumers requested that the MPSC authorize
a 13 percent rate of return on equity, instead of the currently authorized
rate of 13.25 percent. In June 1995, the MPSC staff filed its position in
this case, recommending an $11 million rate decrease. The MPSC staff's
recommendation included a lower rate base, a lower return on common
equity, a revised capital structure and a lower operating cost forecast
than Consumers had projected. In November 1995, the ALJ issued a proposal
for decision that essentially adopted the MPSC staff's position and
recommended a $12 million rate decrease. Consumers expects an MPSC
decision in early 1996.
GCR Issues: In 1993, the MPSC provided that the price payable to certain
intrastate gas producers by Consumers be reduced. As a result, Consumers
was not allowed to recover $13 million of costs. Consumers accrued a loss
prior to 1993 in excess of the disallowed amount. In March 1995,
management concluded that the intrastate producers' pending appeals of the
MPSC order would not be successful and accordingly reversed $23 million
(pretax) of the previously accrued loss, which represented the portion in
excess of the disallowed amount. In June 1995, the Court of Appeals
affirmed the MPSC's prior decision. The producers filed a motion for
rehearing with the Court of Appeals. That motion was denied and the
producers have petitioned the Michigan Supreme Court for review.
In April 1995, an ALJ issued a proposal for decision in a proceeding that
had been initiated by Consumers regarding a $44 million (excluding any
interest) gas supply contract pricing dispute with certain intrastate
producers. The ALJ found that the market-based pricing provisions
required specific MPSC approval before Consumers could apply those prices
to purchases under the contracts and found that such approval had not
previously been given. Consumers did not agree with the ALJ's findings
and filed exceptions with the MPSC. In October 1995, the MPSC issued an
order stating that Consumers was not obligated to seek prior approval of
price reductions that were implemented under the contracts in question.
The producers will undoubtedly continue to pursue companion civil
litigation for amounts owed under the producers' theories for previously
purchased gas. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
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 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 allows for continued
operation of the plant through the end of its FERC license. 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) to the state of Michigan and the Great Lakes Fishery Trust, 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 definitive settlement documents have been completed and
were filed with the appropriate Michigan courts and state and federal
agencies. The agreement is subject to the MPSC permitting Consumers to
recover all such settlement costs from electric customers, and approval by
the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney
General in 1986 and 1987 on behalf of the State of Michigan. In one, the
state sought $148 million (including $16 million of interest) for past
injuries and $89,000 per day for future injuries, reduced only upon
installation of "adequate" fish barriers and other changed conditions. In
the other lawsuit, the Attorney General sought to have Ludington's
bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under Superfund. Although
Superfund liability is joint and several, along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates its total liability for the significant
sites will average less than 4 percent of the estimated total site
remediation costs, and such liability is expected to be less than $9
million. At September 30, 1995, Consumers has accrued a liability for its
estimated losses. 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur investigation and remedial action costs at a
number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or
no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites and the Michigan Department of
Environmental Quality (formerly the DNR) has approved three of four plans
submitted by Consumers. 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, since there is limited knowledge of
manufactured gas plant contamination at these sites at this time. Data
available to Consumers and its continued internal review have resulted in
an estimate for all costs related to investigation and remedial action for
all 23 sites of between $48 million and $112 million. These estimates are
based on undiscounted 1994 costs. At September 30, 1995, Consumers has
accrued a liability of $48 million and has established a regulatory asset
for approximately the same amount. Any significant change in assumptions
such as remediation technique, nature and extent of contamination and
regulatory requirements, could impact the estimate of remedial action
costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers
believes that remedial action costs are properly recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recoverable 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 has approved similar deferred
accounting requests by several other similar Michigan utilities relative
to investigation and remedial action costs. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance
companies regarding coverage for some or all of the costs which may be
incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of
sulfur dioxide and nitrogen oxides and require emissions monitoring.
Consumers' coal-fueled electric generating units burn low-sulfur coal and
are presently operating at or near the sulfur dioxide emission limits
which will be effective in the year 2000. The Clean Air Act's provisions
required Consumers to make capital expenditures totaling $25 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and possible modifications at other
coal-fired units to be an additional $50 million by the year 2000. Final
acid rain program nitrogen oxide regulations specifying the limits
applicable to the other coal-fired units are not expected earlier than
1996. Management believes that Consumers' annual operating costs will not
be materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $461 million for 1995, $414 million for 1996 and
$353 million for 1997.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. 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 could 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. The SEC has not taken action on this matter.
In June 1995, the SEC released a staff report that recommended three
legislative options to Congress in regards to PUHCA. For further
information, see the Public Utility Holding Company Act Exemption
discussion in the MD&A.
Other: Consumers has experienced a number of lawsuits filed against it
relating to so-called stray voltage. Claimants contend that stray voltage
results when small electrical currents present in grounded electrical
systems are diverted from their intended path. Consumers maintains a
policy of investigating all customer calls regarding stray voltage and
working with customers to address their concerns including, when
necessary, modifying the grounding of the customer's service. At
September 30, 1995, Consumers had 43 separate stray voltage lawsuits
awaiting trial court action. Consumers does not expect the ultimate
resolution of these lawsuits to have a material impact on its financial
position or results of operations.
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. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
5: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. In January 1995, the U.S. Sixth
Circuit Court of Appeals upheld the NRC's rulemaking action. The court
found that the NRC's environmental assessment satisfied National
Environmental Policy Act requirements, and that a site-specific
environmental analysis concerning the use and operation of the storage
casks at Palisades was not required. In June 1995, the U.S. Supreme Court
refused to hear an appeal of this decision as requested by the Attorney
General and other parties. As of September 30, 1995, Consumers had loaded
13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks.
In 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, Consumers has nevertheless decided to remove the spent fuel and
insert it in another cask. Consumers has examined radiographs for all of
its casks and has found all other welds acceptable. 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 confirmed that the pad
location is acceptable to support the casks.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan and Consumers has been storing low-
level waste at its nuclear plant sites. Recently, a site in South
Carolina became available for accepting low-level waste. Consumers began
shipping its low-level waste to this site during the third quarter of
1995.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs for the major portion of prolonged accidental
outages for 12 months after a 21 week exclusion with reduced coverage to
approximately 80 percent for two additional years. If certain loss events
occur at its own or other nuclear plants similarly insured, Consumers
could be required to pay maximum assessments of: $33 million in any one
year to NML and NEIL; $79 million per event under the nuclear liability
secondary financial protection program, limited to $10 million per event
in any one year; and $6 million in the event of nuclear workers claiming
bodily injury from radiation exposure. Consumers considers the
possibility of these assessments to be remote.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicates that
the Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal of an action plan
to provide for operation of the plant beyond 1999. Consumers is
developing plans to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million. This repair would allow for operation of
the plant to the end of its license life in the year 2007. Consumers
cannot predict whether the studies being conducted as part of the
development plans will support Consumers' proposal to anneal.
6: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. 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
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $125 $117 $155 $150
Income taxes paid (net
of refunds) 72 64 41 30
Non-cash transactions
Nuclear fuel placed under
capital lease $ 24 $ 18 $ 27 $ 24
Other assets placed under
capital leases 3 11 7 12
7: Short-term and Long-term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. At September 30, 1995,
Consumers had an unsecured $425 million facility and unsecured, committed
lines of credit aggregating $135 million that are used to finance seasonal
working capital requirements. At September 30, 1995 and 1994, Consumers
had a total of $474 million and $401 million outstanding under these
facilities, respectively.
Consumers has an established $500-million trade receivables purchase and
sale program. At September 30, 1995 and 1994, receivables sold under the
agreement totaled $210 million. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100
million of preferred stock or subordinate debentures. In November 1995,
Consumers filed a registration statement with the SEC for the possible
future sale of $100 million of Trust Originated Preferred Securities
through a business trust affiliated with Consumers. The trust was formed
for the sole purpose of issuing preferred securities and investing the
proceeds in subordinated notes which will be unsecured obligations of
Consumers. The payment of dividends and redemption of the preferred
securities are guaranteed by Consumers.
In September 1995, Consumers extended its nuclear fuel leasing arrangement
an additional year to November 1997. At September 30, 1995, $67 million
of nuclear fuel was under lease.
<PAGE>
<PAGE> 55
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1994 Form 10-K of
Consumers.
Consumers is a combination electric and gas utility company serving 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.
On January 1, 1995, Consumers was internally reorganized into separate
electric utility and gas utility strategic business units. The
restructuring, 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, in the long
term, allow Consumers to be more competitive.
Consolidated earnings for the quarters ended September 30, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $56
million for the third quarter of 1995 and $45 million for the third
quarter of 1994. This net income increase reflects higher electric kWh
sales and gas deliveries and improved operating results from Consumers'
interest in the MCV Facility. Partially offsetting this increase was
reduced gas revenue in 1995 compared to 1994, and higher depreciation and
general tax expenses during 1995. For further information, see the
Electric and Gas Utility Results of Operations sections.
Consolidated earnings for the nine months ended September 30, 1995 and
1994
Consolidated net income after dividends on preferred stock totaled $181
million for the nine months ended September 30, 1995, compared with $166
million for the nine months ended September 30, 1994. The increase in net
income primarily reflects increased electric sales, an electric rate
increase, reversal of losses previously recorded for gas
contingencies (see Note 3), and improved operating results from Consumers'
interest in the MCV Facility. Partially offsetting these increases were a
decrease in gas deliveries, higher operating expenses during the 1995
period, and DSM incentive revenue recorded in the second quarter of 1994.
For further information, see the Electric and Gas Utility Results of
Operations sections.
Consolidated earnings for the 12 months ended September 30, 1995 and 1994
Consolidated net income after dividends on preferred stock totaled $217
million for the 12 months ended September 30, 1995, compared with $213
million for the 12 months ended September 30, 1994. The increase in net
income reflects higher electric kWh sales, an electric rate increase, and
the reversal of losses previously recorded for gas contingencies.
Partially offsetting this increase, were lower gas deliveries during 1995,
DSM incentive revenue recorded in the 1994 period, and higher operating
expenses during 1995. For further information, see the Electric and Gas
Utility Results of Operations sections.
Cash Position, Financing and Investing
Consumers' operating cash requirements are met by its operating and
financing activities. Cash from operations continues to reflect
Consumers' sale and transportation of natural gas and the generation, sale
and transmission of electricity. Cash from operations for the first nine
months of 1995 reflects increased electric sales and increased electric
rates which were approved by the MPSC in mid-1994, offset by greater
underrecoveries for power costs, primarily associated with the increased
108 MW of contractual capacity purchased from the MCV.
Financing and Investing Activities: Capital expenditures, including
assets placed under capital lease and deferred DSM costs, totaled $312
million for the first nine months of 1995 compared with $347 million for
the first nine months of 1994. These amounts primarily represent capital
investments in Consumers' electric and gas utility business units.
In the second quarter of 1995, Consumers declared and paid a $70 million
common dividend from its first quarter earnings.
Financing and Investing Outlook: Consumers estimates that capital
expenditures, including new lease commitments, related to its electric and
gas utility operations will total approximately $1.2 billion over the next
three years. Cash generated by operations is expected to satisfy a
substantial portion of these capital expenditures.
In Millions
Years Ended December 31 1995 1996 1997
---- ---- ----
Consumers
Construction $425 $373 $343
Nuclear fuel lease 28 37 6
Capital leases other than nuclear fuel 5 2 2
Michigan Gas Storage 3 2 2
---- ---- ----
$461 $414 $353
==== ==== ====
At September 30, 1995, Consumers had several available sources of credit
including unsecured, committed lines of credit totaling $135 million and a
$425 million unsecured working capital facility. In July 1995, Consumers
signed a new four-year, unsecured working capital facility in an aggregate
amount of $425 million replacing a $470 million facility, which expired by
its own terms. Consumers has FERC authorization to issue or guarantee up
to $900 million in short-term debt through December 31, 1996. Consumers
uses short-term borrowings to finance working capital, gas in storage 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, 1995, receivables sold under the
agreement totaled $210 million.
Consumers is continuing efforts toward its goal of increasing the equity
portion of its capital structure. In November 1995, Consumers filed a
registration statement with the SEC for the possible future sale of $100
million of Trust Originated Preferred Securities (see Note 7).
In August 1995, in response to an MPSC staff proposal, Consumers
temporarily suspended its common dividends in lieu of CMS Energy making a
direct equity infusion of cash into Consumers. Any increases in
Consumers' retained earnings as a result of this action will be offset by
a reduction in potential equity infusions from CMS Energy.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended September 30, 1995
and 1994: During the third quarter of 1995, electric pretax operating
income increased $18 million from the 1994 level. This increase resulted
primarily from higher electric kWh sales (see Electric Sales section).
The increased load was due to a combination of hot weather and the
resulting increased usage of air conditioning equipment and continued
economic growth. The increase was partially offset by higher
depreciation, general taxes and operation and maintenance expenses during
1995.
Electric Pretax Operating Income for the nine months ended September 30,
1995 and 1994: Electric pretax operating income for the nine months ended
September 30, 1995 increased $14 million from the comparable 1994 period.
This increase primarily reflects higher electric kWh sales (see Electric
Sales section) and the impact of the May 1994 electric rate increase,
which included the recovery of higher postretirement benefit costs. The
increase was partially offset by higher operating expenses during 1995,
which included $10 million of additional postretirement benefit costs,
along with the impact of 1994 DSM incentive revenue.
Electric Pretax Operating Income for the 12 months ended September 30,
1995 and 1994: The $11 million improvement in electric pretax operating
income for the 12 months ended September 30, 1995 compared with the
corresponding 1994 level is primarily the result of the impact of
increased electric kWh sales (see Electric Sales section), and the May
1994 electric rate increase, which included the recovery of the higher
postretirement benefit costs. The increases were partially offset by
higher operating expenses during 1995, which included $20 million of
additional postretirement benefit costs, along with the impact of 1994 DSM
incentive revenue.
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
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Sales $ 34 $43 $41
Rate increases and other
regulatory issues 0 5 16
O&M, general taxes
and depreciation (16) (34) (46)
----- ----- -----
Total change $18 $14 $11
===== ===== =====
Electric Sales: Electric sales during the third quarter of 1995 totaled
9.5 billion kWh, a 5.5 percent increase from 1994 levels. During the
third quarter of 1995, residential, commercial, and industrial sales
increased 15.1 percent, 8.7 percent and 1.9 percent, respectively.
Consumers' electric sales have benefited from warmer-than-normal
temperatures in July and August and a continuing strong Michigan economy.
August 1995 was the third warmest August on record. Electric sales during
the nine months ended September 30, 1995 totaled 26.7 billion kWh, a 3.3
percent increase from 1994 levels. This increase reflects continued
strength in the industrial and commercial sectors, and warmer weather.
During the nine months ended 1995 period, residential, commercial and
industrial sales increased 4.6 percent, 5.3 percent and 3.4 percent
respectively. Electric sales during the 12 months ended September 30,
1995 totaled 35.3 billion kWh, a 3.6 percent increase from 1994 levels.
During the 12 months ended 1995 period, residential, commercial and
industrial sales increased 3.0 percent, 4.7 percent and 3.7 percent
respectively. The chemicals and transportation equipment segments
accounted for the largest share of the growth in industrial kWh sales.
Power Costs: Power costs for the three month period ended September 30,
1995 totaled $270 million, an increase of $34 million from the
corresponding 1994 period. This increase primarily reflects higher
purchased power costs resulting from the warmer temperatures in July and
August 1995. Power costs for the nine month period ended September 30,
1995 totaled $731 million, an $8 million increase from the corresponding
1994 period. Power costs for the 12 month period ended September 30, 1995
totaled $958 million, unchanged from the corresponding 1994 period as
increased volumes of both generated and purchased power were offset by
lower prices. Combined, the average cost of power per kWh for system
sales requirements decreased to 2.52 cents from 2.60 cents.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership increased to 1,240 MW
in 1995. In 1993, the MPSC issued the Settlement Order that has allowed
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 the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. ABATE and the Attorney General have appealed the
Settlement Order to the Court of Appeals. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. These after-tax cash underrecoveries totaled $66
million for the first nine months of 1995. Estimated future after-tax
cash underrecoveries, and possible losses for 1995 and the next four years
are shown in the table below.
After-tax, In Millions
1995 1996 1997 1998 1999
Estimated cash underrecoveries $88 $56 $55 $ 8 $ 9
Possible additional underrecoveries
and losses (a) $ 5 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including the recovery of MCV capacity above
the MPSC's currently authorized level. For further information regarding
the settlement, see Note 3.
Consumers and the MCV Partnership engaged in arbitration proceedings under
the PPA to determine whether the energy charge paid to the MCV Partnership
is being properly calculated. In July 1995, an arbitrator ruled that
Consumers correctly calculated the energy charges and that the MCV
Partnership is not entitled to additional amounts.
In July 1994 and February 1995, Consumers terminated power purchase
agreements with a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. Consumers plans to seek MPSC
approval to utilize 109 MW of less expensive contract capacity from the
MCV Facility which Consumers is currently not authorized to recover from
retail customers. In April 1995, an ALJ issued a proposal for decision
related to the 1995 PSCR case that agreed with objections, raised by
certain parties, as to the inclusion of 65 MW of MCV capacity as part of
the five year forecast included in the plan case. Although recovery of
the costs relating to the MCV capacity was not being requested in this
case, the ALJ concluded that additional capacity should be competitively
bid and recommended that the MPSC state in its order that cost recovery
for the MCV capacity absent a competitive bid is unlikely to be approved.
Consumers has filed exceptions to the ALJ's recommendation. For further
information, see Note 2.
Electric Rate Case: In mid-1994, the MPSC granted Consumers a $58 million
annual increase in its retail electric rates. Consumers filed a request
with the MPSC in late 1994, to further increase its retail electric rates.
As part of this case, in May 1995, the MPSC stated that the remaining 325
MW of MCV capacity will be considered only as part of a competitive
capacity solicitation, and not as part of the electric rate case. This
ruling is subject to rehearing. In August 1995, the ALJ recommended a
final annual rate increase of $46 million. Consumers' currently seeks an
increase of $88 million. For further information regarding Consumers'
request and the staff's recommendation, see Note 3.
Additionally, in January 1995, Consumers filed a request with the MPSC,
seeking approval to increase its traditional depreciation expense by $21
million and reallocate certain portions of its utility plant from
production to transmission, resulting in a $28 million decrease. If both
aspects of the request are approved, the net result would be a decrease in
electric depreciation expense of $7 million for ratemaking purposes. In
April 1995, the MPSC staff's filing did not support Consumers' requested
increase in depreciation expense, but instead proposed a decrease of $24
million. In addition, the MPSC staff also did not support the
reallocation of plant investment as proposed by Consumers but suggested
several alternatives which could partially address this issue. In
September 1995, the ALJ issued a proposal for decision that essentially
supported the MPSC staff's position regarding depreciation expense and
recommended that the MPSC reject both Consumers' and the MPSC staff's
positions regarding the reallocation of Consumers' depreciation reserve
and plant investment. A final order is expected in late 1995.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues, including Consumers' current electric rate
case, depreciation case, special rate case (discussed below) and cost
recovery of 325 MW of uncommitted MCV capacity. The MPSC subsequently
issued an order requiring Consumers to publish a new notice of hearing
regarding the proposed settlement. The order also established a
prehearing conference for late November 1995. For more information
regarding the settlement, see Note 3.
Special Rates: In January 1995, the MPSC dismissed a filing made by
Consumers, seeking approval of a plan to offer competitive, special rates
to certain large qualifying customers. Consumers had proposed 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 that have the ability to acquire energy
from alternative sources. Consumers subsequently filed a new, simplified
proposal with the MPSC which would allow Consumers a certain level of
rate-pricing flexibility, and allow use of MCV contract capacity above the
level currently authorized by the MPSC, to respond to customers'
alternative energy options. In May 1995, the MPSC issued an order stating
that it has legal authority to approve a range of rates under which
Consumers could negotiate prices with customers that have competitive
energy alternatives. However, the MPSC dismissed from consideration, in
this proceeding, the issues related to Consumers' proposed use of the
additional 325 MW of MCV contract capacity to serve these customers. In
June 1995, Consumers filed a petition for rehearing of this decision with
the MPSC. As of September 30, 1995, all parties have filed briefs and
reply briefs in these proceedings.
Electric Conservation Efforts: In June 1995, the MPSC issued an order
that authorized Consumers to collect an $11 million incentive related to
Consumers' achievement of certain DSM program objectives. The MPSC also
authorized Consumers to discontinue future DSM program expenditures and
cease all new programs. Consumers recognized the $11 million in revenue
during 1994. For further information, see Note 3.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its electric utility
operations of $333 million for 1995, $295 million for 1996 and $252
million for 1997. 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 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.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Environmental Response Act) was substantially amended in June 1995.
The Michigan law bears similarities to the federal Superfund law. The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur costs at a number of sites. Consumers believes
costs incurred for both investigation and required remedial actions are
properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Electric Outlook
Competition: Consumers currently expects customer demand for electricity
within its service territory will increase by approximately 1.6 percent
per year over the next five years. Economic growth and an increasing
customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is
experiencing increased competitive pressures which may result in a
negative impact on Consumers' sales growth. The primary sources of this
competition include: the installation of cogeneration or other self-
generation facilities by Consumers' larger industrial customers; the
formation of municipal utilities which would displace retail service by
Consumers to an entire community; and competition from neighboring
utilities which offer flexible rate arrangements designed to encourage
movement to their respective service areas. Several of Consumers'
industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk"
customers. These strategies include a request that the MPSC allow
Consumers to offer special competitive service rates to current industrial
customers which have demonstrated an ability to seek alternate electric
supplies and to attract new customers which are considering locating or
expanding facilities in Michigan. In an effort to meet the challenge of
competition, Consumers signed a sales contract in mid-October 1995 with
its largest customer, General Motors Corporation, which provides that
Consumers will be the sole provider of approximately 450 MW of electricity
for 19 manufacturing facilities currently located in Michigan. Under the
contract, Consumers will serve certain facilities at least five years and
other facilities at least 10 years in exchange for competitively
discounted electric rates. Certain facilities will have the option of
taking retail wheeling service (if available) during the first five years
of the contract. The contract was approved by the MPSC in late October
1995.
As part of its current electric rate case, Consumers has requested that
the MPSC eliminate the rate subsidization of residential customers. If
approved, commercial and industrial customers' electric costs would
decrease by a total of approximately $80 million, or approximately 6
percent, per year. Consumers is committed to holding operation and
maintenance expenses level and continuing to improve customer service.
Consumers is also working with large customers to identify ways to improve
the efficiency with which energy is used.
In 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. The program becomes effective upon Consumers' next
solicitation for capacity. In June 1995, the MPSC issued an order that
set rates and charges for retail delivery service under the experiment.
Consumers and ABATE sought rehearing regarding a number of issues included
in the order. In September 1995, the MPSC denied the rehearing requests.
Consumers, ABATE and the Dow Chemical Company have filed claims of appeal
of the MPSC's retail wheeling orders. Consumers anticipates that these
appeals will be consolidated with appeals previously filed by Detroit
Edison and the Attorney General. Consumers does not expect this short-
term experiment to have a material impact on its financial position or
results of operations.
In March 1995, the FERC issued a NOPR and a supplemental NOPR that propose
changes in the wholesale electric industry. Among the most significant
proposals, is a requirement that utilities provide open access to the
domestic interstate transmission grid. Under the FERC's proposal, all
utilities would be required to use these tariffs for their own wholesale
sales of electric energy, and the utilities would be allowed the
opportunity to recover wholesale stranded costs (including those
applicable to municipalization situations). Consumers is unable to
predict what (if any) final rules that may be issued by the FERC related
to this proposal. However, management believes that Consumers is well-
positioned to conform to open access as it has been voluntarily providing
this transmission service since 1992.
Nuclear Matters: In July 1995, the NRC issued its Systematic Assessment
of Licensee Performance report for Palisades. The report recognized
improved performance at the plant, specifically in the areas of
Engineering and Plant Operations. In the report, the NRC noted areas
which continue to require management's attention, but also recognized the
development and implementation of plans for corrective action designed to
address previously identified weak areas. The report noted that
performance in the areas of Maintenance and Plant Support was good and
remained unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consumers is using NRC-approved dry casks, which are steel and
concrete vaults, for temporary on-site storage. In January 1995, the U.S.
Sixth Circuit Court of Appeals issued a decision, effectively allowing
Consumers to continue using dry cask storage at Palisades. In June 1995,
the U.S. Supreme Court refused to hear an appeal of this decision as
requested by the Attorney General and other parties.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan and Consumers has been storing low-
level waste at its nuclear plant sites. Recently, a site in South
Carolina became available for accepting low-level waste. Consumers began
shipping its low-level waste to this site during the third quarter of
1995.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is developing plans to anneal the reactor vessel in 1998
at an estimated cost of $20 million to $30 million. This repair would
allow for operation of the plant to the end of its license life in the
year 2007. Consumers cannot predict whether the studies being conducted
as a part of the development plans will support Consumers' proposal to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At September
30, 1995, Consumers had 43 separate stray voltage lawsuits awaiting trial
court action. Consumers believes that the resolution of these lawsuits
will not have a material impact on its financial position or results of
operations. For further information, see Note 4.
Gas Utility Results of Operations
Gas Pretax Operating Income for the quarters ended September 30, 1995 and
1994: During the third quarter of 1995, gas pretax operating income
decreased $2 million from the 1994 level. The decreased operating income
reflects lower gas revenue in 1995 compared to 1994 as a result of a
cumulative revenue adjustment recorded in 1994 which increased revenues
for that year, and higher depreciation expense during 1995. Partially
offsetting this decrease was an 11.4 percent increase in gas deliveries
(see Gas Deliveries section), and lower operation, maintenance and general
tax expenses during 1995.
Gas Pretax Operating Income for the nine months ended September 30, 1995
and 1994: The $4 million increase in gas pretax operating income for the
nine months ended September 30, 1995 compared with the same 1994 period
reflects the reversal of losses previously recorded for gas contingencies
(see Note 3) and lower general tax and gas operation and maintenance
expenses. Partially offsetting this increase were lower gas deliveries
(see Gas Deliveries section) and higher depreciation.
Gas Pretax Operating Income for the 12 months ended September 30, 1995 and
1994: The $17 million decrease in 1995 gas pretax operating income
compared with 1994 reflects lower gas deliveries (see Gas Deliveries
section) and higher depreciation and general taxes, partially offset by
the reversal of losses previously recorded for gas contingencies and lower
operation and maintenance expenses.
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
1995 compared 1995 compared 1995 compared
with 1994 with 1994 with 1994
Deliveries $ 1 $(13) $(29)
Recovery of gas costs and
other regulatory issues (9) 17 14
O&M, general taxes
and depreciation 6 - (2)
---- ---- ----
Total change $ (2) $ 4 $(17)
==== ==== ====
Gas Deliveries: During the third quarter of 1995, gas sales and gas
transported, excluding transport to the MCV and off-system transportation,
totaled 31.9 bcf, an 11.4 percent increase from the corresponding 1994
level. Gas sales and gas transported increased 1.0 bcf and 2.2 bcf,
respectively, with the majority of the change attributable to increased
usage. For the nine months ended September 30, 1995, gas sales and gas
transported for all customer classes totaled 273.1 bcf, an 8.5 percent
decrease from the corresponding 1994 level. Gas sales decreased 8.6 bcf
while transport deliveries increased 4.7 bcf. The decrease in firm sales
occurred primarily due to warmer temperatures. For the 12 months ended
September 30, 1995, gas sales and gas transported for all customer classes
totaled 383.7 bcf, a 9.5 percent decrease from the corresponding 1994
level, reflecting record cold winter weather during the 12 months ended
September 30, 1994 and significantly warmer weather during the 12 months
ended September 30, 1995 period.
Cost of Gas Sold: The cost of gas sold for the third quarter of 1995
increased $5 million from the 1994 level. The cost of gas sold for the
nine months ended September 30, 1995 decreased $40 million from the 1994
level as a result of reduced deliveries and the reversal of a gas supplier
loss contingency. The cost of gas sold for the 12 months ended
September 30, 1995 decreased $58 million from the corresponding 1994 level
which was also the result of reduced gas deliveries and the gas supplier
loss contingency reversal.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates by $21 million. The requested
increase in revenue reflects increased expenditures, including those
associated with postretirement benefits, and proposes a 13 percent return
on equity. In June 1995, the MPSC staff filed its position in this case,
recommending an $11 million rate decrease. In November 1995 the ALJ issued
a proposal for decision that essentially adopted the MPSC staff's position
and recommended a $12 million rate decrease. A final order from the MPSC
is expected in early 1996. For further information regarding Consumers'
current gas rate case, see Note 3.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-pass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
GCR Issues: In April 1995, an ALJ issued a proposal for decision in a
proceeding that had been initiated by Consumers regarding a $44 million
(excluding any interest) gas supply contract pricing dispute with certain
intrastate producers. The ALJ found that the market-based pricing
provisions required specific MPSC approval before Consumers could apply
those prices to purchases under the contracts and found that such approval
had not previously been given. Consumers did not agree with the ALJ's
findings and filed exceptions with the MPSC. In October 1995, the MPSC
issued an order stating that Consumers was not obligated to seek prior
approval of price reductions that were implemented under the contracts in
question. The producers will undoubtedly continue to pursue companion
civil litigation for amounts owed under the producers' theories for
previously purchased gas. Consumers believes the MPSC order supports its
position that the producers' theories are without merit and intends to
vigorously oppose any claims they may raise but cannot predict the outcome
of this issue.
Gas Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its gas utility operations of
$128 million for 1995, $119 million for 1996 and $101 million for 1997.
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: The Michigan Natural Resources and
Environmental Protection Act (formerly the Environmental Response Act) was
substantially amended in June 1995. The Michigan law bears similarities
to the federal Superfund law. The purpose of the 1995 amendments was
generally to encourage development of industrial sites and to remove
liability from some parties who were not responsible for activities
causing contamination. Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites, including
some that formerly housed manufactured gas plant facilities. Data
available to Consumers and its continued internal review of these former
manufactured gas plant sites have resulted in an estimate for all costs
related to investigation and remedial action of between $48 million and
$112 million. These estimates are based on undiscounted 1994 costs. At
September 30, 1995, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could impact the
estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recovered in rates, prudent costs must be
approved in a rate case. The MPSC has approved similar deferred
accounting requests by several other Michigan utilities relative to
investigation and remedial action costs. In June 1995, as part of
Consumers' rate case, the MPSC staff recommended that the MPSC adopt the
same accounting and cost recovery previously provided to other Michigan
utilities. Consumers has initiated discussions with certain insurance
companies regarding coverage for some or all of the costs which may be
incurred for these sites. For further information, see Note 4.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.0
percent per year (excluding MCV transportation and off-system deliveries)
over the next five years, primarily due to a steadily growing customer
base. Additionally, Consumers has several strategies which will support
increased load requirements in the future. These strategies include
increased efforts to promote natural gas to both current and potential
customers that are using other fuels for space and water heating.
Consumers plans additional capital expenditures to construct new gas mains
that are expected to expand Consumers' system.
New technologies being developed on a national level, such as the emerging
use of natural gas vehicles, also provide Consumers with sales growth
opportunities. In addition, as air quality standards continue to become
more stringent, management believes that greater opportunities exist for
converting industrial boiler load and other processes to natural gas.
Low Income Home Energy Assistance Program funding currently provides
approximately $71 million in heating assistance to approximately 400,000
Michigan households, with approximately 18 percent of funds going to
Consumers' customers. However, recent actions by the U. S. House of
Representatives Committee on Appropriations has put restoration of funding
for fiscal year 1996 at risk. Consumers is continuing vigorous efforts to
maintain this funding.
Other
Public Utility Holding Company Act Exemption: CMS Energy is exempt from
registration under PUHCA. However, in 1991, the Attorney General and the
MMCG asked the SEC to revoke this exemption. In April 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. CMS Energy is opposing this
request and believes it will maintain its current exemption from
registration under PUHCA. The SEC has not taken action on this matter.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) a repeal of PUHCA, without condition; or
3) amend PUHCA to give the SEC broader exemptive authority. The SEC staff
supported option 1 because it would achieve the benefits of unconditional
repeal, while preserving the ability of states to protect consumers. In
October, a bill was introduced in the U. S. Senate to transfer oversight
of public utility holding companies from the SEC to FERC.
New Accounting Standards: In March 1995, the FASB issued SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement, which is effective for 1996
financial statements, requires that an asset be reviewed for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that a loss be recognized
whenever a regulator excludes a portion of an asset's cost from a
company's rate base. Consumers does not expect the application of this
statement to have a material impact on its financial position or results
of operations.
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation, effective for 1996. This new standard encourages companies
to apply the fair-value method of accounting for stock compensation, but
permits continued use of the intrinsic-value method, with disclosure of
pro-forma net income and earnings per share as if the fair-value method
had been applied. Consumers does not believe that changing to the fair-
value method would have a material impact on its financial position or
results of operations.
<PAGE>
<PAGE> 66
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' 1994 Forms 10-K
for the year ended December 31, 1994, and in Form 10-Q for the quarters
ended March 31, 1995 and June 30, 1995. 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.
Rate Case Proceedings
Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant
Investment
In 1984, Consumers abandoned construction of its unfinished nuclear power
plant located in Midland, Michigan, and subsequently took a series of
write-downs. In proceedings before the MPSC docketed as Case No. U-7830,
Step 3B, Consumers sought to recover $2.1 billion of abandoned Midland
assets from its retail electric customers over 15 years. In 1991, the
MPSC issued a final order permitting Consumers to recover $760 million of
its abandoned Midland investment over 10 years without a return.
Consumers, the Attorney General and ABATE filed claims of appeal of the
MPSC order with the Court of Appeals. In December 1994, the Court of
Appeals issued an opinion affirming the MPSC's order in all respects.
Consumers, ABATE and the Attorney General all filed applications for leave
to appeal the Court of Appeals decision with the Michigan Supreme Court.
In October 1995, the Michigan Supreme Court denied all applications for
leave to appeal the Court of Appeals' decision relating to the Step 3B
order.
1994 Electric Rate Case Filing
In August 1995, Consumers filed exceptions to the ALJ's proposal for
decision which, among other things, recommended a $46 million rate
increase. In September 1995, Consumers and the MPSC staff reached a
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in three separate
proceedings, one of which is the 1994 electric rate case. Specifically,
the agreement would: resolve the current electric rate case and provide
for approximately a $50 million annual increase in revenue; substantially
reduce subsidization of residential customers by large industrial
customers; provide for cost recovery of the remaining 325 MW of MCV
capacity; implement provisions for incentive ratemaking; resolve the
pending special competitive services and depreciation rate cases;
implement a limited direct access program; enable Consumers to negotiate
rates for certain large industrial customers; and accelerate recovery of
nuclear plant investment. In mid-September, the MPSC issued an order
creating a consolidated proceeding to consider the settlement and
establishing an expedited hearing schedule. On October 6, 1995, Consumers
filed amendments to its applications in each of the three cases to include
a request that the settlement agreement be considered and approved by the
MPSC. In late October, in response to a lawsuit filed by the Attorney
General, the Circuit Court of Ingham County entered an order vacating the
September 14th scheduling order of the MPSC and indicated that the MPSC
should reconsider its procedural handling of the proposed settlement. The
MPSC, in an order issued November 1, 1995, found that further proceedings
should be held and ordered Consumers to publish a notice of hearing by
November 12, 1995. The order also scheduled a pre-hearing conference for
November 21, 1995 at which the MPSC will consider petitions for leave to
intervene, hear arguments on motions regarding the consolidation of the
three cases and objections to the amendments to the applications filed by
Consumers in the three cases, and schedule subsequent proceedings and
other preliminary matters.
1994 Gas Rate Case Filing
In November 1995, the ALJ issued a proposal for decision essentially
adopting the MPSC Staff's position and recommending a $12 million rate
decrease. Under the MPSC rate case scheduling policies, a final order in
this case is expected in early 1996.
Stray Voltage Lawsuits
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when small electrical currents present in grounded electric
systems are diverted from their intended path. In September 1995,
Consumers was contacted by counsel who purported to represent over 125
customers who believe they are owed additional payments as a result of a
stray voltage claims settlement previously reached with Consumers in late
1992 to early 1993. If these parties are correct, then approximately $3.5
million in additional payments may be owed in satisfaction of the claims.
In October 1995, counsel for the claimants commenced litigation and
Consumers believes the claimants' position is without merit and intends to
vigorously oppose any claims they may raise but cannot predict the outcome
of this matter. In the meantime, a second lawyer has sought to negotiate
a settlement on behalf of 33 of the potential claimants whom he claims are
now his clients. Consumers is studying the matter. At September 30,
1995, Consumers had 43 other separate stray voltage cases awaiting action
at the trial court level.
MPSC Case No. U-10029 - Intrastate Gas Supply
On February 8, 1993, the MPSC issued an order granting Consumers' request
to lower the price to be paid North Michigan under its contract, and North
Michigan filed an appeal with the Court of Appeals. The Court of Appeals
affirmed the MPSC order and North Michigan's motion for reconsideration
was denied in August 1995. In September 1995, North Michigan filed an
application for leave to appeal the Court of Appeal's order with the
Michigan Supreme Court.
Request for Approval of a Competitive Tariff for Certain Industrial
Customers
As of September 30, 1995, all parties have filed briefs and reply briefs
in this proceeding. See Item 1. Legal Proceedings - Rate Case
Proceedings - 1994 Electric Rate Case Filings, for information concerning
a proposed settlement agreement relating to this case.
Retail Wheeling Proceedings
In June 1995, the MPSC issued an order that set rates and charges for
retail delivery service under the experiment. In September 1995, the MPSC
denied Consumers' and ABATE's petitions for rehearing. Consumers, ABATE
and Dow Chemical Company have filed claims of appeal of the MPSC's order
with the Court of Appeals, joining Detroit Edison and the Attorney General
who had previously appealed.
Highland Township Franchise Proceeding
MichCon obtained a revocable franchise in 1956 to provide natural gas
service to Highland Township, Michigan. In 1962, Consumers secured an
irrevocable 30 year franchise to provide natural gas service to Highland
Township. Neither franchise was exclusive. MichCon's franchise expired
in 1986, and was not renewed, however, MichCon continued service to
Highland Township. Consumers secured a revocable renewal franchise in
1992.
Thereafter, in 1992, Consumers filed suit to enjoin MichCon from expanding
its gas service to new customers in Highland Township. The Circuit Court
of Oakland County, Michigan denied MichCon's motion for summary
disposition and granted Consumers' petition for an injunction. MichCon
subsequently transferred its remaining rights and interest in Highland
Township to Consumers, ceased doing business there and appealed the
Circuit Court decision with the Court of Appeals. In August 1995, the
Court of Appeals refused to decide the issue addressed by the Circuit
Court (namely whether MichCon, as a holdover utility without any
franchise, could continue to lawfully do business in a township) because
the Court of Appeals concluded that the Consumers' 1992 revocable renewal
franchise was invalid since it was not confirmed by a vote of the Highland
Township electorate as the Court determined was required in the Public
Utility Franchise Act. Prior to this decision, the commonly held
interpretation of the Public Utility Franchise Act was that a vote of the
electorate was only required for irrevocable franchises, not revocable
franchises such as that held by Consumers in this case. The Michigan
Court of Appeals reversed and remanded to the Circuit Court order for
entry of summary disposition in MichCon's favor -- even though the only
franchise MichCon had ever possessed was revocable, and thus under the
Court's decision, invalid. Although the Court of Appeals specifically
stated in its opinion that continuing to provide utility service without a
valid franchise was not necessarily unlawful, Consumers currently has
approximately 700 revocable franchises which could be affected should the
Court of Appeals order remain in place. In September 1995, Consumers
filed a motion for reconsideration and for a stay of the Court of Appeal's
opinion pending final appellate resolution.
Intrastate Gas Supplier Contract Pricing Dispute
On April 18, 1995, the ALJ issued a proposal for decision in a proceeding
that had been initiated by Consumers regarding a gas supply contract
pricing dispute. In the proposal for decision the ALJ agreed with
Consumers that certain market based pricing provisions should, on a
prospective basis, limit the price paid by Consumers under the three gas
purchase agreements at issue. The ALJ also found that the market based
pricing provisions required specific MPSC approval before Consumers could
apply those prices to purchase under the agreements and found that such
approval had not previously been given. On October 25, 1995, the MPSC
issued an opinion and order finding that a pricing mechanism like the one
at issue, that operates within definite ceiling and floor prices, is a
definite pricing provision within the meaning of the state statutes and
was properly implemented to reduce gas prices without the prior approval
of the MPSC.
Prior to the issuance of the ALJ's proposal for decision, the intrastate
gas producers involved in this MPSC proceeding filed a complaint against
Consumers in a local circuit alleging breach of contract. On Consumers'
motion, the court dismissed the lawsuit. The gas suppliers subsequently
filed a petition for rehearing with the court where the matter is still
pending.
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)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
Current Reports on Form 8-K dated September 11, 1995 (CMS Energy
Corporation and Consumers Power Company) covering matters pursuant to
"Item 5. Other Events."
<PAGE>
<PAGE> 70
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 13, 1995 By A M Wright
------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: November 13, 1995 By A M Wright
------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT (12)
<PAGE>
<PAGE>
<PAGE>
<TABLE>
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges
(Millions of Dollars)
<CAPTION>
Nine Months
Ended Years Ended December 31
Sept. 30, 1995 1994 1993 1992 1991 1990
(b) (c)(d) (e)
<S> <C> <C> <C> <C> <C> <C>
Earnings as defined (a)
Net income $ 166 $ 179 $ 155 $(297) $(262) $(494)
Income taxes 103 92 75 (146) (94) 25
Exclude equity basis subsidiaries (30) (18) (6) 10 10 13
Fixed charges as defined, adjusted to
exclude capitalized interest of $4,
$6, $5, $3, $5, and $38 million for
the nine months ended September 30, 1995
and for the years ended December 31,
1994, 1993, 1992, 1991 and 1990,
respectively 209 237 245 228 364 317
------ ------ ------ ------ ------ ------
Earnings as defined $ 448 $ 490 $ 469 $(205) $ 18 $(139)
====== ====== ====== ====== ====== ======
Fixed charges as defined (a)
Interest on long-term debt $ 168 $ 193 $ 204 $ 169 $ 274 $ 293
Estimated interest portion of lease rental 7 9 11 16 17 18
Other interest charges 17 18 24 35 68 33
Preferred stock dividend 32 36 17 16 15 17
------ ------ ------ ------ ------ ------
Fixed charges as defined $ 224 $ 256 $ 256 $ 236 $ 374 $ 361
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges 2.00 1.91 1.83 - - -
====== ====== ====== ====== ====== ======
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K.
(b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include
a $520 million pretax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and
other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in
its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding
these amounts.
(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
pretax 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
pretax 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>
ARTHUR ANDERSEN LLP
Exhibit (15)
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
its Registration Statements No. 33-51877, No. 33-55805, No. 33-29681, No.
33-47629, No. 33-57719, No. 33-57719-01, No. 33-64044, No. 33-60007 and
No. 33-62573 its Form 10-Q for the quarter ended September 30, 1995, which
includes our report dated November 9, 1995 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 9, 1995
<PAGE>
<PAGE>
ARTHUR ANDERSEN LLP
Exhibit (15)
To Consumers Power Company:
We are aware that Consumers Power Company has incorporated by reference in
its Registration Statements No. 33-63949 and No. 33-63949-01 its Form 10-Q
for the quarter ended September 30, 1995, which includes our report dated
November 9, 1995 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 9, 1995
<PAGE>
<TABLE> <S> <C>
<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 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-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,318
<OTHER-PROPERTY-AND-INVEST> 1,447
<TOTAL-CURRENT-ASSETS> 742
<TOTAL-DEFERRED-CHARGES> 1,349
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,856
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 1,935
<RETAINED-EARNINGS> (489)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,439
0
356
<LONG-TERM-DEBT-NET> 1,997
<SHORT-TERM-NOTES> 474
<LONG-TERM-NOTES-PAYABLE> 766
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 164
0
<CAPITAL-LEASE-OBLIGATIONS> 101
<LEASES-CURRENT> 43
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,508
<TOT-CAPITALIZATION-AND-LIAB> 7,856
<GROSS-OPERATING-REVENUE> 2,821
<INCOME-TAX-EXPENSE> 103
<OTHER-OPERATING-EXPENSES> 2,342
<TOTAL-OPERATING-EXPENSES> 2,453
<OPERATING-INCOME-LOSS> 368
<OTHER-INCOME-NET> (8)
<INCOME-BEFORE-INTEREST-EXPEN> 368
<TOTAL-INTEREST-EXPENSE> 181
<NET-INCOME> 187
21
<EARNINGS-AVAILABLE-FOR-COMM> 166
<COMMON-STOCK-DIVIDENDS> 60
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 389
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<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 IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000201533
<NAME> CONSUMERS POWER COMPANY
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,318
<OTHER-PROPERTY-AND-INVEST> 681
<TOTAL-CURRENT-ASSETS> 618
<TOTAL-DEFERRED-CHARGES> 1,200
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,817
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 491
<RETAINED-EARNINGS> 191
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,545
0
356
<LONG-TERM-DEBT-NET> 1,518
<SHORT-TERM-NOTES> 474
<LONG-TERM-NOTES-PAYABLE> 403
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 45
0
<CAPITAL-LEASE-OBLIGATIONS> 101
<LEASES-CURRENT> 43
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,354
<TOT-CAPITALIZATION-AND-LIAB> 6,817
<GROSS-OPERATING-REVENUE> 2,554
<INCOME-TAX-EXPENSE> 112
<OTHER-OPERATING-EXPENSES> 2,121
<TOTAL-OPERATING-EXPENSES> 2,242
<OPERATING-INCOME-LOSS> 312
<OTHER-INCOME-NET> 1
<INCOME-BEFORE-INTEREST-EXPEN> 322
<TOTAL-INTEREST-EXPENSE> 120
<NET-INCOME> 202
21
<EARNINGS-AVAILABLE-FOR-COMM> 181
<COMMON-STOCK-DIVIDENDS> 70
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 318
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Power Company ("Consumers") and
its wholly-owned subsidiary, Michigan Gas Storage Company) as of September
30, 1995 and 1994, and the related 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 balance sheet of Consumers Gas Group as of December 31,
1994, and the related statements of income, common stockholders' equity
and cash flows for the year then ended (not presented herein), and, in our
report dated January 31, 1995 (except with respect to certain matters
discussed in Notes 2, 3 and 6 to the financial statements as to which the
date is June 9, 1995), we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
balance sheet as of December 31, 1994, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
Arthur Andersen LLP
Detroit, Michigan,
November 9, 1995
<PAGE>
<PAGE> 2
<TABLE>
Consumers Gas Group
Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1995 1994 1995 1994 1995 1994
In Millions
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE $ 122 $ 126 $ 801 $ 837 $1,116 $1,188
---------------------------------------------------------
OPERATING EXPENSES
Operation
Cost of gas sold 53 48 435 475 622 680
Other 42 50 135 137 183 183
---------------------------------------------------------
Total operation 95 98 570 612 805 863
Maintenance 9 9 27 30 37 42
Depreciation, depletion and amortization 10 8 57 51 82 75
General taxes 6 7 37 38 53 52
---------------------------------------------------------
Total operating expenses 120 122 691 731 977 1,032
---------------------------------------------------------
PRETAX OPERATING INCOME 2 4 110 106 139 156
INCOME TAXES (1) (1) 35 32 44 44
---------------------------------------------------------
NET OPERATING INCOME 3 5 75 74 95 112
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS) - - - (1) (1) (1)
---------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 8 8 23 22 31 32
Other interest 2 1 4 3 6 5
Capitalized interest - - (1) - (1) -
Preferred dividends 1 1 5 3 6 4
---------------------------------------------------------
Net fixed charges 11 10 31 28 42 41
---------------------------------------------------------
NET INCOME (LOSS) $ (8) $ (5) $ 44 $ 45 $ 52 $ 70
=========================================================
NET INCOME (LOSS) ATTRIBUTABLE TO CMS ENERGY
SHAREHOLDERS THROUGH RETAINED INTEREST $ (7) $ (5) $ 45 $ 45 $ 53 $ 70
=========================================================
NET LOSS ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ (1) $ - $ (1) $ - $ (1) $ -
=========================================================
AVERAGE CLASS G COMMON SHARES OUTSTANDING 7 - 7 - 7 -
=========================================================
LOSS PER AVERAGE CLASS G COMMON SHARE $ (.17) $ - $ (.17) $ - $ (.17) $ -
=========================================================
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .28 $ - $ .28 $ -
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 3
<TABLE>
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30 September 30
1995 1994 1995 1994
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 44 $ 45 $ 52 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 57 51 82 75
Capital lease and other amortization 3 3 4 6
Deferred income taxes and investment tax credit 19 6 17 10
Other 1 1 1 3
Changes in other assets and liabilities (59) 11 (53) 36
------ ------ ------ ------
Net cash provided by operating activities 65 117 103 200
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (77) (82) (124) (128)
Other (5) (5) (7) (6)
------ ------ ------ ------
Net cash used in investing activities (82) (87) (131) (134)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net 68 (2) 86 (37)
Payment of common stock dividends (49) (30) (65) (55)
Payment of capital lease obligations (2) (3) (3) (5)
Retirement of bonds and other long-term debt (1) (29) (3) (152)
Repayment of bank loans (1) (31) (76) (31)
Proceeds from bank loans - - 88 1
Proceeds from preferred stock - 42 - 42
Contribution from stockholder - 22 - 22
Proceeds from bonds and other long-term debt - - - 149
------ ------ ------ ------
Net cash provided by (used in) financing activities 15 (31) 27 (66)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) (1) (1) -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 4 4 3 3
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 2 $ 3 $ 2 $ 3
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 4
<TABLE>
Consumers Gas Group
Balance Sheets
<CAPTION>
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Plant $2,132 $2,064 $2,014
Less accumulated depreciation, depletion and amortization 1,164 1,117 1,103
----------------------------------
968 947 911
Construction work-in-progress 48 47 57
----------------------------------
1,016 994 968
----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 2 4 3
Accounts receivable and accrued revenue, less
allowances of $2, $2 and $2, respectively (Note 6) 49 51 23
Inventories at average cost
Gas in underground storage 263 235 271
Materials and supplies 10 9 10
Trunkline settlement 30 30 30
Deferred income taxes 1 16 11
Prepayments and other 22 48 23
----------------------------------
377 393 371
----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 160 158 158
Trunkline settlement 33 55 63
Deferred income taxes 7 3 -
Other 65 70 65
----------------------------------
265 286 286
----------------------------------
TOTAL ASSETS $1,658 $1,673 $1,625
==================================
</TABLE>
<PAGE>
<PAGE> 5
<TABLE>
<CAPTION>
September 30 September 30
1995 December 31 1994
(Unaudited) 1994 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 312 $ 317 $ 325
Preferred stock 78 78 78
Long-term debt 417 426 372
Non-current portion of capital leases 16 18 18
----------------------------------
823 839 793
----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 21 13 53
Notes payable 167 99 81
Accounts payable 56 68 69
Trunkline settlement 30 30 30
Accrued refunds 30 20 31
Accrued taxes 22 55 25
Accrued interest 7 8 7
Other 40 68 63
----------------------------------
373 361 359
----------------------------------
NON-CURRENT LIABILITIES
Postretirement benefits 177 172 176
Regulatory liabilities for income taxes, net 153 144 137
Trunkline settlement 33 55 63
Deferred investment tax credit 29 30 31
Other 70 72 66
----------------------------------
462 473 473
----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,658 $1,673 $1,625
==================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 6
<TABLE>
Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1995 1994 1995 1994 1995 1994
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184
------- ------- ------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 107 107 107 85 107 85
Stockholder's contribution - - - 22 - 22
------- ------- ------- ------- ------- -------
At end of period 107 107 107 107 107 107
------- ------- ------- ------- ------- -------
RETAINED EARNINGS
At beginning of period 38 35 26 19 34 19
Net income (loss) (8) (5) 44 45 52 70
Common stock dividends
declared (Note 2) (9) 4 (49) (30) (65) (55)
------- ------- ------- ------- ------- -------
At end of period 21 34 21 34 21 34
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 312 $ 325 $ 312 $ 325 $ 312 $ 325
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 7
Consumers Gas Group
Condensed Notes to Financial Statements
In July and August 1995, CMS Energy issued a total of 7,520,000 shares of
Class G Common Stock. This new class of Common Stock is intended to
reflect the separate performance of the gas distribution, storage and
transportation businesses conducted by Consumers and Michigan Gas Storage
(collectively, Consumers Gas Group). Accordingly, these financial
statements and their related condensed notes should be read along with the
financial statements and notes contained in the 1994 Form 10-K of
CMS Energy Corporation that includes the Report of Independent Public
Accountants, and the financial statements and notes of CMS Energy and
Consumers Gas Group in CMS Energy's Registration Statement on Form S-3
(Nos. 33-57719 and 33-57719-01) relating to the Class G Common Stock. 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
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the business of CMS Energy, see Note 1
to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
In March 1995, CMS Energy received shareholders' approval to amend its
Articles of Incorporation and authorize a new class of Common Stock of
CMS Energy, designated Class G Common Stock which reflects the separate
performance of the Consumers Gas Group. For further information regarding
the nature and issuance of the Class G Common Stock, see Note 7 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein.
2: Earnings (Loss) Per Share and Dividends
The loss per share, for the three, nine and twelve month periods ended
September 30, 1995, reflects the performance of the Consumers Gas Group
since the initial issuance of the Class G Common Stock during the third
quarter of 1995. The Class G Common Stock participates in earnings and
dividends from the issue date. The earnings (loss) attributable to such
common stock and the related amounts per share is computed by considering
the weighted average number of common shares outstanding.
The earnings (loss) attributable to outstanding Class G Common Stock is
equal to Consumers Gas Group's net income (loss) multiplied by a fraction,
the numerator of which is the weighted average number of shares of Class G
Common Stock outstanding during the period and the denominator which
represents the weighted average number of Outstanding Shares and Retained
Interest Shares during the period. The loss attributable to Class G
Common Stock on a per share basis, for the periods ended September 30,
1995, is based on 23.17 percent of the loss of the Consumers Gas Group
since the initial issuance.
Earnings (loss) per share are omitted from the statements of income, for
the periods ended September 30, 1994, since the Class G Common Stock was
not part of the equity structure of CMS Energy. For purpose of analysis,
the pro forma data provided below for the nine months ended September 30,
1995 and 1994 and the year ended December 31, 1994 gives effect to the
original issuance and sale of 7.52 million shares of Class G Common Stock
(representing 23.5 percent of the equity attributable to the Consumers Gas
Group) as if the sale occurred on January 1, 1994.
In Millions, Except Per Share Amounts
Pro Forma Pro Forma
Nine Months Ended Year Ended
September 30 December 31
1995 1994 1994
----- ----- -----
Consumers Gas Group Net Income $ 44 $ 45 $ 53
Net Income attributable to CMS Energy
Common Stock through Retained Interest $ 34 $ 34 $ 41
Net Income attributable to outstanding
Class G Common Stock $ 10 $ 11 $ 12
Average shares outstanding
of Class G Common Stock 7.521 7.520 7.520
Earnings per share attributable to
outstanding Class G Common Stock $1.38 $1.41 $1.66
Holders of Class G Common Stock have no direct rights in the equity or
assets of the Consumers Gas Group, but rather have rights in the equity
and assets of CMS Energy as a whole. In the sole discretion of its Board
of Directors, dividends may be paid exclusively to the holders of Class G
Common Stock, exclusively to the holders of CMS Energy Common Stock, or to
the holders of both classes in equal or unequal amounts. Dividends on the
Class G Common Stock are paid at the discretion of the Board of Directors
based primarily upon the earnings and financial condition of the Consumers
Gas Group, and to a lesser extent, CMS Energy as a whole. It is the Board
of Directors' current intention that the declaration or payment of
dividends with respect to the Class G Common Stock will not be reduced,
suspended or eliminated as a result of factors arising out of or relating
to the electric utility business or the non-utility businesses of
CMS Energy unless such factors also require, in the Board of Directors'
sole discretion, the omission of the declaration or reduction in payment
of dividends on both the CMS Energy Common Stock and the Class G Common
Stock.
The portion of Consumers' common dividends attributed to the Consumers Gas
Group, for periods prior to the July 1995 issuance of the Class G Common
Stock, have been reflected in the financial statements. These dividend
amounts were allocated based on the ratio of the Consumers Gas Group's net
income (loss) to Consumers' consolidated net income after dividends on
preferred stock. This ratio was then applied to Consumers' total dividend
payments for these periods. Dividends declared on the Class G Common
Stock following the issuance are also reflected on the financial
statements. In July and October 1995, the Board of Directors declared
quarterly dividends of 28 cents per share ($1.12 per share on an annual
basis) on Class G Common Stock.
3: Rate Matters
For information regarding rate matters directly affecting the Consumers
Gas Group, see the "Gas Rates" and "GCR Issues," discussions in Note 3 to
the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
4: Commitments and Contingencies
Capital Expenditures: The Consumers Gas Group estimates capital
expenditures, including new lease commitments, will be $128 million for
1995, $119 million for 1996 and $101 million for 1997. These estimates
include an attributed portion of Consumers' anticipated capital
expenditures for common plant and equipment of $23 million, $18 million
and $15 million for 1995, 1996 and 1997, respectively.
For further information regarding commitments and contingencies directly
affecting the Consumers Gas Group (including those involving former
manufactured gas plant sites), see the "Environmental Matters," "Public
Utility Holding Company Act Exemption" and "Other" discussions in Note 4
to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
5: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1995 1994 1995 1994
---- ---- ---- ----
Cash transactions
Interest paid (net of
amounts capitalized) $ 26 $ 26 $ 33 $ 35
Income taxes paid (net of
refunds) 31 30 40 27
Non-cash transactions
Assets placed under
capital leases $ 1 $ 3 $ 3 $ 4
6: Short-term and Long-term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. At September 30, 1995,
Consumers had an unsecured $425 million facility and unsecured, committed
lines of credit aggregating $135 million that are used to finance seasonal
working capital requirements. At September 30, 1995 and 1994, Consumers
had a total of $474 million and $401 million outstanding under these
facilities, respectively.
Consumers has an established $500-million trade receivables purchase and
sale program. At September 30, 1995 and 1994, receivables sold under the
agreement totaled $210 million. Consumers generally manages its
short-term financings on a centralized consolidated basis. The portion of
receivables sold attributable to the Consumers Gas Group at September 30,
1995 and 1994 is estimated by management to be $29 million and $32
million, respectively. Accounts receivable and accrued revenue in the
balance sheets have been reduced to reflect receivables sold. The
portions of short-term debt and receivables sold attributed to Consumers
Gas Group reflect the high utilization of short-term borrowings to finance
the purchase of gas for storage in the summer and fall periods.
In April 1995, the MPSC issued an order authorizing Consumers to issue and
sell up to $300 million of intermediate and/or long-term debt and $100
million of preferred stock or subordinate debentures. In November 1995,
Consumers filed a registration statement with the SEC for the possible
future sale of $100 million of Trust Originated Preferred Securities
through a business trust affiliated with Consumers. The trust was formed
for the sole purpose of issuing certain securities and investing the
proceeds in an equivalent principal amount of subordinated notes. The
subordinated notes will be unsecured obligations of Consumers. A portion
of any future issuance of debt or securities may be attributed to the
Consumers Gas Group.
<PAGE>
<PAGE> 11
Consumers Gas Group
Management's Discussion and Analysis
In July and August 1995, CMS Energy issued a total of 7,520,000 shares of
Class G Common Stock. This new class of Common Stock is intended to
reflect the separate performance of the gas distribution, storage and
transportation businesses conducted by Consumers and Michigan Gas Storage
(collectively, Consumers Gas Group). Accordingly, this MD&A should be
read along with the MD&A in the 1994 Form 10-K of CMS Energy and the MD&As
of CMS Energy and Consumers Gas Group in CMS Energy's Registration
Statement on Form S-3 (Nos. 33-57719 and 33-57719-01) relating to the
Class G Common Stock.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the businesses of CMS Energy, including
the nature and issuance of the Class G Common Stock, see the MD&A of
CMS Energy included and incorporated by reference herein.
Earnings for the quarters ended September 30, 1995 and 1994
For the third quarter of 1995 the Consumers Gas Group experienced a net
loss of $8 million compared to a $5 million net loss for the third quarter
of 1994. Losses during the third quarter are not unexpected given the
seasonality (approximately 75 percent of gas revenues are generated in the
first and fourth quarters) of Consumers Gas Group's business. The
additional $3 million loss for the current period reflects a cumulative
revenue adjustment recorded in 1994 which increased revenue for that year.
Partially offsetting this loss was an 11.4 percent increase in gas
deliveries, and lower operation and general tax expenses during 1995.
Earnings for the nine months ended September 30, 1995 and 1994
Net income for the Consumers Gas Group for the nine months ended September
30, 1995 totaled $44 million, compared with $45 million for the nine
months ended September 30, 1994. Earnings in 1995 recognize the benefit
of reversing losses previously recorded for gas contingencies and lower
general tax and gas operation expenses, offset by lower gas deliveries,
higher depreciation expense, and increased preferred dividend cost.
Earnings for the 12 months ended September 30, 1995 and 1994
Net income for the Consumers Gas Group for the 12 months ended September
30, 1995 totaled $52 million, compared with $70 million for the 12 months
ended September 30, 1994. The decrease in 1995 net income reflects lower
gas deliveries and higher depreciation and general tax expenses, somewhat
offset by the reversal of losses previously recorded for gas contingencies
and lower operation and maintenance expenses during the 1995 period.
Cash Position, Financing and Investing
Consumers Gas Group's cash requirements are met by cash from operations
and financing activities. In the first nine months of 1995 and 1994,
Consumers Gas Group's cash inflow from operations was derived mainly from
Consumers' sale and transportation of natural gas. Consumers Gas Group's
primary use of cash continues to reflect its gas utility construction
expenditures and improvements in the reliability of its gas utility
transmission and distribution systems. It also has used its cash to
retire portions of long-term securities and to pay common and preferred
dividends.
Financing and Investing Activities: Capital expenditures for the
Consumers Gas Group (including assets placed under capital lease) totaled
$78 million for the first nine months of 1995 compared with $85 million
for the first nine months of 1994.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures for the Consumers Gas Group, including new lease commitments,
will total approximately $348 million over the next three years.
In Millions
Years Ended December 31 1995 1996 1997
Gas Utility (a) $125 $117 $ 99
Michigan Gas Storage 3 2 2
---- ---- ----
$128 $119 $101
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to both
utility businesses.
The Consumers Gas Group expects that cash from operations and the ability
to access debt markets will provide necessary working capital and
liquidity to fund future capital expenditures, required debt payments and
other cash needs in the foreseeable future. In November 1995, Consumers
filed a registration statement with the SEC for the possible future sale
of $100 million of Trust Originated Preferred Securities. For further
information, see Note 6 to the Financial Statements of Consumers Gas
Group.
Consumers generally manages its short-term financings on a centralized,
consolidated basis. At September 30, 1995, Consumers' available sources
of credit included unsecured, committed lines of credit totaling $135
million and a $425 million working capital facility. Consumers also has
FERC authorization to issue or guarantee up to $900 million in short-term
debt through December 31, 1996. 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, 1995, receivables
sold totaled $210 million. Consumers Gas Group's attributed portion of
such receivables sold totaled $29 million.
Results of Operations
For Consumers Gas Group's results of operations, see "Consumers Gas Group
Results of Operations" in CMS Energy's MD&A included and incorporated by
reference herein.
Gas Issues
For Consumers Gas Group's discussion of Gas Rates, GCR Issues and
Environmental Matters, see "Consumers Gas Group Issues" in CMS Energy's
MD&A included and incorporated by reference herein.
Outlook
For Consumers Gas Group's outlook discussion, see "Consumers Gas Group
Outlook" in CMS Energy's MD&A included and incorporated by reference
herein.
Other
For information regarding CMS Energy's exemption from registration under
PUHCA and the effect of new accounting standards, see "Other" in
CMS Energy's MD&A included and incorporated by reference herein.
<PAGE>
<PAGE>
==========================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION
AND
CONSUMERS POWER COMPANY
FORM 10-Q
EXHIBITS
FOR QUARTER ENDED SEPTEMBER 30, 1995
==========================================================================
<PAGE>
EXHIBIT INDEX
Exhibit
Numbers Description
- ------- -----------------------------------------------------------
(12) - CMS Energy: Statements regarding computation of
Ratio of Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
<PAGE>
