<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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS 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 April 30, 1996:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 91,999,879
CMS Energy Class G Common Stock, no par value 7,700,919
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 March 31, 1996
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. . . . . . . . . . . . . . . . . 21
Consumers Power Company
Report of Independent Public Accountants. . . . . . . . . . . . . . . 34
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Common Stockholder's Equity. . . . . . . . 39
Condensed Notes to Consolidated Financial Statements. . . . . . . . . 40
Management's Discussion and Analysis. . . . . . . . . . . . . . . . . 47
PART II:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 57
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 59
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
<PAGE>
<PAGE> 3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . . Association of Businesses Advocating
Tariff Equity
ABB . . . . . . . . . . . . . . Asea Brown Boveri Energy Ventures
ALJ . . . . . . . . . . . . . . Administrative Law Judge
Attorney General. . . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . . Big Rock Point nuclear plant, owned by
Consumers
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 Electric Marketing. . . . . CMS Electric Marketing Company, a
subsidiary of Enterprises
CMS Energy. . . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . . One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas and Electric. . . . . . CMS Gas and Electric Company, a subsidiary
of Enterprises
CMS Gas Marketing . . . . . . . CMS Gas Marketing Company, a subsidiary of
Enterprises
CMS Gas Transmission. . . . . . CMS Gas Transmission and Storage Company,
a subsidiary of Enterprises
CMS Generation. . . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . . CMS Midland Holdings Company, a subsidiary
of Consumers
CMS Midland . . . . . . . . . . CMS Midland Inc., a subsidiary of
Consumers
CMS NOMECO. . . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of
Enterprises
Common Stock. . . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . . Consumers Power Company, a subsidiary of
CMS Energy
Consumers Power Company
Financing I . . . . . . . . . A wholly-owned Delaware business trust of
Consumers
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
Detroit Edison. . . . . . . . . The Detroit Edison Company
DNR . . . . . . . . . . . . . . Michigan Department of Natural Resources
DSM . . . . . . . . . . . . . . Demand-side management
EDEER S. A. . . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., an electric distribution
utility in northeastern Argentina
Enterprises . . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
FERC. . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP. . . . . . . . . . . . . . First Midland Limited Partnership
GCR . . . . . . . . . . . . . . Gas cost recovery
General Motors. . . . . . . . . General Motors Corporation
GTNs. . . . . . . . . . . . . . CMS Energy General Term Notes, $250
million Series A and $125 million Series B
HYDRA-CO. . . . . . . . . . . . HYDRA-CO Enterprises, Inc., a subsidiary
of CMS Generation
kWh . . . . . . . . . . . . . . Kilowatt-hour
mcf . . . . . . . . . . . . . . Thousand cubic feet
MCV Facility. . . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the MCV
Partnership
MCV Partnership . . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . . Management's Discussion and Analysis
Michigan Gas Storage. . . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
Michigan Natural Resources
and Environmental Protection
Act. . . . . . . . . . . . . . Michigan Natural Resources and
Environmental Protection Act Part 201
MHP . . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P.
MPSC. . . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . . Megawatts
NEIL. . . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
NML . . . . . . . . . . . . . . Nuclear Mutual Ltd.
NOPR. . . . . . . . . . . . . . Notice of Proposed Rulemaking
NRC . . . . . . . . . . . . . . Nuclear Regulatory Commission
Outstanding Shares. . . . . . . Outstanding shares of Class G Common Stock
Palisades . . . . . . . . . . . Palisades nuclear plant, owned by
Consumers
PPA . . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a
35-year term commencing in March 1990
PSCR. . . . . . . . . . . . . . Power supply cost recovery
Retained Interest . . . . . . . The interest in the common stockholders'
equity of the Consumers Gas Group that is
retained by CMS Energy
Retained Interest Shares. . . . Authorized but unissued shares of Class G
Common Stock not held by holders of the
Outstanding Shares and attributable to the
Retained Interest
SEC . . . . . . . . . . . . . . Securities and Exchange Commission
Settlement Order. . . . . . . . MPSC Order issued March 31, 1993 in MPSC
Case Nos. U-10127, U-8871 and others, and
the rehearing order issued May 26, 1993
SFAS. . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
Terra . . . . . . . . . . . . . Terra Energy Ltd., an oil and gas
exploration and production company located
in Traverse City, Michigan
TGN . . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in Argentina
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
March 31, 1996 and 1995, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
preferred stock of CMS Energy Corporation and subsidiaries as of
December 31, 1995, 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 26, 1996, 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, 1995, 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,
May 10, 1996.
<PAGE>
<PAGE> 7
<TABLE>
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 591 $ 540 $2,328 $2,185
Gas utility 546 482 1,259 1,105
Oil and gas exploration and production 31 32 107 94
Independent power production 21 23 94 60
Natural gas transmission, storage and marketing 83 38 241 140
Other 3 2 19 6
------- ------- ------- -------
Total operating revenue 1,275 1,117 4,048 3,590
------- ------- ------- -------
OPERATING EXPENSES
Operation
Fuel for electric generation 73 67 289 294
Purchased power - related parties 140 124 507 484
Purchased and interchange power 47 36 207 156
Cost of gas sold 410 308 923 721
Other 168 160 706 638
------- ------- ------- -------
Total operation 838 695 2,632 2,293
Maintenance 40 46 180 194
Depreciation, depletion and amortization 124 114 426 390
General taxes 59 56 199 178
------- ------- ------- -------
Total operating expenses 1,061 911 3,437 3,055
------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS)
Electric utility 103 87 378 331
Gas utility 91 91 151 143
Oil and gas exploration and production 9 15 24 22
Independent power production 6 13 39 31
Natural gas transmission, storage and marketing 8 3 19 9
Other (3) (3) - (1)
------- ------- ------- -------
Total pretax operating income 214 206 611 535
------- ------- ------- -------
INCOME TAXES 57 54 133 111
------- ------- ------- -------
NET OPERATING INCOME 157 152 478 424
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Accretion income 3 3 11 12
Accretion expense (7) (8) (30) (34)
Other income taxes, net 3 1 14 11
Other, net 2 5 7 19
------- ------- ------- -------
Total other income 1 1 2 8
------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 57 56 225 203
Other interest 7 5 29 20
Capitalized interest (2) (1) (9) (6)
Preferred stock dividends 7 7 28 28
Preferred securities distributions 1 - 1 -
------- ------- ------- -------
Net fixed charges 70 67 274 245
------- ------- ------- -------
NET INCOME $ 88 $ 86 $ 206 $ 187
======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO COMMON STOCKS
CMS Energy $ 76 $ 86 $ 191 $ 187
======= ======= ======= =======
Class G $ 12 $ - $ 15 $ -
======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy 92 87 90 86
======= ======= ======= =======
Class G 8 - 8 -
======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy $ .83 $ .99 $ 2.12 $ 2.17
======= ======= ======= =======
Class G $ 1.50 $ - $ 1.90 $ -
======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE
CMS Energy $ .24 $ .21 $ .93 $ .81
======= ======= ======= =======
Class G $ .28 $ - $ .84 $ -
======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 8
<TABLE>
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 88 $ 86 $ 206 $ 187
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $13,
$51 and $49, respectively) 124 114 426 390
Capital lease amortization 9 10 36 30
Debt discount amortization - 8 16 36
Deferred income taxes and investment tax credit 6 29 52 68
Accretion expense 7 8 30 34
Accretion income - abandoned Midland project (3) (3) (11) (12)
Undistributed earnings of related parties (21) (12) (62) (33)
MCV power purchases - settlement (Note 2) (12) (37) (112) (102)
Other 7 - 14 4
Changes in other assets and liabilities 144 127 106 (45)
------ ------ ------ ------
Net cash provided by operating activities 349 330 701 557
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (110) (131) (514) (592)
Investments in partnerships and unconsolidated subsidiaries (71) (11) (301) (41)
Acquisition of companies, net of cash acquired (20) (156) (10) (156)
Investments in nuclear decommissioning trust funds (13) (13) (51) (49)
Cost to retire property, net (6) (9) (39) (41)
Deferred demand-side management costs (2) (2) (10) (11)
Other (3) (4) (12) (9)
Proceeds from sale of property - - 22 20
------ ------ ------ ------
Net cash used in investing activities (225) (326) (915) (879)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans, notes and bonds 339 208 464 869
Proceeds from preferred securities 97 - 97 -
Issuance of common stock 8 9 159 26
Increase (decrease) in notes payable, net (303) (204) (97) 135
Repayment of bank loans (246) (9) (255) (427)
Payment of common stock dividends (24) (18) (90) (70)
Payment of capital lease obligations (9) (10) (36) (29)
Retirement of bonds and other long-term debt - (11) (33) (181)
Retirement of common stock - - (1) (1)
------ ------ ------ ------
Net cash provided by (used in) financing activities (138) (35) 208 322
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (14) (31) (6) -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 48 48
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 42 $ 48 $ 42 $ 48
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 9
<TABLE>
CMS Energy Corporation
Consolidated Balance Sheets
<CAPTION>
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT AND PROPERTY (At Cost)
Electric $6,130 $6,103 $5,826
Gas 2,287 2,218 2,115
Oil and gas properties (full-cost method) 1,096 1,074 978
Other 86 105 55
------ ------ ------
9,599 9,500 8,974
Less accumulated depreciation, depletion and amortization 4,747 4,627 4,405
------ ------ ------
4,852 4,873 4,569
Construction work-in-progress 200 201 257
------ ------ ------
5,052 5,074 4,826
------ ------ ------
INVESTMENTS
Independent power production 297 275 262
Natural gas transmission, storage and marketing 231 193 41
First Midland Limited Partnership (Note 2) 226 225 219
Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83
Other 25 22 16
------ ------ ------
883 818 621
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 42 56 48
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 356 296 149
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 85 83 79
Generating plant fuel stock 16 37 27
Deferred income taxes 22 24 37
Prepayments and other 190 230 178
------ ------ ------
750 910 598
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 458 462 473
Nuclear decommissioning trust funds 323 304 236
Abandoned Midland project 126 131 143
Other 451 444 441
------ ------ ------
1,358 1,341 1,293
------ ------ ------
TOTAL ASSETS $8,043 $8,143 $7,338
====== ====== ======
</TABLE>
<PAGE>
<PAGE> 10
<TABLE>
<CAPTION>
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION (Note 7)
Common stockholders' equity $1,541 $1,469 $1,209
Preferred stock of subsidiary 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 3,110 2,906 2,787
Non-current portion of capital leases 108 106 103
------ ------ ------
5,215 4,837 4,455
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 97 207 180
Notes payable 38 341 135
Accounts payable 267 304 160
Accrued taxes 223 256 172
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 60 53 54
Accrued interest 49 45 30
Accrued refunds 28 22 35
Other 187 192 166
------ ------ ------
1,039 1,510 1,027
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 638 640 604
Postretirement benefits 539 533 549
Power purchases - settlement (Note 2) 215 221 295
Deferred investment tax credits 168 171 178
Regulatory liabilities for income taxes, net 53 44 29
Other 176 187 201
------ ------ ------
1,789 1,796 1,856
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,043 $8,143 $7,338
====== ====== ======
<FN>
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers Power Company
Financing I is $103 million principal amount of 8.36% subordinated interest notes due 2015 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 11
<TABLE>
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 1,951 1,701 1,734 1,684
Common stock reacquired - - (1) (1)
Common stock issued:
CMS Energy 7 33 100 50
Class G 1 - 125 -
Common stock reissued - - 1 1
------- ------- ------- -------
At end of period 1,959 1,734 1,959 1,734
------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (8) - 1 1
Change in unrealized investment-gain (loss) - 1 (9) -
------- ------- ------- -------
At end of period (8) 1 (8) 1
------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (475) (595) (527) (644)
Net income 88 86 206 187
Common stock dividends declared:
CMS Energy (22) (18) (84) (70)
Class G (2) - (6) -
------- ------- ------- -------
At end of period (411) (527) (411) (527)
------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,541 $1,209 $1,541 $1,209
======= ======= ======= =======
<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 1995 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 segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses, including oil and gas exploration
and production, development and operation of independent power production
facilities, electric and gas marketing services to utility, commercial and
industrial customers, and 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 and twelve month periods ended March 31, 1996,
undistributed equity earnings were $21 million and $62 million,
respectively and $12 million and $33 million for the three and twelve
month periods ended March 31, 1995.
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.
Consumers, through its subsidiaries, holds the following assets related to
the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation
to purchase contract capacity from the MCV Partnership is 1,240 MW for
1996 and for each subsequent year through the end of the PPA. 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.
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, the fixed energy charge and the prescribed energy charges
associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis. For all energy delivered on an economic basis above the
availability limits to 915 MW, Consumers has been 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
1993 MPSC-authorized level, future additional after-tax losses and after-
tax cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
- --------------------------------------------------------------------------
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional
underrecoveries and losses (a) 20 22 72 72 74
==========================================================================
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will 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. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals and in March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including Consumers' electric rate case (see
Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding this proposed settlement, see Note 3.
At March 31, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $198 million and $202 million,
respectively. The reduction in the liability since December 31, 1995,
reflects after-tax cash underrecoveries of $8 million, partially offset by
after-tax accretion expense of $4 million. The undiscounted after-tax
amount associated with the liability totaled $593 million at March 31,
1996.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase
agreements with the developers of two proposed independent power projects
totaling 109 MW. As part of the proposed settlement reached with the MPSC
staff (see Note 3), Consumers is seeking 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 1996. Even if Consumers is not allowed
to substitute MCV Facility capacity for the capacity to be provided under
the terminated agreements, Consumers believes that the MPSC would still
approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 23 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
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. For further information
regarding these requests, see the Electric Rate Proceedings and Special
Rates discussions in the Management's Discussion and Analysis.
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 currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in
February 1996 when the MPSC issued a partial final order in Consumers'
electric rate case. If fully adopted, the settlement agreement would:
provide for cost recovery of the entire 325 MW of uncommitted MCV Facility
capacity; implement provisions for incentive ratemaking; resolve the
special competitive services and depreciation rate cases; implement a
limited direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order by mid-1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases,
including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites (see Note 4). In March
1996, the MPSC issued a final order in this case, authorizing recovery of
costs related to postretirement benefits and former manufactured gas plant
sites. Overall however, the order decreased Consumers' gas rates by
$11.7 million annually and authorized an 11.6 percent return on common
equity, a decrease from the 13.25 percent previously authorized.
Consumers has filed a petition for rehearing with the MPSC, requesting,
among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition for
rehearing, if granted in its entirety, would result in a $5.5 million
annual rate reduction compared with the $11.7 million reduction.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intrastate producers. In early 1995, management concluded that the
intrastate producers' pending appeals of the order would not be successful
and accordingly, reversed a previously accrued contingency and recorded a
$23 million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers have petitioned the Michigan Supreme
Court for review.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order 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.
Resolution of the issues discussed in this note is not expected to have a
material impact on CMS Energy's or Consumers' financial position or
results of operations.
4: Commitments, Contingencies and Other
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates 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 March 31, 1996, Consumers has accrued a liability for its
estimated losses.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in June 1995. This Michigan law bears some
similarities to the federal Superfund law. 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. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality. The findings for two remedial investigations
indicate that the expenditures for remedial action at those sites are
likely to be less than previously estimated; however, these findings may
not be representative of all of the sites. Data available to Consumers
and its continued internal review have resulted in an estimate for all
costs related to investigation and remedial action for all 23 sites of
between $48 million and $98 million. These estimates are based on
undiscounted 1996 costs. At March 31, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and legal and
regulatory requirements, could effect the estimate of remedial action
costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and
amortizing these costs over 10 years. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the
costs 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.
Management believes that Consumers' annual operating costs will not be
materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $965 million for 1996, $770 million for 1997 and $745
million for 1998.
Other: As of March 31, 1996, CMS Energy or its subsidiaries have
guaranteed up to $71 million in contingent obligations of unconsolidated
affiliates and other parties.
In August 1995 CMS Generation was served a complaint, which was filed in
the U.S. District Court in Denver, alleging multiple claims relating to a
business project in the Philippines. Plaintiffs have claimed
approximately $85 million in direct damages, indirect damages in a like
amount, plus punitive damages, interest, and attorney's fees. CMS
Generation is vigorously contesting this action.
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 March 31, 1996, Consumers had
33 separate stray voltage lawsuits awaiting trial court action.
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
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers review and file estimated decommissioning costs
with the MPSC in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. 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. As of March 31, 1996, 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 the cask continues to safely store
spent fuel and there is no requirement for its replacement, 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. Certain parties, including the Attorney
General, have petitioned the NRC to suspend Consumers' general license to
store spent fuel, claiming that Consumers' cask unloading procedure does
not satisfy NRC regulations. The NRC staff is reviewing the petitions.
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: $30 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 a future decision 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 March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1996 1995 1996 1995
- -------------------------------------------------------------------------
Cash transactions
Interest paid (net
of amounts capitalized) $ 56 $ 60 $ 203 $ 170
Income taxes paid
(net of refunds) 2 - 36 39
Non-cash transactions
Nuclear fuel placed under
capital lease $ - $ 7 $ 20 $ 25
Other assets placed under
capital leases 1 2 4 15
Common Stock issued to
acquire companies - 24 66 24
Assumption of debt - 16 4 16
Capital leases refinanced - - 21 -
==========================================================================
7: Short-Term And Long-Term Financings, Capitalization and Other
CMS Energy
In the first quarter of 1996, CMS Energy filed a shelf-registration with
the SEC for the issuance and sale of up to $125 million of GTNs, Series B,
with net proceeds to be used for general corporate purposes. As of April
30, 1996, CMS Energy had issued and outstanding approximately $250 million
of Series A and $30 million of Series B GTNs with a weighted-average
interest rates of 7.7 and 8.0 percent, respectively.
Consumers
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital
requirements. At March 31, 1996, a total of $38 million was outstanding
at a weighted-average interest rate of 6.2 percent, compared with $133
million outstanding at March 31, 1995, at a weighted-average interest rate
of 7.0 percent. Consumers has an established $500 million trade
receivables purchase and sale program. At March 31, 1996 and 1995,
receivables sold under the agreement totaled $280 million and $300
million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
In January 1996, 4 million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing preferred securities and the primary asset of the
trust is $103 million of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers. The obligations of Consumers with
respect to the preferred securities under the notes that mature in 2015,
the indenture under which the notes are issued, Consumers' guarantee of
the preferred securities and the Declaration of Trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
CMS NOMECO
In March 1996, CMS NOMECO refinanced its $140 million revolving credit
agreement with a $225 million revolving credit agreement. As of March 31,
1996, $120 million remains outstanding, under the new agreement, with a
weighted-average interest rate of 6.0 percent.
CMS Generation
In January 1996, CMS Generation refinanced a one year $118 million bridge
credit facility for the HYDRA-CO acquisition with a $110 million, five-
year term loan. As of March 31, 1996, $107 million remains outstanding
with a weighted-average interest rate of 7.5 percent.
8: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the twelve month
period ended March 31, 1996 reflect the performance of the Consumers Gas
Group since initial issuance of Class G Common Stock during the third
quarter of 1995. The Class G Common Stock participates in earnings and
dividends from the issue date. The 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 are equal
to the Consumers Gas Group net income (loss) multiplied by a fraction, the
numerator is the weighted-average number of Outstanding Shares during the
period and the denominator represents the weighted-average number of
Outstanding Shares and Retained Interest Shares during the period.
The earnings attributable to Class G Common Stock on a per share basis,
for the three months ended March 31, 1996, are based on 23.72 percent of
the income 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 three months
ended March 31, 1995 and the year ended December 31, 1995 which give
effect to the issuance and sale of 7.52 million shares of Class G Common
Stock (representing 23.50 percent of the equity attributable to the
Consumers Gas Group) on January 1, 1994, and actual data for the three
months ended March 31, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Three Months Ended Three Months Ended Year Ended
------------------ ------------------ ----------
March 31 March 31 December 31
1996 1995 1995
- --------------------------------------------------------------------------
Net Income $ 88 $ 86 $ 204
Net Income attributable to
CMS Energy Common Stock $ 76 $ 74 $ 189
Net Income attributable to
outstanding Class G
Common Stock $ 12 $ 12 $ 15
Average shares outstanding:
CMS Energy Common Stock 91.664 86.918 88.810
Class G Common Stock 7.627 7.520 7.536
Earnings per share attributable
to CMS Energy Common Stock $ 0.83 $ 0.86 $ 2.14
Earnings per share attributable
to outstanding Class G
Common Stock $ 1.50 $ 1.55 $ 1.93
==========================================================================
In April 1996, the Board of Directors declared quarterly dividends of $.24
per share on CMS Energy Common Stock and $.28 per share on Class G Common
Stock.
<PAGE>
<PAGE> 21
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
CMS Energy. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates,
assumptions and uncertainties which could cause actual results or outcomes
to differ materially from those expressed in the forward-looking
information. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Form 10-Q,
the Forward-Looking Information section of this MD&A indicates some
important factors that could cause actual results or outcomes to differ
materially from those addressed in the forward-looking discussions.
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Enterprises is engaged in several domestic and
international energy-related businesses, including oil and gas exploration
and production, development and operation of independent power production
facilities, electric and gas marketing services to utility, commercial and
industrial customers, and storage and transmission of natural gas.
Consolidated earnings for the quarters ended March 31, 1996 and 1995
Consolidated net income totaled $88 million or $.83 per CMS Energy Common
share for the first quarter of 1996, compared to net income of $86 million
or $.99 per CMS Energy Common share for the first quarter of 1995. The $2
million increase reflects increased electric utility sales resulting from
Michigan's continuing economic growth, the impact of a 1996 electric
utility rate increase and higher gas utility deliveries due to increased
growth and colder weather experienced in the first quarter of 1996.
Partially offsetting this increase in net income was the reversal of a gas
contract contingency which benefited the 1995 period (see Note 3). The
decrease in earnings per share attributable to CMS Energy Common Stock for
the first quarter of 1996 compared to the first quarter of 1995, primarily
reflects comparatively lower net income (reflecting the above 1995 non-
recurring item) and the net income attributable to Class G Common stock.
Class G Common stock was issued in the third quarter of 1995.
Consolidated earnings for the 12 months ended March 31, 1996 and 1995
Consolidated net income totaled $206 million or $2.12 per CMS Energy
Common share for the 12 months ended March 31, 1996, compared to $187
million or $2.17 per CMS Energy Common share for the 12 months ended March
31, 1995. The $19 million increase reflects both higher electric utility
sales and gas utility deliveries and the impact of increased electric
utility rates which became effective in early 1996. Partially offsetting
this increase was the recognition of DSM incentive revenue and the
reversal of previously recorded gas contingencies (see Note 3) in the 1995
period, and increased operating expenses in the 1996 period. The decrease
in CMS Energy Common Stock earnings per share for the 12 months ended
March 31, 1996, compared to the corresponding period in the prior year,
primarily reflects comparatively lower net income (reflecting the above
1995 non-recurring items) and the net income attributable to Class G
Common stock. Class G Common stock was issued in the third quarter of
1995.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. CMS Energy's consolidated operating cash requirements
are met by its operating and financing activities. CMS Energy's
consolidated cash from operations is derived mainly from Consumers' sale
and transportation of natural gas, its generation, transmission, and sale
of electricity and CMS NOMECO's sale of oil and natural gas. Consolidated
cash from operations totaled $349 million and $330 million for the first
quarters of 1996 and 1995, respectively. Increased cash resulting from
higher sales of utility electricity, improved gas utility deliveries,
lower cash losses associated with the PPA, and CMS NOMECO's increased sale
of oil and natural gas was partially offset by the timing of cash payments
related to Consumers' operations. CMS Energy primarily uses its operating
cash to expand its international businesses, maintain and expand its
electric and gas utility systems, retire portions of its long-term debt
and pay dividends.
Financing Activities: Net cash used in financing activities totaled $138
million and $35 million for the first quarters of 1996 and 1995,
respectively. The increase of $103 million reflects a decrease in notes
payable and refinancing of bank loans offset by increased cash of $97
million from the sale of Trust Originated Preferred Securities through
Consumers Power Company Financing I (see Note 7).
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. CMS Energy will continue to evaluate market conditions for
a possible offering of CMS NOMECO common stock.
In the first quarter of 1996, CMS Energy filed a shelf-registration
statement with the SEC for the issuance and sale of up to $125 million of
GTNs, Series B, with net proceeds to be used for general corporate
purposes. As of April 30, 1996, CMS Energy had issued and outstanding
approximately $250 million of GTNs, Series A and $30 million of GTNs,
Series B with weighted-average interest rates of 7.7 percent and 8.0
percent, respectively.
In the first quarter of 1996, CMS Generation refinanced its $118 million
bridge credit facility for the acquisition of HYDRA-CO with a $110
million, five-year term loan. As of March 31, 1996, $107 million remains
outstanding with a weighted-average interest rate of 7.5 percent.
In the first quarter of 1996, CMS NOMECO refinanced its $140 million
revolving credit agreement with a $225 million revolving credit agreement.
As of March 31, 1996, $120 million remains outstanding, under the new
agreement, with a weighted-average interest rate of 6.0 percent.
In February 1996, CMS Energy paid $22 million in cash dividends to holders
of CMS Energy Common Stock and $2 million in cash dividends to holders of
Class G Common Stock. In April 1996, the Board of Directors declared
quarterly dividends $.24 per share on CMS Energy Common Stock and $.28 per
share on Class G Common Stock.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996. Consumers had temporarily suspended its common dividends in
mid-1995 to improve the equity portion of its capital structure.
Investing Activities: Net cash used in investing activities totaled $225
million and $326 million for the first quarters of 1996 and 1995,
respectively. The decrease of $101 million primarily reflects the
acquisition of HYDRA-CO in the first quarter of 1995 partially offset by
an increase in 1996 in investments in partnerships and unconsolidated
subsidiaries. CMS Energy's expenditures for its utility and international
businesses were $86 million and $117 million, respectively.
Financing and Investing Outlook: CMS Energy has available, unsecured,
committed lines of credit totaling $105 million and a $450 million credit
facility. At March 31, 1996, CMS Energy has utilized a total of $242
million under these facilities. CMS Energy will continue to evaluate the
capital markets in 1996 as a source of financing its subsidiaries'
investing activities and required debt retirements.
Consumers has several available, unsecured, committed lines of credit
totaling $145 million and a $425 million working capital facility. At
March 31, 1996, Consumers had a total of $38 million outstanding under
these facilities. 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 and 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 March 31, 1996 and 1995,
receivables sold totaled $280 million and $300 million, respectively.
Electric Utility Results of Operations
In Millions
Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
Sales $ 9 $ 66
Rate increases and
other regulatory issues 9 8
Operations and maintenance 4 2
General taxes and depreciation (6) (29)
------- -------
Total change $16 $ 47
======= =======
Electric Sales: Electric sales during the first quarter of 1996 were 9.0
billion kWh, a 4.0 percent increase from 1995 levels. The increase
included a 2.6 percent increase in sales to Consumers' ultimate customers.
Residential and commercial sales increased 7.3 percent and 5.6 percent,
respectively, while industrial sales decreased 3.1 percent, compared with
the corresponding period in 1995. Industrial sales were adversely
impacted by the General Motors strike which was resolved in late March
1996. Electric sales during the 12 months ended March 31, 1996 were 35.9
billion kWh, a 3.7 percent increase from 1995 levels. The increase
included a 4.6 percent increase in sales to Consumers' ultimate customers.
During the period, residential, commercial and industrial sales increased
7.7 percent, 5.8 percent and .9 percent, respectively.
Power Costs: Power costs totaled $260 million and $227 million for the
three-month periods ending March 31, 1996 and 1995, respectively. The $33
million increase primarily reflects greater power purchases from outside
sources to meet increased sales demand. Power costs totaled $1,003
million and $934 million during the 12-month periods ending March 31, 1996
and 1995, respectively. The $69 million increase primarily reflects
greater power purchases from outside sources to meet increased sales
demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the end of the PPA. 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. ABATE and the Attorney General had appealed the
Settlement Order to the Court of Appeals and in March 1996, the Court of
Appeals affirmed the Settlement Order. 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. As
anticipated in 1992, Consumers continues to experience cash
underrecoveries associated with the Settlement Order. These after-tax
cash underrecoveries totaled $8 million for the first three months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 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 electric rate case (discussed
below) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding the settlement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC
granted Consumers authority to increase its annual electric retail rates
by $46 million. This partial final order did not address cost recovery
related to the 325 MW of MCV Facility contract capacity above 915 MW. The
MPSC stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
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. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order by mid-1996. For more information regarding the
electric rate order and the settlement, see Note 3.
In 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 to the
request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. The ALJ
issued a proposal for decision in this case that recommended the MPSC
reject Consumers' position regarding the reallocation of Consumers'
depreciation reserve and plant investment. This case is currently part of
the proposed settlement. In the settlement proposal, Consumers requested
that depreciation of certain plants (including nuclear plants) be
accelerated while holding overall depreciation rates level.
Special Rates: Consumers currently has a request before the MPSC that,
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: In April 1996, a seven company consortium
in which CMS Gas and Electric holds a 40 percent interest, acquired a 90
percent ownership interest in EDSEER S.A., an electric distribution
utility serving northeastern Argentina's Entre Rios Province for $161
million. EDEER S.A., with 1995 revenue of $105 million and electric sales
of 1.1 billion kWh, serves over 200,000 customers, primarily residential
and commercial, in a 55,000 square kilometer area. CMS Gas and Electric,
as lead operator, anticipates taking over operation of the utility in May
1996.
CMS Energy and Consumers estimate capital expenditures, including new
lease commitments, related to electric utility operations of $380 million
for 1996, $285 million for 1997 and $290 million for 1998. These amounts
include an attributed portion of Consumers' anticipated capital
expenditures for plant and equipment common to both the electric and gas
utility businesses and CMS Energy's capital expenditures relating to its
international energy distribution operations.
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. Final acid rain
program nitrogen oxide regulations are expected to be issued in 1996.
Management believes that Consumers' annual operating costs will not be
materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to the Federal
Superfund law. 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, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 7.
Nuclear Matters: In 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. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. In 1996,
Consumers plans to unload and replace one of the casks where a minor flaw
has been detected. For further information, see Note 8.
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 a future decision to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action. CMS Energy believes that the resolution of these lawsuits
will not have a material impact on its financial position or results of
operations.
Consumers Gas Group Results of Operations
In Millions
Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
Sales $ 22 $ 53
Reversal of gas contingencies (23) (34)
Recovery of gas costs and
other regulatory issues 2 6
Operations and maintenance 3 (6)
General taxes and depreciation (4) (11)
----- -----
Total change $ - $ 8
===== =====
Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126
bcf, a 15.7 percent increase from 1995 levels, and total system
deliveries, excluding transport to the MCV Facility, increased 14.8
percent from 1995 levels. On a weather-adjusted basis, total system
deliveries increased 8.5 percent, reflecting significant growth resulting
from customer additions and conversions to natural gas from alternative
fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf,
a 19.0 percent increase from the corresponding period ended March 31,
1995, and total system deliveries, excluding transport to the MCV
Facility, increased 17.8 percent.
Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million
for the first quarters of 1996 and 1995, respectively. The increase of
$64 million was the result of increased sales. The increased costs also
reflect the reversal of a $23 million gas supplier contingency during the
first quarter of 1995. The cost of gas sold totaled $735 million and $608
million for the 12 months ended March 31, 1996 and 1995, respectively.
The increase of $127 million was also the result of increased sales offset
by the reversal of the gas supplier contingency of $23 million in the 1995
period.
Consumers Gas Group Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers has filed a petition for rehearing with the MPSC,
requesting, among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition, if
granted in its entirety, would result in a $5.5 million annual rate
reduction compared with the $11.7 million reduction.
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 Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order 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
$130 million for 1996, $110 million for 1997 and $105 million for 1998.
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: 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 $98 million. These estimates are based on undiscounted 1996 costs.
At March 31, 1996, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could effect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring
environmental clean-up costs and amortizing these costs over 10 years.
The order authorizes current recovery of $1 million annually. Consumers
is continuing discussions with certain insurance companies regarding
coverage for some or all of the costs which may be incurred for these
sites. For further information, see Note 7.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months
ended March 31, 1996 decreased $6 million from the same period in 1995,
primarily due to recognition of a gain from assignment and novation of a
gas supply contract recorded in the first quarter of 1995 partially offset
by higher oil and gas prices and volumes in the first quarter of 1996.
Pretax operating income for the 12 months ended March 31, 1996 increased
$2 million from the 12 months ended March 31, 1995, primarily due to
higher sales volumes and oil prices partially offset by lower average
market prices for gas and the gains from the assignment and novation of a
gas supply contracts in 1995.
Capital Expenditures: Capital expenditures for the three months ended
March 31, 1996 totaled $27 million, primarily for development of existing
oil and gas reserves.
CMS Energy currently plans to invest $405 million from 1996 to 1998 in 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 March 31, 1996 decreased $7 million from 1995 levels, primarily
reflecting lower capacity sales by the MCV Partnership. Pretax operating
income for the 12 months ended March 31, 1996 increased $8 million from
the 12 months ended March 31, 1995, primarily reflecting additional
generating capacity and improved equity earnings.
Capital Expenditures and Other: In April 1996, CMS Generation and ABB
signed agreements with Morocco's national utility, Office National de
l'Electricite, for the privatization, expansion and operation of the Jorf
Lasfar coal-fueled power plant located southwest of Casablanca. The
agreements cover purchase and operation of two existing 330 MW units and
construction and operation of another two 330 MW units by CMS Generation
and ABB. CMS Energy posted a $30 million conditional letter of credit to
ensure performance under the agreements. CMS Generation and ABB each will
hold 50 percent interest in the transaction. Financial closing is
expected by year end, with construction of the second two units to begin
shortly thereafter.
In the first quarter of 1996, CMS Generation increased its ownership
interest from 51 percent to 78 percent in its Centrales Termicas Mendoza
electric generating plant in western Argentina's Mendoza Province.
CMS Generation currently plans to invest $185 million in the Mendoza plant
to refurbish and repower the facility resulting in an increase in its
capacity from 260 MW to over 400 MW.
Capital expenditures for the three months ended March 31, 1996 totaled $15
million related to expanding ownership in existing facilities.
CMS Energy currently plans to invest $515 million relating to its
independent power production operations from 1996 to 1998. CMS Generation
will pursue acquisitions and development of electric generating plants in
the United States, Latin America, southern Asia, the Pacific Rim region
and North Africa.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three and 12
months ended March 31, 1996 increased $5 million and $10 million,
respectively, over the same periods ended March 31, 1995, primarily
reflecting earnings from new pipeline investments and the continued growth
of existing projects and gas marketed to end-users.
Capital Expenditures and Other: In April 1996, CMS Gas Transmission
signed a purchase agreement to sell its 50 percent ownership interest in
Moss Bluff Gas Storage Systems, a partnership that owns a gas storage
facility, to its partner, MHP, and MHP will sell its 50 percent ownership
interest to CMS Gas Transmission in the Grands Lacs Limited Partnership, a
marketing center for natural gas. CMS Gas Transmission will receive a net
cash payment of approximately $26 million. The transaction is anticipated
to close no later than June 30, 1996.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company,
a natural gas storage facility located in Forrest County, Mississippi.
The salt dome storage cavern provides up to 3.2 bcf per day of 10-day
storage service and has the capability of being refilled in 20 days.
In February 1996, CMS Gas Transmission acquired an ownership interest in
Nitrotec Corporation, a proprietary gas technology company. Nitrotec
specializes in the development and commercialization of advanced carbon-
based adsorption gas separation technologies. Nitrotec recently received
approval of patent applications covering its helium removal process and
nitrogen rejection process.
Capital expenditures for the three months ended March 31, 1996 totaled $76
million for acquisitions, expansion of existing facilities and
construction of new facilities.
CMS Energy currently plans to invest $260 million from 1996 to 1998
relating to its non-utility gas operations, and will continue to pursue
development of natural gas storage, gathering and pipeline operations both
domestically and internationally. CMS Energy also plans to work toward
the development of U.S. regional "market centers" for natural gas through
strategic alliances and asset acquisition and development.
Forward-Looking Information
Capital Expenditures: CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total approximately $2.5 billion over
the next three years. Cash generated by operations is expected to satisfy
a substantial portion of capital expenditures. Additionally, CMS Energy
will continue to evaluate capital markets in 1996 as a potential source of
financing its subsidiaries' investing activities.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Electric utility $380 $285 $290
Gas utility 130 110 105
Oil and gas exploration and production 120 135 150
Independent power production 190 175 150
Natural gas transmission, storage and marketing 145 65 50
---- ---- ----
$965 $770 $745
==== ==== ====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital
expenditures see the individual capital expenditures sections within this
MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions or the
developing competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including: 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. Consumers continues to work toward retaining
its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and 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) after the first
three years of the contract. The MPSC approved this contract in 1995.
This MPSC order and other MPSC orders approving special long-term sales
contracts have been appealed by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
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, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those 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, liquidity
or results of operations.
In April 1996, the FERC issued two orders which require utilities to
provide open access to the interstate transmission grid. The first order
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. The order also requires power pools to restructure their
ongoing operations and open up to non-utility members. The second order
requires utilities to establish electronic systems to share information
about available transmission capacity and to separate their wholesale
power marketing and transmission operations functions by implementing
standards of conduct. These orders will become effective in July 1996.
In addition, the FERC issued a NOPR on April 24, 1996, which proposes for
consideration a new system for utilities to use in reserving capacity on
their own and others' transmission lines. This would replace certain
tariffs included in the first order with a capacity reservation tariff in
which participants would reserve firm rights to transfer power between
designated receipt and delivery points. Consumers is evaluating these
developments and has not determined the impact of the FERC's Orders on its
financial position, liquidity or results of operations.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan
utilities in light of increasing competition in the utility industry. The
MPSC has directed Consumers (and Detroit Edison) to file applications by
May 15, 1996, addressing the recommendation of the Michigan Jobs
Commission to allow a choice of power suppliers for new industrial and
commercial electric load. The Michigan Jobs Commission's recommendations
also include related matters, such as the full recovery of utility
stranded costs. No new legislation has been introduced. However,
Consumers anticipates additional MPSC orders during 1996 which will
further define a new electric and gas utility regulatory framework for
Michigan.
SFAS 71 allows the deferral of certain costs and the recording of
regulatory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Consumers Gas Group Outlook, Competition and Deliveries: Consumers
currently anticipates gas deliveries to grow approximately 2 percent per
year (excluding transportation to the MCV Facility and off-system
deliveries) over the next five years, assuming a steadily growing customer
base. Additionally, Consumers has several strategies 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. The
emerging use of natural gas vehicles also provides 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. Consumers also plans additional capital expenditures to construct
new gas mains that are expected to expand Consumers' system. Actual gas
deliveries in future periods may be affected by abnormal weather,
alternative energy prices, changes in competitive conditions and the level
of natural gas consumption.
In 1995, the Low Income Home Energy Assistance Program provided
approximately $71 million in heating assistance to about 400,000 Michigan
households, with approximately 18 percent of funds going to Consumers'
customers. In late 1995, federal legislative approval provided Michigan
residents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are
regulated by the MPSC as parties to this proceeding. Consumers has filed
its comments with the MPSC, indicating that the MPSC should only direct
local distribution companies to file pilot programs designed to test the
feasibility of expanded transportation service. Consumers also expressed
its position that it is premature to expand transportation service to
residential customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Other Forward-Looking Information: Some important factors that could
cause actual results or outcomes to differ materially from those discussed
in the forward-looking statements include prevailing governmental policies
and regulatory actions both domestically and internationally (including
those of the FERC and the MPSC) with respect to rates, industry and rate
structure, operation of nuclear power facilities, acquisition and disposal
of assets and facilities, operation and construction of plant facilities,
natural gas pipeline and storage facilities, recovery of purchased power,
decommissioning costs, and present or prospective wholesale and retail
competition, among others. The business and profitability of CMS Energy
is also influenced by economic and geographic factors including political
and economic risks(particularly those associated with international
development and operations, including currency fluctuation), changes in
compliance with environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy from plants or facilities,
inflation, capital market conditions, unanticipated development project
delays or changes in project costs, and the ability to secure agreement
concerning pending negotiations (particularly for projects in
development), among other important factors. All such factors are
difficult to predict, contain uncertainties which may materially affect
actual results, and are beyond the control of CMS Energy.
Forward-looking information is included throughout this Form 10-Q.
CMS Energy's material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
(This page intentionally left blank)
<PAGE>
<PAGE> 34
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 March 31, 1996 and 1995,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 1995, 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 26, 1996, 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, 1995, 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,
May 10, 1996.
<PAGE>
<PAGE> 35
<TABLE>
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
OPERATING REVENUE
Electric $ 591 $ 540 $2,328 $2,185
Gas 546 482 1,259 1,105
Other 4 10 33 25
----------------------------------------------
Total operating revenue 1,141 1,032 3,620 3,315
----------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 73 67 289 294
Purchased power - related parties 140 124 507 484
Purchased and interchange power 47 36 207 156
Cost of gas sold 345 281 735 608
Other 136 137 591 573
----------------------------------------------
Total operation 741 645 2,329 2,115
Maintenance 39 45 178 190
Depreciation, depletion and amortization 108 101 364 342
General taxes 56 54 191 172
----------------------------------------------
Total operating expenses 944 845 3,062 2,819
----------------------------------------------
PRETAX OPERATING INCOME
Electric 103 87 378 331
Gas 91 91 151 143
Other 3 9 29 22
----------------------------------------------
Total pretax operating income 197 187 558 496
INCOME TAXES 61 56 150 124
----------------------------------------------
NET OPERATING INCOME 136 131 408 372
----------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 16 17
Accretion income 3 3 11 12
Accretion expense (7) (8) (30) (34)
Other income taxes, net 3 2 13 11
Other, net - 2 4 12
----------------------------------------------
Total other income 3 3 14 18
----------------------------------------------
INTEREST CHARGES
Interest on long-term debt 35 35 140 137
Other interest 3 5 22 19
Capitalized interest (1) - (3) (1)
----------------------------------------------
Net interest charges 37 40 159 155
----------------------------------------------
Net Income 102 94 263 235
Preferred Stock Dividends 7 7 28 28
Preferred Securities Distributions 1 - 1 -
----------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 94 $ 87 $ 234 $ 207
==============================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 36
<TABLE>
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 102 $ 94 $ 263 $ 235
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $13, $13,
$51 and $49, respectively) 108 101 364 342
Capital lease and other amortization 9 11 36 29
Deferred income taxes and investment tax credit 3 23 37 65
Accretion expense 7 8 30 34
Accretion income - abandoned Midland project (3) (3) (11) (12)
Undistributed earnings of related parties (4) (10) (30) (24)
MCV power purchases - settlement (Note 2) (12) (37) (112) (102)
Other 3 2 6 2
Changes in other assets and liabilities 95 120 58 (34)
------ ------ ------ ------
Net cash provided by operating activities 308 309 641 535
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (83) (74) (422) (438)
Investments in nuclear decommissioning trust funds (13) (13) (51) (49)
Cost to retire property, net (6) (9) (39) (41)
Deferred demand-side management costs (2) (2) (10) (11)
Other 1 (4) 1 (4)
Proceeds from sale of property - - 1 13
------ ------ ------ ------
Net cash used in investing activities (103) (102) (520) (530)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (303) (204) (97) 135
Payment of capital lease obligations (9) (10) (36) (28)
Payment of preferred stock dividends (7) (7) (28) (21)
Retirement of bonds and other long-term debt (1) (1) (1) (27)
Preferred securities distributions (1) - (1) -
Proceeds from preferred securities 97 - 97 -
Contribution from stockholder 13 - 13 100
Payment of common stock dividends - - (70) (160)
Repayment of bank loans - - - (422)
Proceeds from bank loans - - - 400
------ ------ ------ ------
Net cash used in financing activities (211) (222) (123) (23)
------ ------ ------ ------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (6) (15) (2) (18)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 10 28
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 8 $ 10 $ 8 $ 10
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 37
<TABLE>
Consumers Power Company
Consolidated Balance Sheets
<CAPTION>
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Electric $6,130 $6,103 $5,826
Gas 2,207 2,169 2,078
Other 26 30 30
-----------------------------------
8,363 8,302 7,934
Less accumulated depreciation, depletion and amortization 4,195 4,090 3,893
-----------------------------------
4,168 4,212 4,041
Construction work-in-progress 199 190 249
-----------------------------------
4,367 4,402 4,290
-----------------------------------
INVESTMENTS
Stock of affiliates 336 337 318
First Midland Limited Partnership (Note 2) 226 225 219
Midland Cogeneration Venture Limited Partnership (Note 2) 104 103 83
Other 9 7 8
-----------------------------------
675 672 628
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 8 14 10
Accounts receivable and accrued revenue, less
allowances of $3, $3 and $4, respectively (Note 7) 173 137 63
Accounts receivable - related parties 12 10 11
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 74 72 76
Generating plant fuel stock 16 37 27
Postretirement benefits 25 25 25
Deferred income taxes 23 26 39
Prepayments and other 143 181 133
-----------------------------------
513 686 464
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 458 462 473
Nuclear decommissioning trust funds 323 304 236
Abandoned Midland Project 126 131 143
Other 309 297 322
-----------------------------------
1,216 1,194 1,174
-----------------------------------
TOTAL ASSETS $6,771 $6,954 $6,556
===================================
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in-capital 504 491 491
Revaluation capital 29 29 17
Retained earnings since December 31, 1992 331 237 167
-----------------------------------
1,705 1,598 1,516
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,923 1,922 1,954
Non-current portion of capital leases 96 104 103
-----------------------------------
4,180 3,980 3,929
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 89 90 48
Notes payable 38 341 135
Accrued taxes 201 225 134
Accounts payable 165 207 125
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 64 56 56
Accrued refunds 28 22 35
Accrued interest 26 32 25
Other 166 178 153
-----------------------------------
867 1,241 806
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 599 605 585
Postretirement benefits 520 517 537
Power purchases - settlement (Note 2) 215 221 295
Deferred investment tax credit 166 169 177
Regulatory liabilities for income taxes, net 53 44 29
Other (Note 4) 171 177 198
-----------------------------------
1,724 1,733 1,821
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,771 $6,954 $6,556
===================================
<FN>
(a) As described in Note 7 to the Consolidated Financial Statements, the primary asset of Consumers
Power Company Financing I is $103 million principal amount of 8.36% subordinated interest notes due
2015 from Consumers.
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 39
<TABLE>
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841
---------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 491 491 491 391
Stockholder's contribution 13 - 13 100
---------------------------------------------------
At end of period 504 491 504 491
---------------------------------------------------
REVALUATION CAPITAL
At beginning of period 29 15 17 15
Change in unrealized investment-gain - 2 12 2
---------------------------------------------------
At end of period 29 17 29 17
---------------------------------------------------
RETAINED EARNINGS
At beginning of period 237 80 167 120
Net income 102 94 263 235
Common stock dividends declared - - (70) (160)
Preferred stock dividends declared (7) (7) (28) (28)
Preferred securities distributions (1) - (1) -
---------------------------------------------------
At end of period 331 167 331 167
---------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,705 $1,516 $1,705 $1,516
===================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 40
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 1995 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 segment of which is the automotive industry.
2: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility,
contracted to sell electricity to Consumers for a 35-year period beginning
in 1990 and to supply electricity and steam to The Dow Chemical Company.
Consumers, through its subsidiaries, holds the following assets related to
the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent
general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation
to purchase contract capacity from the MCV Partnership is 1,240 MW for
1996 and for each subsequent year through the end of the PPA. 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.
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, the fixed energy charge and the prescribed energy charges
associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis. For all energy delivered on an economic basis above the
availability limits to 915 MW, Consumers has been 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
1993 MPSC-authorized level, future additional after-tax losses and after-
tax cash underrecoveries would be incurred. Consumers' estimates of its
after-tax cash underrecoveries and possible losses for 1996 and the next
four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 authorized level.
Under the Settlement Order, capacity and energy purchases from the MCV
Partnership above the 915 MW level can be utilized to satisfy customers'
power needs, but the MPSC will 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. The MCV Partnership did not object to the Settlement Order.
ABATE and the Attorney General had appealed the Settlement Order to the
Court of Appeals and in March 1996, the Court of Appeals affirmed the
Settlement Order.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including Consumers' electric rate case (see
Note 3) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding this proposed settlement, see Note 3.
At March 31, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $198 million and $202 million,
respectively. The reduction in the liability since December 31, 1995,
reflects after-tax cash underrecoveries of $8 million, partially offset by
after-tax accretion expense of $4 million. The undiscounted after-tax
amount associated with the liability totaled $593 million at March 31,
1996.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase
agreements with the developers of two proposed independent power projects
totaling 109 MW. As part of the proposed settlement reached with the MPSC
staff (see Note 3), Consumers is seeking 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 1996. Even if Consumers is not allowed
to substitute MCV Facility capacity for the capacity to be provided under
the terminated agreements, Consumers believes that the MPSC would still
approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
PSCR Matters Related to Power Purchases from the MCV Partnership: As part
of the 1993 and 1994 plan case orders, the MPSC confirmed the recovery of
certain costs related to power purchases from the MCV Partnership. ABATE
or the Attorney General appealed these plan case orders to the Court of
Appeals. In February 1996, the Court of Appeals affirmed the MPSC's order
in the 1993 plan case.
As part of its decision in the 1993 PSCR reconciliation case issued
February 23, 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believes this is contrary to
the terms of the Settlement Order and has appealed the February 23 order
on this issue. The MCV Partnership and ABATE have also filed separate
appeals of this order.
3: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Early in 1996, the MPSC issued a partial final
order in this case, granting Consumers a $46 million annual increase in
its electric retail rates. This order authorized a 12.25 percent return
on common equity. However, it did not address cost recovery related to
the 325 MW of MCV Facility contract capacity above 915 MW. The MPSC
stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
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. For further information
regarding these requests, see the Electric Rate Proceedings and Special
Rates discussions in the Management's Discussion and Analysis.
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 currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in
February 1996 when the MPSC issued a partial final order in Consumers'
electric rate case. If fully adopted, the settlement agreement would:
provide for cost recovery of the entire 325 MW of uncommitted MCV Facility
capacity; implement provisions for incentive ratemaking; resolve the
special competitive services and depreciation rate cases; implement a
limited direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order by mid-1996.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994 that incorporated cost increases,
including costs for postretirement benefits and costs related to
Consumers' former manufactured gas plant sites (see Note 4). In March
1996, the MPSC issued a final order in this case, authorizing recovery of
costs related to postretirement benefits and former manufactured gas plant
sites. Overall however, the order decreased Consumers' gas rates by
$11.7 million annually and authorized an 11.6 percent return on common
equity, a decrease from the 13.25 percent previously authorized.
Consumers has filed a petition for rehearing with the MPSC, requesting,
among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition for
rehearing, if granted in its entirety, would result in a $5.5 million
annual rate reduction compared with the $11.7 million reduction.
GCR Matters: In 1993, the MPSC issued an order favorable to Consumers
regarding a gas pricing disagreement between Consumers and certain
intrastate producers. In early 1995, management concluded that the
intrastate producers' pending appeals of the order would not be successful
and accordingly, reversed a previously accrued contingency and recorded a
$23 million (pretax) benefit. The MPSC order was affirmed by the Court of
Appeals in June 1995. The producers have petitioned the Michigan Supreme
Court for review.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order 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.
Resolution of the issues discussed in this note is not expected to have a
material impact on Consumers' financial position or results of operations.
4: Commitments and Contingencies
Environmental Matters: Consumers is a so-called "potentially responsible
party" at several sites being administered under Superfund. Superfund
liability is joint and several and along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based upon past
negotiations, Consumers estimates 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 March 31, 1996, Consumers has accrued a liability for its
estimated losses.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in June 1995. This Michigan law bears some
similarities to the federal Superfund law. 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. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality. The findings for two remedial investigations
indicate that the expenditures for remedial action at those sites are
likely to be less than previously estimated; however, these findings may
not be representative of all of the sites. Data available to Consumers
and its continued internal review have resulted in an estimate for all
costs related to investigation and remedial action for all 23 sites of
between $48 million and $98 million. These estimates are based on
undiscounted 1996 costs. At March 31, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and legal and
regulatory requirements, could effect the estimate of remedial action
costs for the sites.
In accordance with an MPSC rate order issued in early 1996, Consumers is
deferring environmental clean-up costs incurred at these sites and
amortizing these costs over 10 years. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the
costs 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.
Management believes that Consumers' annual operating costs will not be
materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $445 million for 1996, $395 million for 1997 and
$395 million for 1998.
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 March
31, 1996, Consumers had 33 separate stray voltage lawsuits awaiting trial
court action.
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
Consumers filed updated decommissioning information with the MPSC in 1995
which estimated decommissioning costs for Big Rock and Palisades. In
April 1996, the MPSC issued an order in Consumers' nuclear decommissioning
case, which fully supported Consumers' request and did not change the
overall surcharge revenues collected from retail customers. The MPSC
ordered that Consumers review and file estimated decommissioning costs
with the MPSC in 1998.
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. 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. As of March 31, 1996, 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 the cask continues to safely store
spent fuel and there is no requirement for its replacement, 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. Certain parties, including the Attorney
General, have petitioned the NRC to suspend Consumers' general license to
store spent fuel, claiming that Consumers' cask unloading procedure does
not satisfy NRC regulations. The NRC staff is reviewing the petitions.
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: $30 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 a future decision 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 March 31 were:
In Millions
Three Months Ended Twelve Months Ended
1996 1995 1996 1995
---- ---- ---- -----
Cash transactions
Interest paid (net of
amounts capitalized) $ 41 $ 50 $149 $147
Income taxes paid
(net of refunds) 5 - 48 31
Non-cash transactions
Nuclear fuel placed
under capital lease $ - $ 7 $ 20 $ 25
Other assets placed
under capital leases 1 2 4 15
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through December 31, 1996. Consumers has an unsecured
$425 million facility and unsecured, committed lines of credit aggregating
$145 million that are used to finance seasonal working capital
requirements. At March 31, 1996, a total of $38 million was outstanding
at a weighted-average interest rate of 6.2 percent, compared with $133
million outstanding at March 31, 1995, at a weighted-average interest rate
of 7.0 percent. Consumers has an established $500 million trade
receivables purchase and sale program. At March 31, 1996 and 1995,
receivables sold under the agreement totaled $280 million and $300
million, respectively. Accounts receivable and accrued revenue in the
Consolidated Balance Sheets have been reduced to reflect receivables sold.
In January 1996, 4 million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds
from the sale totaled $97 million. The business trust was formed for the
sole purpose of issuing preferred securities and the primary asset of the
trust is $103 million of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers. The obligations of Consumers with
respect to the preferred securities under the notes that mature in 2015,
the indenture under which the notes are issued, Consumers' guarantee of
the preferred securities and the Declaration of Trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996.
<PAGE>
<PAGE> 47
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in the 1995 Form 10-K of
Consumers. This Form 10-Q contains "forward-looking statements" as
defined by the Private Securities Litigation Reform Act of 1995, including
(without limitation) discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions underlying or
concerning matters discussed in this document. These discussions, and any
other discussions contained in this Form 10-Q that are not historical
facts, are forward-looking and, accordingly, involve estimates,
assumptions and uncertainties which could cause actual results or outcomes
to differ materially from those expressed in the forward-looking
information. In addition to certain contingency matters (and their
respective cautionary statements) discussed elsewhere in this Form 10-Q,
the Forward-Looking Information section of this MD&A indicates some
important factors that could cause actual results or outcomes to differ
materially from those addressed in the forward-looking discussions.
Consumers is a combination electric and gas utility company serving the
Lower Peninsula of Michigan, and is the principal subsidiary of
CMS Energy, an energy holding company. Consumers' customer base includes
a mix of residential, commercial and diversified industrial customers, the
largest segment of which is the automotive industry.
Consolidated earnings for the quarters ended March 31, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $94 million and $87 million for the first quarters of
1996 and 1995, respectively. The $7 million increase reflects increased
electric sales resulting from Michigan's continuing economic growth, the
impact of a 1996 electric rate increase and higher gas deliveries due to
increased growth and colder weather experienced in the first quarter of
1996. Partially offsetting this increase in net income was the reversal
of a gas contract contingency which benefited the 1995 period (see Note
3).
Consolidated earnings for the 12 months ended March 31, 1996 and 1995
Consolidated net income after dividends and distributions on preferred
securities totaled $234 million and $207 million for the 12 months ended
March 31, 1996 and March 31, 1995, respectively. The $27 million increase
reflects both higher electric sales and gas deliveries and the impact of
increased electric rates which became effective in early 1996. Partially
offsetting this increase was the recognition of DSM incentive revenue and
the reversal of previously recorded gas contingencies (see Note 3) in the
1995 period, and increased operating expenses in the 1996 period.
Cash Position, Financing and Investing
Cash from operations is derived from the sale and transportation of
natural gas and the generation, transmission, and sale of electricity.
Cash from operations totaled $308 million and $309 million for the first
quarters of 1996 and 1995, respectively. Increased cash resulting from
higher sales of electricity, improved gas deliveries and lower cash losses
associated with the PPA, was essentially offset by the timing of cash
payments related to Consumers' operations. Consumers primarily uses its
operating cash to maintain and expand its electric and gas systems, retire
portions of its long-term debt and pay dividends.
Financing Activities: Net cash used in financing activities totaled $211
million and $222 million for the first quarters of 1996 and 1995,
respectively. The decrease of $11 million reflects increased cash from a
$13 million equity investment from CMS Energy and $97 million from the
sale of Trust Originated Preferred Securities (see Note 7). During the
first quarter of 1996, cash was used to reduce short-term borrowings by an
additional $99 million, as compared to the 1995 period.
In April 1996, Consumers declared a $75 million common dividend to be paid
in May 1996. Consumers had temporarily suspended its common dividends in
mid-1995 to improve the equity portion of its capital structure.
Investing Activities: Net cash used in investing activities totaled $103
million and $102 million for the first quarters of 1996 and 1995,
respectively. Cash used for increased capital expenditures was
principally offset by the reduced costs to retire property.
Financing and Investing Outlook: Consumers has several available,
unsecured, committed lines of credit totaling $145 million and a $425
million working capital facility. At March 31, 1996, Consumers had a
total of $38 million outstanding under these facilities. 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 and 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 March 31, 1996 and 1995, receivables sold totaled $280
million and $300 million, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income for the quarters ended March 31, 1996 and
1995: Electric pretax operating income totaled $103 million and $87
million for the first quarters of 1996 and 1995, respectively. The $16
million increase primarily resulted from increased electric sales, an
increase in electric rates in early 1996, and lower operation and
maintenance costs during the first quarter of 1996. Partially offsetting
this increase were decreased revenue from special contract discounts given
to large industrial customers and higher depreciation and general taxes in
1996.
Electric Pretax Operating Income for the 12 months ended March 31, 1996
and 1995: Electric pretax operating income totaled $378 million and $331
million for the 12 months ended March 31, 1996 and 1995, respectively.
The $47 million increase is primarily the result of increased electric
sales and an increase in electric rates effective in early 1996. These
increases were partially offset by higher electric depreciation and
property tax expenses in the 1996 period, decreased revenue from special
contract discounts given to large industrial customers, and the impact of
recognizing DSM incentive revenue in the 1995 period.
The following table quantifies the impact of the major reasons for the
changes in electric pretax operating income for the periods ended March
31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
--------- ---------
Sales $ 9 $ 66
Rate increases and other regulatory issues 9 8
Operations and maintenance 4 2
General taxes and depreciation (6) (29)
---- ----
Total change $16 $ 47
==== ====
Electric Sales: Electric sales during the first quarter of 1996 were 9.0
billion kWh, a 4.0 percent increase from 1995 levels. The increase
included a 2.6 percent increase in sales to Consumers' ultimate customers.
Residential and commercial sales increased 7.3 percent and 5.6 percent,
respectively, while industrial sales decreased 3.1 percent, compared with
the corresponding period in 1995. Industrial sales were adversely
impacted by the General Motors strike which was resolved in late March
1996. Electric sales during the 12 months ended March 31, 1996 were 35.9
billion kWh, a 3.7 percent increase from 1995 levels. The increase
included a 4.6 percent increase in sales to Consumers' ultimate customers.
During the period, residential, commercial and industrial sales increased
7.7 percent, 5.8 percent and .9 percent, respectively.
Power Costs: Power costs totaled $260 million and $227 million for the
three-month periods ending March 31, 1996 and 1995, respectively. The $33
million increase primarily reflects greater power purchases from outside
sources to meet increased sales demand. Power costs totaled $1,003
million and $934 million during the 12-month periods ending March 31, 1996
and 1995, respectively. The $69 million increase primarily reflects
greater power purchases from outside sources to meet increased sales
demand.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW for 1996
and for each subsequent year through the end of the PPA. 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. ABATE and the Attorney General had appealed the
Settlement Order to the Court of Appeals and in March 1996, the Court of
Appeals affirmed the Settlement Order. 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. As
anticipated in 1992, Consumers continues to experience cash
underrecoveries associated with the Settlement Order. These after-tax
cash underrecoveries totaled $8 million for the first three months of
1996. Estimated after-tax cash underrecoveries and possible losses for
1996 and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional underrecoveries
and losses (a) 20 22 72 72 74
(a) If unable to sell any capacity above the MPSC's 1993 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 electric rate case (discussed
below) and cost recovery for the entire 325 MW of MCV Facility capacity
above the MPSC's currently authorized 915 MW level. Consumers does not
anticipate the need for an additional loss to be recorded above the amount
anticipated in 1992 if the settlement agreement is adopted as proposed.
For further information regarding the settlement, see Note 3.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 2.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC
granted Consumers authority to increase its annual electric retail rates
by $46 million. This partial final order did not address cost recovery
related to the 325 MW of MCV Facility contract capacity above 915 MW. The
MPSC stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
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. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of the entire 325 MW of uncommitted MCV Facility capacity. Consumers
expects a final order by mid-1996. For more information regarding the
electric rate order and the settlement, see Note 3.
In 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 to the
request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. The ALJ
issued a proposal for decision in this case that recommended the MPSC
reject Consumers' position regarding the reallocation of Consumers'
depreciation reserve and plant investment. This case is currently part of
the proposed settlement. In the settlement proposal, Consumers requested
that depreciation of certain plants (including nuclear plants) be
accelerated while holding overall depreciation rates level.
Special Rates: Consumers currently has a request before the MPSC that,
would allow Consumers a certain level of rate-pricing flexibility to
respond to customers' alternative energy options. This request has also
been consolidated into the settlement proceeding discussed above.
Electric Capital Expenditures: Consumers estimates capital expenditures,
including new lease commitments, related to its electric utility
operations of $315 million for 1996, $285 million for 1997 and $290
million for 1998. 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. Final acid rain
program nitrogen oxide regulations are expected to be issued in 1996.
Management believes that Consumers' annual operating costs will not be
materially affected.
The Michigan Natural Resources and Environmental Protection Act was
substantially amended in 1995 and bears some similarities to the Federal
Superfund law. 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, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 4.
Nuclear Matters: In 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. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. In 1996,
Consumers plans to unload and replace one of the casks where a minor flaw
has been detected. For further information, see Note 5.
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 a future decision to
anneal.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At March 31,
1996, Consumers had 33 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.
Gas Utility Results of Operations
Gas Pretax Operating Income for the quarters ended March 31, 1996 and
1995: Gas pretax operating income totaled $91 million for both the first
quarters of 1996 and 1995. Pretax operating income reflected a 15 percent
increase in gas deliveries resulting from customer additions and load
conversions to natural gas from alternative fuels and colder temperatures
during the first quarter of 1996. However, when compared to 1995, the
strong increases were offset by the benefit achieved in 1995 with the
reversal of a previously recorded gas contract contingency (see Note 3)
and higher depreciation and general taxes.
Gas Pretax Operating Income for the 12 months ended March 31, 1996 and
1995: Gas pretax operating income totaled $151 million and $143 million
for the 12 months ended March 31, 1996 and 1995, respectively. The $8
million increase reflects higher gas deliveries and higher operating
expenses. However, the increase was partially offset by the reversal in
the 1995 period, of previously recorded gas contingencies.
The following table quantifies the impact of the major reasons for the
changes in gas pretax operating income for the periods ended March 31:
In Millions
Impact on Pretax Operating Income
Quarter ended 12 months ended
1996 compared 1996 compared
with 1995 with 1995
--------- ---------
Sales $ 22 $ 53
Reversal of gas contingencies (23) (34)
Recovery of gas costs and
other regulatory issues 2 6
Operations and maintenance 3 (6)
General taxes and depreciation (4) (11)
----- -----
Total change $ - $ 8
===== =====
Gas Deliveries: Gas sales during the first quarter of 1996 totaled 126
bcf, a 15.7 percent increase from 1995 levels, and total system
deliveries, excluding transport to the MCV Facility, increased 14.8
percent from 1995 levels. On a weather-adjusted basis, total system
deliveries increased 8.5 percent, reflecting significant growth resulting
from customer additions and conversions to natural gas from alternative
fuels. For the 12 months ended March 31, 1996, gas sales totaled 271 bcf,
a 19.0 percent increase from the corresponding period ended March 31,
1995, and total system deliveries, excluding transport to the MCV
Facility, increased 17.8 percent.
Cost of Gas Sold: Cost of gas sold totaled $345 million and $281 million
for the first quarters of 1996 and 1995, respectively. The increase of
$64 million was the result of increased sales. The increased costs also
reflect the reversal of a $23 million gas supplier contingency during the
first quarter of 1995. The cost of gas sold totaled $735 million and $608
million for the 12 months ended March 31, 1996 and 1995, respectively.
The increase of $127 million was also the result of increased sales offset
by the reversal of the gas supplier contingency of $23 million in the 1995
period.
Gas Utility Issues
Gas Rate Proceedings: In early 1996, the MPSC issued a final order in
Consumers' gas rate case, decreasing Consumers' gas rates by $11.7 million
annually. The MPSC order authorized an 11.6 percent return on common
equity. Consumers has filed a petition for rehearing with the MPSC,
requesting, among other things, recovery of certain gas losses, as well as
reconsideration of issues in the order that Consumers believes provide
disincentives to competition. The relief requested in the petition, if
granted in its entirety, would result in a $5.5 million annual rate
reduction compared with the $11.7 million reduction.
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 Matters: In October 1995, the MPSC issued an order regarding a $44
million (excluding any interest) gas supply contract pricing dispute
between Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order 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
$130 million for 1996, $110 million for 1997 and $105 million for 1998.
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: 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 $98 million. These estimates are based on undiscounted 1996 costs.
At March 31, 1996, Consumers has accrued a liability for $48 million and
has established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could effect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, Consumers is deferring
environmental clean-up costs and amortizing these costs over 10 years.
The order authorizes current recovery of $1 million annually. Consumers
is continuing discussions with certain insurance companies regarding
coverage for some or all of the costs which may be incurred for these
sites. For further information, see Note 4.
Forward-Looking Information
Capital Expenditures: 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.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Consumers
Construction $396 $368 $335
Nuclear fuel lease 34 5 41
Capital leases other than nuclear fuel 6 19 16
Michigan Gas Storage 9 3 3
---- ---- ----
$445 $395 $395
==== ==== ====
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. For a breakdown of projected capital
expenditures by electric and gas utility, see the Electric Capital
Expenditures and Gas Capital Expenditures sections within this MD&A.
Electric Outlook, Sales and Competition: Consumers currently expects
approximately 2 percent average annual growth in electric system sales
over the next five years. Actual electric sales in future periods may be
affected by abnormal weather, changing economic conditions or the
developing competitive market for electricity as discussed below.
Consumers' retail service is affected by competition in several areas,
including: 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. Consumers continues to work toward retaining
its current retail service customers.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and 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) after the first
three years of the contract. The MPSC approved this contract in 1995.
This MPSC order and other MPSC orders approving special long-term sales
contracts have been appealed by the Attorney General.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
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, ABATE and The Dow Chemical Company filed claims of appeal of
the MPSC's retail wheeling orders. The Court of Appeals subsequently
consolidated these appeals with those 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, liquidity
or results of operations.
In April 1996, the FERC issued two orders which require utilities to
provide open access to the interstate transmission grid. The first order
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access
tariffs that contain minimum terms and conditions of non-discriminatory
service, allows utilities to charge their current conforming transmission
rates or apply for new rates, and provides for the full recovery of
stranded costs. The order also requires power pools to restructure their
ongoing operations and open up to non-utility members. The second order
requires utilities to establish electronic systems to share information
about available transmission capacity and to separate their wholesale
power marketing and transmission operations functions by implementing
standards of conduct. These orders will become effective in July 1996.
In addition, the FERC issued a NOPR on April 24, 1996, which proposes for
consideration a new system for utilities to use in reserving capacity on
their own and others' transmission lines. This would replace certain
tariffs included in the first order with a capacity reservation tariff in
which participants would reserve firm rights to transfer power between
designated receipt and delivery points. Consumers is evaluating these
developments and has not determined the impact of the FERC's Orders on its
financial position, liquidity or results of operations.
The Governor of the State of Michigan has requested that the MPSC review
the existing statutory and regulatory framework governing Michigan
utilities in light of increasing competition in the utility industry. The
MPSC has directed Consumers (and Detroit Edison) to file applications by
May 15, 1996, addressing the recommendation of the Michigan Jobs
Commission to allow a choice of power suppliers for new industrial and
commercial electric load. The Michigan Jobs Commission's recommendations
also include related matters, such as the full recovery of utility
stranded costs. No new legislation has been introduced. However,
Consumers anticipates additional MPSC orders during 1996 which will
further define a new electric and gas utility regulatory framework for
Michigan.
SFAS 71 allows the deferral of certain costs and the recording of
regulatory assets. Management has evaluated Consumers' current regulatory
position and believes it continues to support the recognition of
Consumers' electric-related regulatory assets. If changes in the industry
were to lead to Consumers discontinuing the application of SFAS 71, for
all or part of its business, Consumers may be required to write off the
portion of any regulatory asset for which no regulatory assurance of
recovery continued to exist. Consumers does not believe that there is any
current evidence that supports the write-off of any of its electric-
related regulatory assets.
Gas Outlook, Competition and Deliveries: Consumers currently anticipates
gas deliveries to grow approximately 2 percent per year (excluding
transportation to the MCV Facility and off-system deliveries) over the
next five years, assuming a steadily growing customer base. Additionally,
Consumers has several strategies 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. The emerging use of natural gas
vehicles also provides 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. Consumers also
plans additional capital expenditures to construct new gas mains that are
expected to expand Consumers' system. Actual gas deliveries in future
periods may be affected by abnormal weather, alternative energy prices,
changes in competitive conditions and the level of natural gas
consumption.
In 1995, the Low Income Home Energy Assistance Program provided
approximately $71 million in heating assistance to about 400,000 Michigan
households, with approximately 18 percent of funds going to Consumers'
customers. In late 1995, federal legislative approval provided Michigan
residents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to
be held in 1996, to assess whether it is appropriate to allow all natural
gas customers access to gas transportation service. The MPSC notice
designated all eight local distribution companies whose rates are
regulated by the MPSC as parties to this proceeding. Consumers has filed
its comments with the MPSC, indicating that the MPSC should only direct
local distribution companies to file pilot programs designed to test the
feasibility of expanded transportation service. Consumers also expressed
its position that it is premature to expand transportation service to
residential customers.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its regulatory
assets related to its gas business, and believes that sufficient
regulatory assurance exists to provide for the recovery of these deferred
costs.
Other Forward-Looking Information: Some important factors that could
cause actual results or outcomes to differ materially from those discussed
in the forward-looking statements include prevailing governmental policies
and regulatory actions (including those of the FERC and the MPSC) with
respect to rates, industry and rate structure, operation of nuclear power
facilities, acquisition and disposal of assets and facilities, operation
and construction of plant facilities, natural gas pipeline and storage
facilities, recovery of purchased power, decommissioning costs, and
present or prospective wholesale and retail competition, among others.
The business and profitability of Consumers is also influenced by economic
and geographic factors including political and economic risks, changes in
compliance with environmental laws and policies, weather conditions,
competition for retail and wholesale customers, pricing and transportation
of commodities, market demand for energy from plants or facilities,
inflation, capital market conditions, and the ability to secure agreement
concerning pending negotiations (particularly for projects in
development), among other important factors. All such factors are
difficult to predict, contain uncertainties which may materially affect
actual results, and are beyond the control of Consumers.
Forward-looking information is included throughout this Form 10-Q.
Consumers' material contingencies are also described in the Condensed
Notes to Consolidated Financial Statements and should be read accordingly.
<PAGE>
<PAGE>
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' 1995 Forms 10-K
for the year ended December 31, 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 proceedings before the MPSC docketed as Case No. U-7830, Step 3A, the
MPSC reviewed Consumers' compliance with the financial stabilization order
conditions. In 1991, the MPSC issued an order finding that Consumers was
not in compliance with certain financial stabilization orders. Upon
appeal by several parties, including the Attorney General, the Court of
Appeals affirmed the MPSC determinations in Step 3A in an order issued in
April 1995. In May 1995, ABATE filed an application for leave to appeal
this decision with the Michigan Supreme Court, which was denied by that
court in March 1996. This proceeding is now closed.
1994 Gas Rate Case Filing
Consumers filed a general gas rate case in December 1994. Consumers'
final position in this case requested an increase in its gas rates of $6.7
million annually and a 12.25 percent return on equity. The MPSC issued a
final order in this case in March 1996. In this order, the MPSC reduced
Consumers' general gas rates by $11.7 million annually based on a return
on common equity of 11.6 percent. In April 1996, Consumers filed a
petition for rehearing of this order with the MPSC. The Company cannot
predict the outcome of this matter.
MCV - RELATED PROCEEDINGS
In March 1993, the MPSC approved, with modifications, a contested
settlement agreement among Consumers, the MPSC staff and 10 independent
cogenerators which resolved certain regulatory issues and allowed
Consumers to recover from electric customers a substantial portion of the
cost of 915 MW of contract capacity from the MCV Facility. After their
requests for rehearing were denied by the MPSC, ABATE and the Attorney
General appealed the orders approving the settlement to the Court of
Appeals. In March 1996, the Court of Appeals affirmed the March 1993 MPSC
order settling the electric rate issues involving Consumers and the MCV
Facility, and rejected claims by ABATE and the Attorney General which
contested the rates being charged electric customers since January 1993
for 915 MW of capacity and related energy being provided by the MCV
Facility. This proceeding is now closed.
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. Several recent lawsuits
allege personal injury as well as damage to livestock. Consumers believes
these claims to be without merit and intends to vigorously oppose all
claims the plaintiffs may raise but cannot predict the outcome of this
matter. At March 31, 1996, Consumers had 33 separate stray voltage cases
awaiting action at the trial court level.
INDEPENDENT POWER PRODUCTION PROJECT LITIGATION
In August 1995, William R. Williams and two of his corporations, Altresco
Philippines, Inc. and WRW Corporation (formerly Altresco International,
Inc.) filed a lawsuit against CMS Generation in the Denver County District
Court, State of Colorado, in connection with a project to be developed in
Bantangas, Philippines by Luzon Power Associates, Inc. in which
CMS Generation purchased a 50% ownership interest. Luzon Power
Associates, Inc. has an agreement to supply power to the Manila Electric
Company. The complaint alleges, breach of a confidentiality agreement,
breach of fiduciary duty, intentional interference with a contract, breach
of implied covenant of good faith and fair dealing, and unfair
competition. The claims primarily relate to a confidentiality agreement
between the parties, and CMS Generation's alleged pursuit of another
project to sell power directly to the Manila Electric Company, known as
the Magellan project, in alleged violation of a restrictive covenant in
the confidentiality agreement. The plaintiffs claim direct damages of
approximately $85 million and indirect damages in a like amount from loss
of future business, plus punitive damages, interest, and attorney's fees.
CMS Generation removed the case to the United States District Court for
the District of Colorado in September 1995, and in January 1996, that
court denied CMS Generation's motion to dismiss the suit or to transfer
the case based on improper venue. A trial date of July 1997 has been set
by the court. CMS Generation believes the plaintiff's position is without
merit and intends to vigorously oppose any claims they may raise but
cannot predict the outcome of this matter.
<PAGE>
<PAGE> 59
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(4) CMS Energy: Second Supplemental Indenture dated as of
March 19, 1996 between CMS Energy Corporation
and The Chase Manhattan Bank (National
Association), as Trustee
(10) CMS Energy: Employment Agreement dated March 20, 1996
between CMS Energy Corporation and Preston D.
Hopper
(12) CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15) CMS Energy: Letter of Independent Public Accountant
(27)(a) CMS Energy: Financial Data Schedule
(27)(b) Consumers: Financial Data Schedule
(99) CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
Current Reports on Form 8-K dated January 18, 1996 (Consumers), February
23, 1996 (CMS Energy) and April 23, 1996 (CMS Energy and Consumers)
covering matters pursuant to "Item 5. Other Events."
<PAGE>
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Date: May 15, 1996 By A M Wright
------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: May 15, 1996 By A M Wright
------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE>
SECOND SUPPLEMENTAL INDENTURE
dated as of March 19, 1996
____________________
This Second Supplemental Indenture, dated as of the 19th day
of March, 1996 between CMS Energy Corporation, a corporation duly
organized and existing under the laws of the State of Michigan
(hereinafter called the "Company") and having its principal office at
Fairlane Plaza South, Suite 1100, 330 Town Center Drive, Dearborn,
Michigan 48126, and The Chase Manhattan Bank (National Association), a
national banking association organized and existing under the laws of the
United States of America (hereinafter called the "Trustee") and having its
principal Corporate Trust Office at 4 Chase MetroTech Center, Brooklyn,
New York 11245,
WITNESSETH:
WHEREAS, the Company and the Trustee entered into an
Indenture, dated as of January 15, 1994 (the "Original Indenture"),
pursuant to which one or more series of debt securities of the Company
(the "Securities") may be issued from time to time; and
WHEREAS, Section 301 of the Original Indenture permits the
terms of any series of Securities to be established in an indenture
supplemental to the Original Indenture; and
WHEREAS, Section 901(7) of the Original Indenture provides
that a supplemental indenture may be entered into by the Company and the
Trustee without the consent of any Holders of the Securities to establish
the form and terms of the Securities of any series; and
WHEREAS, the Company has requested the Trustee to join with
it in the execution and delivery of this Second Supplemental Indenture in
order to supplement and amend the Original Indenture by, among other
things, establishing the form and terms of a series of Securities to be
known as the Company's "General Term Notes (registered servicemark),
Series B" (the "General Term Notes"), providing for the issuance of
the General Term Notes and amending and adding certain provisions thereof
for the benefit of the Holders of the General Term Notes; and
WHEREAS, the Company and the Trustee desire to enter into
this Second Supplemental Indenture for the purposes set forth in Sections
301 and 901(7) of the Original Indenture as referred to above; and
WHEREAS, all things necessary to make this Second
Supplemental Indenture a valid agreement of the Company and the Trustee
and a valid supplement to the Original Indenture have been done,
___________________________
(Registered servicemark of J. W. Korth & Company)<PAGE>
<PAGE> 3
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE
WITNESSETH:
For and in consideration of the premises and the purchase of
the General Term Notes to be issued hereunder by holders thereof, the
Company and the Trustee mutually covenant and agree, for the equal and
proportionate benefit of the respective holders from time to time of the
General Term Notes, as follows:
ARTICLE I
STANDARD PROVISIONS; DEFINITIONS
SECTION 101. Standard Provisions. The Original Indenture
together with this Second Supplemental Indenture and all indentures
supplemental thereto entered into pursuant to the applicable terms thereof
are hereinafter sometimes collectively referred to as the "Indenture."
All of the terms, conditions, covenants and provisions contained in the
Original Indenture as heretofore supplemented are incorporated herein by
reference in their entirety and, except as specifically noted herein or
unless the context otherwise requires, shall be deemed to be a part hereof
to the same extent as if such provisions had been set forth in full
herein. All capitalized terms which are used herein and not otherwise
defined herein are defined in the Indenture and are used herein with the
same meanings as in the Indenture.
SECTION 102. Definitions. Section 101 of the Indenture is
amended to insert the new definitions applicable to the General Term
Notes, in the appropriate alphabetical sequence, as follows:
"Amortization Expense" means, for any period, amounts
recognized during such period as amortization of capital leases,
depletion, nuclear fuel, goodwill and assets classified as intangible
assets in accordance with generally accepted accounting principles.
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (x) the number of years from the date of determination
to the dates of each successive scheduled principal payment of such
Indebtedness and (y) the amount of such principal payment by (ii) the sum
of all such principal payments.
"Capital Lease Obligation" of a Person means any obligation
that is required to be classified and accounted for as a capital lease on
the face of a balance sheet of such Person prepared in accordance with
generally accepted accounting principles; the amount of such obligation
shall be the capitalized amount thereof, determined in accordance with
generally accepted accounting principles; the stated maturity thereof
shall be the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty; and such obligation
shall be deemed secured by a Lien on any property or assets to which such
lease relates.
"Capital Stock" means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock, including any Preferred
Stock or Letter Stock.
"Change in Control" means an event or series of events by
which (i) the Company ceases to own beneficially, directly or indirectly,
at least 80% of the total voting power of all classes of Capital Stock
then outstanding of Consumers (whether arising from issuance of securities
of the Company or Consumers, any direct or indirect transfer of securities
by the Company or Consumers, any merger, consolidation, liquidation or
dissolution of the Company or Consumers or otherwise); (ii) any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) becomes the "beneficial owner" (as such term is used in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or
group shall be deemed to have "beneficial ownership" of all shares that
such person or group has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 30% of the Voting Stock of the Company; or (iii)
the Company consolidates with or merges into another corporation or
directly or indirectly conveys, transfers or leases all or substantially
all of its assets to any Person, or any corporation consolidates with or
merges into the Company, in either event pursuant to a transaction in
which the outstanding Voting Stock of the Company is changed into or
exchanged for cash, securities, or other property, other than any such
transaction in which (A) the outstanding Voting Stock of the Company is
changed into or exchanged for Voting Stock of the surviving corporation
and (B) the holders of the Voting Stock of the Company immediately prior
to such transaction retain, directly or indirectly, substantially
proportionate ownership of the Voting Stock of the surviving corporation
immediately after such transaction.
"Consolidated Assets" means, at any date of determination,
the aggregate assets of the Company and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"Consolidated Capital" means, at any date of determination,
the sum of (a) Consolidated Indebtedness, (b) consolidated equity of the
common stockholders of the Company and the Consolidated Subsidiaries, (c)
consolidated equity of the preference stockholders of the Company and the
Consolidated Subsidiaries and (d) consolidated equity of the preferred
stockholders of the Company and the Consolidated Subsidiaries, in each
case determined at such date in accordance with generally accepted
accounting principles.
"Consolidated Coverage Ratio" with respect to any period
means the ratio of (i) the aggregate amount of Operating Cash Flow for
such period to (ii) the aggregate amount of Consolidated Interest Expense
for such period.
"Consolidated Indebtedness" means, at any date of
determination, the aggregate Indebtedness of the Company and its
Consolidated Subsidiaries determined on a consolidated basis in accordance
with generally accepted accounting principles.
"Consolidated Interest Expense" means, for any period, the
total interest expense in respect of Indebtedness of the Company and its
Consolidated Subsidiaries, including, without duplication, (i) interest
expense attributable to capital leases, (ii) amortization of debt
discount, (iii) capitalized interest, (iv) cash and noncash interest
payments, (v) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (vi) net
costs under Interest Rate Protection Agreements (including amortization of
discount) and (vii) interest expense in respect of obligations of other
Persons deemed to be Indebtedness of the Company or any Consolidated
Subsidiaries under clause (v) or (vi) of the definition of Indebtedness,
provided, however, that Consolidated Interest Expense shall exclude any
costs otherwise included in interest expense recognized on early
retirement of debt.
"Consolidated Leverage Ratio" means, at any date of
determination, the ratio of Consolidated Indebtedness to Consolidated
Capital.
"Consolidated Net Income" means, for any period, the net
income of the Company and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting
principles; provided, however, that there shall not be included in such
Consolidated Net Income:
(i) any net income of any Person if such Person is not a
Subsidiary, except that (A) the Company's equity in the net income
of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Consolidated Subsidiary as a dividend or other distribution and (B)
the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net
Income;
(ii) any net income of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition; and
(iii) any gain or loss realized upon the sale or other
disposition of any property, plant or equipment of the Company or
its Consolidated Subsidiaries which is not sold or otherwise
disposed of in the ordinary course of business and any gain or loss
realized upon the sale or other disposition of any Capital Stock of
any Person.
"Consolidated Net Worth" of any Person means the total of
the amounts shown on the consolidated balance sheet of such Person and its
consolidated subsidiaries, determined on a consolidated basis in
accordance with generally accepted accounting principles, as of any date
selected by such Person not more than 90 days prior to the taking of any
action for the purpose of which the determination is being made (and
adjusted for any material events since such date), as (i) the par or
stated value of all outstanding Capital Stock plus (ii) paid-in capital or
capital surplus relating to such Capital Stock plus (iii) any retained
earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable
to Exchangeable Stock.
"Consolidated Subsidiary" means, any Subsidiary whose
accounts are or are required to be consolidated with the accounts of the
Company in accordance with generally accepted accounting principles.
"Consumers" means Consumers Power Company, a Michigan
corporation, all of whose common stock is on the date hereof owned by the
Company.
"Credit Agreement" means the Credit Agreement dated as of
November 21, 1995, as amended from time to time, among the Company, the
banks named therein, Citibank, N.A., and Union Bank, as Co-Agents,
Citibank, N.A., as Documentation Agent, and Union Bank, as Operational
Agent.
"Duff & Phelps" shall mean Duff & Phelps Credit Rating Co.,
and any successor thereto which is a nationally recognized statistical
rating organization, or if such entity shall cease to rate the General
Term Notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by the Company which is acceptable to the Trustee.
"Enterprises" means CMS Enterprises Company, a Michigan
corporation.
"Event of Default" with respect to the General Term Notes
has the meaning specified in Article VI of this Second Supplemental
Indenture.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchangeable Stock" means any Capital Stock of a
corporation that is exchangeable or convertible into another security
(other than Capital Stock of such corporation that is neither Exchangeable
Stock or Redeemable Stock).
"Indebtedness" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as
the deferred purchase price of property, all conditional sale
obligations and all obligations under any title retention agreement
(but excluding trade accounts payable arising in the ordinary
course of business);
(iv) all obligations of such Person for the reimbursement
of any obligor on any letter of credit, bankers' acceptance or
similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations
described in clauses (i) through (iii) above) entered into in the
ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the third Business
Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit);
(v) all obligations of the type referred to in clauses (i)
through (iv) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is
responsible or liable as obligor, guarantor or otherwise; and
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the
obligation so secured.
"Interest Rate Protection Agreement" means any interest rate
swap agreement, interest rate cap agreement or other financial agreement
or arrangement designed to protect the Company or any Subsidiary against
fluctuations in interest rates.
"Letter Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however
designated) which is intended to reflect the separate performance of
certain of the businesses or operations conducted by such corporation or
any of its subsidiaries.
"Lien" means any lien, mortgage, pledge, security interest,
conditional sale, title retention agreement or other charge or encumbrance
of any kind.
"Net Proceeds" means, with respect to any issuance or sale
or contribution in respect of Capital Stock, the aggregate proceeds of
such issuance, sale or contribution, including the fair market value (as
determined by the Board of Directors and net of any associated debt and of
any consideration other than Capital Stock received in return) of property
other than cash, received by the Company, net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts, or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as
a result thereof, provided, however, that if such fair market value as
determined by the Board of Directors of property other than cash is
greater than $25 million, the value thereof shall be based upon an opinion
from an independent nationally recognized firm experienced in the
appraisal or similar review of similar types of transactions.
"NOMECO" means, CMS NOMECO Oil & Gas Co., a Michigan
corporation and wholly-owned subsidiary of the Company.
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible
Capital Stock other than Preferred Stock of such corporation; provided,
however, that Non-Convertible Capital Stock shall not include any
Redeemable Stock or Exchangeable Stock.
"Operating Cash Flow" means, for any period, with respect to
the Company and its Consolidated Subsidiaries, the aggregate amount of
Consolidated Net Income after adding thereto Consolidated Interest Expense
(adjusted to include costs recognized on early retirement of debt), income
taxes, depreciation expense, Amortization Expense and any noncash
amortization of debt issuance costs, any nonrecurring, noncash charges to
earnings and any negative accretion recognition.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however
designated) that is preferred as to the payment of dividends, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such corporation, over shares of Capital Stock of any other
class of such corporation.
"Redeemable Stock" means any Capital Stock that by its terms
or otherwise is required to be redeemed prior to the first anniversary of
the Maturity of any Outstanding General Term Notes or is redeemable at the
option of the holder thereof at any time prior to the first anniversary of
the Maturity of any Outstanding General Term Notes.
"Restricted Subsidiary" means any Subsidiary (other than
Consumers and its subsidiaries) of the Company which, as of the date of
the Company's most recent quarterly consolidated balance sheet,
constituted at least 10% of the total Consolidated Assets of the Company
and its Consolidated Subsidiaries and any other Subsidiary which from time
to time is designated a Restricted Subsidiary by the Board of Directors
provided that no Subsidiary may be designated a Restricted Subsidiary if,
immediately after giving effect thereto, an Event of Default or event
that, with the lapse of time or giving of notice or both, would constitute
an Event of Default would exist or the Company and its Restricted
Subsidiaries could not incur at least $1 of additional Indebtedness under
Section 510, and (i) any such Subsidiary so designated as a Restricted
Subsidiary must be organized under the laws of the United States or any
State thereof, (ii) more than 80% of the Voting Stock of such Subsidiary
must be owned of record and beneficially by the Company or a Restricted
Subsidiary, (iii) such Restricted Subsidiary must be a Consolidated
Subsidiary, and (iv) such Subsidiary must not theretofore have been
designated as a Restricted Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Corporation,
and any successor thereto which is a nationally recognized statistical
rating organization, or if such entity shall cease to rate the General
Term Notes or shall cease to exist and there shall be no such successor
thereto, any other nationally recognized statistical rating organization
selected by the Company which is acceptable to the Trustee.
"Support Obligations" means, for any person, without
duplication, any financial obligation, contingent or otherwise, of such
person guaranteeing or otherwise supporting any debt or other obligation
of any other person in any manner, whether directly or indirectly, and
including, without limitation, any obligation of such person, direct or
indirect, (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such debt or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of such debt,
(ii) to purchase property, securities or services for the purpose of
assuring the owner of such debt of the payment of such debt, (iii) to
maintain working capital, equity capital, available cash or other
financial statement condition of the primary obligor so as to enable the
primary obligor to pay such debt, (iv) to provide equity capital under or
in respect of equity subscription arrangements (to the extent that such
obligation to provide equity capital does not otherwise constitute debt),
or (v) to perform, or arrange for the performance of, any non-monetary
obligations or non-funded debt payment obligations of the primary obligor.
"Tax-Sharing Agreement" means the Amended and Restated
Agreement for the Allocation of Income Tax Liabilities and Benefits, dated
January 1, 1994, as amended or supplemented from time to time, by and
among Company, each of the members of the Consolidated Group (as defined
therein), and each of the corporations that become members of the
Consolidated Group.
Certain terms, used principally in Articles Three, Four and
Seven of this Second Supplemental Indenture, are defined in those
Articles.
ARTICLE II
DESIGNATION AND TERMS OF THE GENERAL TERM NOTES; FORMS
SECTION 201. Establishment of Series. There is hereby
created a series of Securities to be known and designated as the "General
Term Notes (registered servicemark), Series B" and limited in aggregate
principal amount (except as contemplated in Section 301(2) of the Indenture)
to $125,000,000.
Each General Term Note will be dated and issued as of the
date of its authentication by the Trustee. Each General Term Note shall
also bear an Original Issue Date (as hereinafter defined) which, with
respect to any General Term Note (or any portion thereof), shall mean the
date of its original issue, as specified in such General Term Note (the
"Original Issue Date"), and such Original Issue Date shall remain the same
if such General Term Note is subsequently issued upon transfer, exchange,
or substitution of such General Term Note regardless of its date of
authentication. Principal on any General Term Note shall become due and
payable from nine months to twenty-five years from the Original Issue Date
of such General Term Note, as specified on such General Term Note.
Each General Term Note will bear interest from the Original
Issue Date, or from the most recent date to which interest has been paid
or duly provided for, at the rate per annum stated therein until the
principal thereof is paid or made available for payment. Interest will be
payable either monthly, quarterly or semi-annually on each Interest
Payment Date and at Maturity, as specified below and in each General Term
Note. Interest will be payable to the person in whose name a General Term
Note is registered at the close of business on the Regular Record Date
next preceding each Interest Payment Date; provided, however, interest
payable at Maturity will be payable to the person to whom principal shall
be payable. Interest on the General Term Notes will be computed on the
basis of a 360-day year of twelve 30-day months.
The Interest Payment Dates for a General Term Note that
provides for monthly interest payments shall be the fifteenth day of each
calendar month; provided, however, that in the case of a General Term Note
issued between the first and fifteenth day of a calendar month, interest
otherwise payable on the fifteenth day of such calendar month will be
payable on the fifteenth day of the next succeeding calendar month. In
the case of a General Term Note that provides for quarterly interest
payments, the Interest Payment Dates shall be the fifteenth day of each of
the months specified in such General Term Note, commencing on the day that
is three months from (i) the day on which such General Term Note is
issued, if such General Term Note is issued on the fifteenth day of a
calendar month, or (ii) the fifteenth day of the calendar month
immediately preceding the calendar month in which such General Term Note
is issued, if such General Term Note is issued prior to the fifteenth day
of a calendar month, or (iii) the fifteenth day of the calendar month in
which such General Term Note is issued, if such General Term Note is
issued after the fifteenth day of a calendar month. In the case of a
General Term Note that provides for semi-annual interest payments, the
Interest Payment Dates shall be the fifteenth day of each of the months
specified in such General Term Note, commencing on the day that is six
months from (i) the day on which such General Term Note is issued, if such
General Term Note is issued on the fifteenth day of a calendar month, or
(ii) the fifteenth day of the calendar month immediately preceding the
calendar month in which such General Term Note is issued, if such General
Term Note is issued prior to the fifteenth day of a calendar month, or
(iii) the fifteenth day of the calendar month in which such General Term
Note is issued, if such General Term Note is issued after the fifteenth
day of a calendar month.
Payment of principal of the General Term Notes (and premium,
if any) and, unless otherwise paid as hereinafter provided, any interest
thereon will be made at the office or agency of the Company in New York,
New York; provided, however, that payment of interest (other than interest
at Maturity) may be made at the option of the Company by check or draft
mailed to the Person entitled thereto at such Person's address appearing
in the Security Register or by wire transfer to an account designated by
such Person not later than ten days prior to the date of such payment.
The Regular Record Date referred to in Section 301 of the
Indenture for the payment of the interest on any General Term Note payable
on any Interest Payment Date (other than at Maturity) shall be the first
day (whether or not a Business Day) of the calendar month in which such
Interest Payment Date occurs as is specified in such General Term Note,
and, in the case of interest payable at Maturity, the Regular Record Date
shall be the date of Maturity. Unless otherwise specified in such General
Term Notes, the cities of New York, New York and Chicago, Illinois shall
be the reference cities for determining a Business Day.
The General Term Notes may be issued only as registered
notes, without coupons, in denominations of $1,000 and any larger
denomination which is in an integral multiple of $1,000.
Upon the execution of this Second Supplemental Indenture, or
from time to time thereafter, General Term Notes may be executed by the
Company and delivered to the Trustee for authentication, and the Trustee
shall thereupon authenticate and deliver said General Term Notes in
accordance with the procedures set forth in or upon a Company Order
complying with Sections 301 and 303 of the Indenture.
SECTION 202. Forms Generally. The General Term Notes shall
be in substantially the form set forth in this Article, with such
appropriate insertions, omissions, substitutions and other variations as
are required or permitted by the Indenture, and may have such letters,
numbers or other marks of identification and such legends or endorsements
placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such General Term Notes, as evidenced by their
execution thereof.
The definitive General Term Notes shall be printed,
lithographed or engraved on steel engraved borders or may be produced in
any other manner, all as determined by the officers executing such General
Term Notes, as evidenced by their execution thereof.
SECTION 203. Form of Face of General Term Note.
[Insert any legend required by the Internal Revenue
Code and the regulations thereunder.]
CMS ENERGY CORPORATION
GENERAL TERM NOTE (registered servicemark), SERIES B
No. ________ $__________
[Initial Redemption Date]
CMS Energy Corporation, a corporation duly organized and
existing under the laws of the State of Michigan (herein called the
"Company", which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_________________________________, or registered assigns, the principal
sum of ____________________ Dollars on __________________________ and to
pay interest thereon from _____________ (the "Original Issue Date") or
from the most recent Interest Payment Date to which interest has been paid
or duly provided for, [choose one of the following --
monthly/quarterly/semi-annually [insert as applicable -- on ___________
[________, ____________] and _________ in each [year/month], commencing
______________, and at Maturity at the rate of ____% per annum, until the
principal hereof is paid or made available for payment [if applicable,
insert --, and at the rate of ___% per annum on any overdue principal and
premium and on any overdue installment of interest]. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment
Date will, as provided in such Indenture, be paid to the Person in whose
name this General Term Note (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the first day of the calendar month in which such
Interest Payment Date occurs (whether or not a Business Day) next
preceding such Interest Payment Date except that the Regular Record Date
for interest payable at Maturity shall be the date of Maturity. Any such
interest not so punctually paid or duly provided for will forthwith cease
to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this General Term Note (or one or more
Predecessor Securities) is registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest to be fixed
by the Trustee, notice whereof shall be given to Holders of General Term
Notes not less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the General Term Notes
may be listed, and upon such notice as may be required by such exchange,
all as more fully provided in said Indenture.
[If the General Term Note is not to bear interest prior to
Maturity, insert -- The principal of this General Term Note shall not bear
interest except in the case of a default in payment of principal upon
acceleration, upon redemption or at Stated Maturity and in such case the
overdue principal of this General Term Note shall bear interest at the
rate of ___% per annum, which shall accrue from the date of such default
in payment to the date payment of such principal has been made or duly
provided for. Interest on any overdue principal shall be payable on
demand. Any such interest on any overdue principal that is not so paid on
demand shall bear interest at the rate of ____% per annum, which shall
accrue from the date of such demand for payment to the date payment of
such interest has been made or duly provided for, and such interest shall
also be payable on demand.]
Payment of the principal of (and premium, if any) and
interest, if any, on this General Term Note will be made at the office or
agency of the Company maintained for that purpose in New York, New York
(the "Place of Payment"), in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public
and private debts; provided, however, that at the option of the Company
payment of interest (other than interest payable at Maturity) may be made
by check mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register or by wire transfer to an
account designated by such Person not later than ten days prior to the
date of such payment.
Reference is hereby made to the further provisions of this
General Term Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set forth at
this place.
Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual
signature, this General Term Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed under its corporate seal.
Dated:
CMS ENERGY CORPORATION
By ____________________________
Attest:
_________________________
SECTION 204. Form of Reverse of General Term Note.
This General Term Note (registered servicemark), Series B is one of a
duly authorized issue of securities of the Company (herein called the "General
Term Notes"), issued and to be issued in one or more series under an
Indenture, dated as of January 15, 1994, as supplemented by certain
supplemental indentures, including the Second Supplemental Indenture,
dated as of _____________, 1996 (herein collectively referred to as the
"Indenture"), between the Company and The Chase Manhattan Bank (National
Association), as Trustee (herein called the "Trustee", which term includes
any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement
of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee, the Holders of the General Term
Notes and of the terms upon which the General Term Notes are, and are to
be, authenticated and delivered. This General Term Note is one of the
series designated on the face hereof, limited in aggregate principal
amount to $125,000,000.
[If applicable, insert -- The General Term Notes of this
series are subject to redemption upon not more than 60 nor less than 30
days' notice as provided in the Indenture, at any time [on or after
__________, _____,] as a whole or in part from time to time, at the
election of the Company, at the following Redemption Prices (expressed as
percentages of the principal amount): If redeemed [on or before
_____________, ___%, and if redeemed] during the 12-month period beginning
____________ of the years indicated,
Redemption Redemption
Year Price Year Price
____ __________ ____ __________
and thereafter at a Redemption Price equal to ___% of the principal
amount, together in the case of any such redemption with accrued interest
to the Redemption Date, but interest installments whose Stated Maturity is
on or prior to such Redemption Date will be payable to the Holders of such
General Term Notes, or one or more Predecessor Securities, of record at
the close of business on the relevant Record Dates referred to on the face
hereof, all as provided in the Indenture.]
[Notwithstanding the foregoing, the Company may not, prior
to __________, redeem this General Term Note of as a part of, or in
anticipation of, any refunding operation by the application, directly or
indirectly, of moneys borrowed having an effective interest cost to the
Company (calculated in accordance with generally accepted financial
practice) of less than the effective interest cost to the Company
(similarly calculated) of this General Term Note.]
[If the General Term Note is subject to redemption,
insert -- In the event of redemption of this General Term Note in part
only, a new General Term Note or Notes of this series and of like tenor
for the unredeemed portion hereof will be issued in the name of the Holder
hereof upon the cancellation hereof.]
If a Change in Control occurs, the Company shall notify the
Holder of this General Term Note of such occurrence and such Holder shall
have the right to require the Company to make a Required Repurchase of all
or any part of this General Term Note at a Change in Control Purchase
Price equal to 101% of the principal amount of this General Term Note to
be so purchased as more fully provided in the Indenture and subject to the
terms and conditions set forth therein. In the event of a Required
Repurchase of only a portion of this General Term Note, a new General Term
Note or Notes for the unrepurchased portion hereof will be issued in the
name of the Holder hereof upon the cancellation hereof.
[If this General Term Note is subject to redemption upon
exercising a Survivor's Option, insert -- As more fully provided in the
Indenture and subject to the terms and conditions set forth therein, the
Company will repay this General Term Note (or portion thereof) properly
tendered for repayment by or on behalf of the person (the
"Representative") that has authority to act on behalf of a deceased owner
of the beneficial interest in this General Term Note under the laws of the
appropriate jurisdiction (including, without limitation, the personal
representative, executor, surviving joint tenant or surviving tenant by
the entirety of such deceased beneficial owner) at a price equal to 100%
of the principal amount hereof plus accrued interest to the date of such
repayment. The Company may, in its sole discretion, limit the aggregate
principal amount of all outstanding General Term Notes as to which
exercises of this option (the "Survivor's Option") will be accepted in any
calendar year to one percent (1%) of the outstanding principal amount of
all General Term Notes as of the end of the most recent fiscal year, but
not less than $500,000 in any such calendar year, or such greater amount
as the Company in its sole discretion may determine for any calendar year,
and may limit to $100,000, or such greater amount as the Company in its
sole discretion may determine for any calendar year, the aggregate
principal amount of General Term Notes (or portions thereof) as to which
exercise of the Survivor's Option will be accepted in such calendar year
with respect to any individual deceased owner of beneficial interests in
such General Term Notes.
[If the General Term Note is not an Original Issue Discount
Security, insert -- If an Event of Default with respect to this General
Term Note shall occur and be continuing, the principal of this General
Term Note may be declared due and payable in the manner and with the
effect provided in the Indenture.]
In any case where any Interest Payment Date, Redemption
Date, Repayment Date, Stated Maturity or Maturity of any General Term Note
shall not be a Business Day at any Place of Payment, then (notwithstanding
any other provision of the Indenture or this General Term Note), payment
of interest or principal (and premium, if any) need not be made at such
Place of Payment on such date, but may be made on the next succeeding
Business Day at such Place of Payment with the same force and effect as if
made on the Interest Payment Date, Redemption Date or Repayment Date or at
the Stated Maturity or Maturity; provided that no interest shall accrue on
the amount so payable for the period from and after such Interest Payment
Date, Redemption Date, Repayment Date, Stated Maturity or Maturity, as the
case may be, to such Business Day.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of all
Outstanding Securities under the Indenture at any time by the Company and
the Trustee with the consent of the Holders of not less than a majority in
principal amount of all Outstanding Securities affected. The Indenture
also contains provisions permitting the Holders of specified percentages
in principal amount of all Outstanding Securities, on behalf of the
Holders of all Outstanding Securities, to waive compliance by the Company
with certain provisions of the Indenture. Any such consent or waiver by
the Holder of this General Term Note shall be conclusive and binding upon
such Holder and upon all future Holders of this General Term Note and of
any General Term Note issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this General Term Note.
The Indenture permits the Holders of not less than a
majority in principal amount of all Outstanding Securities of any series
thereunder to waive on behalf of the Holders of all Outstanding Securities
of such series any past default by the Company, provided that no such
waiver may be made with respect to a default in the payment of the
principal of or premium, if any, or the interest on any Security of such
series or the default by the Company in respect of certain covenants or
provisions of the Indenture, the modification or amendment of which must
be consented to by the Holder of each Outstanding Security of each series
affected.
As set forth in, and subject to, the provisions of the
Indenture, no Holder of any General Term Note will have any right to
institute any proceeding with respect to the Indenture or for any remedy
thereunder, unless such Holder shall have previously given to the Trustee
written notice of a continuing Event of Default, the Holders of not less
than 25% in principal amount of the Outstanding General Term Notes shall
have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding as trustee, and the Trustee shall not
have received from the Holders of a majority in principal amount of the
Outstanding General Term Notes a direction inconsistent with such request
and shall have failed to institute such proceeding within 60 days;
provided, however, that such limitations do not apply to a suit instituted
by the Holder hereof for the enforcement of payment of the principal of
(and premium, if any) or any interest on this General Term Note on or
after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of
this General Term Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest on this General Term Note at the
times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this General Term Note is
registerable in the Security Register, upon surrender of this General Term
Note for registration of transfer at the office or agency of the Company
in any place where the principal of and any premium and interest on this
General Term Note are payable, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new General Term
Notes of this series and of like tenor, of authorized denominations and
for the same aggregate principal amount, will be issued to the designated
transferee or transferees.
The General Term Notes of this series are issuable only in
registered form without coupons in denominations of $1,000 and any
integral multiple thereof. As provided in the Indenture and subject to
certain limitations therein set forth, General Term Notes of this series
are exchangeable for a like aggregate principal amount of General Term
Notes of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration
of transfer or exchange, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in
connection therewith.
[If this General Term Note is redeemable at the option of
the Company, insert -- The Company shall not be required (i) to issue,
register the transfer of or exchange this General Term Note if this
General Term Note may be among those selected for redemption during a
period beginning at the opening of business 15 days before selection of
the General Term Notes to be redeemed under Section 1103 of the Indenture
and ending at the close of business on the day of the mailing of the
relevant notice of redemption, (ii) to register the transfer of or
exchange any General Term Note so selected for redemption in whole or in
part, except, in the case of any General Term Note to be redeemed in part,
the portion thereof not to be redeemed, or (iii) to issue, register the
transfer of or exchange any General Term Note which has been surrendered
for repayment at the option of the Holder, except the portion, if any, of
such General Term Note not to be so repaid.]
Prior to due presentment of this General Term Note for
registration of transfer, the Company, the Trustee and any agent of the
Company or the Trustee may treat the Person in whose name this General
Term Note is registered as the owner hereof for all purposes, whether or
not this General Term Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this General Term Note without definition
which are defined in the Indenture shall have the meanings assigned to
them in the Indenture.
______________________________
(Registered servicemark of J. W. Korth & Company)
----------------------
SECTION 205. Form of Legend for Global Notes. Any Global
Note (as defined in Article VII below) authenticated and delivered
hereunder shall bear a legend in substantially the following form:
"This Security is a Global Note within the meaning of the
Indenture hereinafter referred to and is registered in the name of a
Depositary or a nominee of a Depositary. This General Term Note is not
exchangeable for General Term Notes registered in the name of a Person
other than the Depositary or its nominee except in the limited
circumstances described in the Indenture, and no transfer of this General
Term Note (other than a transfer of this General Term Note as a whole by
the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary) may be
registered except in the limited circumstances described in the
Indenture."
SECTION 206. Form of Trustee's Certificate of
uthentication. The Trustee's certificates of authentication shall be in
substantially the following form:
This is one of the General Term Notes of the series
designated therein referred to in the within-mentioned Indenture.
_____________________________________,
as Trustee
By __________________________________
Authorized Officer
ARTICLE III
REDEMPTION OF GENERAL TERM NOTES; CHANGE OF CONTROL
SECTION 301. Redemption of General Term Notes.
(a) Each General Term Note may be redeemed by the Company in whole or in
part if so provided in, and in accordance with, the terms of such General
Term Note issued by the Company. The Company may redeem any General Term
Note which by its terms is redeemable prior to Stated Maturity without
also redeeming any other General Term Note which is redeemable prior to
Stated Maturity.
(b) Change of Control. Upon the occurrence of a
Change in Control (the effective date of such Change in Control being the
"Change in Control Date"), each Holder of a General Term Note shall have
the right to require that the Company repurchase (a "Required Repurchase")
all or any part of such Holder's General Term Note at a repurchase price
payable in cash equal to 101% of the principal amount of such General Term
Note plus accrued interest to the Purchase Date (the "Change in Control
Purchase Price").
(1) Within 30 days following the Change in Control Date,
the Company shall mail a notice (the "Required Repurchase
Notice") to each Holder with a copy to the Trustee stating:
(i) that a Change in Control has occurred and that
such Holder has the right to require the Company to
repurchase all or any part of such Holder's General Term
Notes at the Change of Control Purchase Price;
(ii) the Change of Control Purchase Price;
(iii) the date on which any Required Repurchase
shall be made (which shall be no earlier than 60 days nor
later than 90 days from the date such notice is mailed)
(the "Purchase Date");
(iv) the name and address of the Paying Agent; and
(v) the procedures that Holders must follow to
cause the General Term Notes to be repurchased, which shall
be consistent with this Section and the Indenture.
(2) Holders electing to have a General Term Note
repurchased must deliver a written notice (the "Change in
Control Purchase Notice") to the Paying Agent (initially
the Trustee) at its office in The City of New York, or any
other office of the Paying Agent maintained for such
purposes, not later than 30 days prior to the Purchase
Date. The Change in Control Purchase Notice shall state:
(i) the portion of the principal amount of any General Term
Notes to be repurchased, which portion must be $1,000 or an
integral multiple thereof; (ii) that such General Term
Notes are to be repurchased by the Company pursuant to the
change in control provisions of the Indenture; and (iii)
unless the General Terms Notes are represented by one or
more Global Notes, the certificate numbers of the General
Term Notes to be delivered by the Holder thereof for
repurchase by the Company. Any Change in Control Purchase
Notice may be withdrawn by the Holder by a written notice
of withdrawal delivered to the Paying Agent not later than
three Business Days prior to the Purchase Date. The notice
of withdrawal shall state the principal amount and, if
applicable, the certificate numbers of the General Term
Notes as to which the withdrawal notice relates and the
principal amount of such General Term Notes, if any, which
remains subject to a Change in Control Purchase Notice.
If a General Term Note is represented by a Global Note (as
described in Article VII below), the Depositary or its
nominee will be the Holder of such General Term Note and
therefore will be the only entity that can elect a Required
Repurchase of such General Term Note. To obtain repayment
pursuant to this Section 301(b) with respect to such
General Term Note, the beneficial owner of such General
Term Note must provide to the broker or other entity
through which it holds the beneficial interest in such
General Term Note (i) the Change in Control Purchase Notice
signed by such beneficial owner, and such signature must be
guaranteed by a member firm of a registered national
securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust
company having an office or correspondent in the United
States, and (ii) instructions to such broker or other
entity to notify the Depositary of such beneficial owner's
desire to obtain repayment pursuant to this Section 301(b).
Such broker or other entity will provide to the Paying
Agent (i) the Change of Control Purchase Notice received
from such beneficial owner and (ii) a certificate
satisfactory to the Paying Agent from such broker or other
entity stating that it represents such beneficial owner.
Such broker or other entity will be responsible for
disbursing any payments it receives pursuant to this
Section 301(b) to such beneficial owner.
(3) Payment of the Change of Control Purchase Price for
a General Term Note for which a Change in Control Purchase
Notice has been delivered and not withdrawn is conditioned
(except in the case of a General Term Note represented by
one or more Global Notes) upon delivery of such General
Term Note (together with necessary endorsements) to the
Paying Agent at its office in The City of New York, or any
other office of the Paying Agent maintained for such
purpose, at any time (whether prior to, on or after the
Purchase Date) after the delivery of such Change in Control
Purchase Notice. Payment of the Change of Control Purchase
Price for such General Term Note will be made promptly
following the later of the Purchase Date or the time of
delivery of such General Term Note. If the Paying Agent
holds, in accordance with the terms of the Indenture, money
sufficient to pay the Change in Control Purchase Price of
such General Term Note on the Business Day following the
Purchase Date, then, on and after such date, interest will
cease accruing, and, if applicable, amounts will no longer
accrue on any such General Term Note that is an Original
Issue Discount Security, whether or not such General Term
Note is delivered to the Paying Agent, and all other rights
of the Holder shall terminate (other than the right to
receive the Change of Control Purchase Price upon delivery
of the General Term Note).
(4) The Company shall comply with the provisions of
Rule 13e-4 and any other tender offer rules under the
Exchange Act, which may then be applicable and shall file
Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to repurchase
General Term Notes at the option of Holders upon a Change
in Control.
(5) No General Term Note may be repurchased by the
Company as a result of a Change in Control if there has
occurred and is continuing an Event of Default (other than
a default in the Payment of the Change in Control Purchase
Price with respect to the General Term Notes).
ARTICLE IV
REPAYMENT UPON DEATH
If so specified in any General Term Note, the Holder of
such General Term Note will have the option (the "Survivor's Option") to
elect repayment of such General Term Note prior to its Stated Maturity in
the event of the death of the beneficial owner of such General Term Note.
Pursuant to exercise of the Survivor's Option, if
applicable, the Company will repay any General Term Note (or portion
thereof) properly tendered for repayment by or on behalf of the person
(the "Representative") that has authority to act on behalf of the deceased
beneficial owner of such General Term Note under the laws of the
appropriate jurisdiction (including, without limitation, the personal
representative, executor, surviving joint tenant or surviving tenant by
the entirety of such deceased beneficial owner) at a price equal to
one-hundred percent (100%) of the principal amount of the beneficial
interest of the deceased owner of such General Term Note plus accrued
interest to the date of such payment, subject to the following
limitations. The Company may, in its sole discretion, limit the aggregate
principal amount of General Term Notes as to which exercises of the
Survivor's Option will be accepted in any calendar year (the "Annual Put
Limitation") to one percent (1%) of the outstanding principal amount of
the General Term Notes as of the end of the most recent fiscal year, but
not less than $500,000 in any such calendar year, or such greater amount
as the Company in its sole discretion may determine for any calendar year,
and may limit to $100,000, or such greater amount as the Company in its
sole discretion may determine for any calendar year, the aggregate
principal amount of General Term Notes (or portions thereof) as to which
exercise of the Survivor's Option will be accepted in such calendar year
with respect to any individual deceased owner of beneficial interests in
such General Term Notes (the "Individual Put Limitation"). Moreover, the
Company will not make principal repayments pursuant to exercise of the
Survivor's Option in amounts that are less that $1,000, and, in the event
that the limitations described in the preceding sentence would result in
the partial repayment of any General Term Note, the principal amount of
such General Term Note remaining outstanding after repayment must be at
least $1,000 (the minimum authorized denomination of the General Term
Notes). Any General Term Note (or portion thereof) tendered pursuant to
exercise of the Survivor's Option may be withdrawn by a written request of
its Holder received by the Trustee prior to its repayment.
Each General Term Note (or portion thereof) that is
tendered pursuant to a valid exercise of the Survivor's Option will be
accepted promptly in the order all such General Term Notes are tendered,
except for any General Term Note (or portion thereof) the acceptance of
which would contravene (i) the Annual Put Limitation, if applied, or (ii)
the Individual Put Limitation, if applied, with respect to the relevant
individual deceased owner of beneficial interests therein. If, as of the
end of any calendar year, the aggregate principal amount of General Term
Notes (or portions thereof) that have been accepted pursuant to exercise
of the Survivor's Option for such year has not exceeded the Annual Put
Limitation, if applied, for such year, any exercise(s) of the Survivor's
Option with respect to General Term Notes (or portions thereof) not
accepted during such calendar year because such acceptance would have
contravened the Individual Put Limitation, if applied, with respect to an
individual deceased owner of beneficial interests therein will be accepted
in the order all such General Term Notes (or portions thereof) were
tendered, to the extent that any such exercise would not exceed the Annual
Put Limitation, if applied, for such calendar year. Any General Term Note
(or portion thereof) accepted for repayment pursuant to exercise of the
Survivor's Option will be repaid no later than the first Interest Payment
Date that occurs 20 or more calendar days after the date of such
acceptance. Each General Term Note (or any portion thereof) tendered for
repayment that is not accepted in any calendar year because of the
application of the Annual Put Limitation will be deemed to be tendered in
the following calendar year in the order in which all such General Term
Notes (or portions thereof) were originally tendered, unless any such
General Term Note (or portion thereof) is withdrawn by the Representative
for the deceased owner prior to its repayment. In the event that a
General Term Note (or any portion thereof) tendered for repayment pursuant
to valid exercise of the Survivor's Option is not accepted, the Trustee
will deliver a notice by first-class mail to the registered Holder thereof
at its last known address as indicated in the Security Register that
states the reasons such General Term Note (or portion thereof) has not
been accepted for repayment.
Subject to the foregoing, in order for a Survivor's Option
to be validly exercised with respect to any General Term Note (or portion
thereof), the Trustee must receive from the Representative of the
individual deceased owner of beneficial interests therein (i) a written
request for payment signed by the Representative, and such signature must
be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States, (ii) if any such General Term Note is not represented by a
Global Note (as described in Article VII below), tender of the General
Term Note (or portion thereof) to be repaid, (iii) appropriate evidence
satisfactory to the Company and the Trustee that (A) the Representative
has authority to act on behalf of the individual deceased beneficial
owner, (B) the death of such beneficial owner has occurred and (C) the
deceased individual was the owner of a beneficial interest in such General
Term Note at the time of death, (iv) if applicable, a properly executed
assignment or endorsement, and (v) if the beneficial interest in such
General Term Note is held by a nominee of the deceased beneficial owner, a
certificate satisfactory to the Trustee from such nominee attesting to the
deceased's ownership of a beneficial interest in such General Term Note.
All questions as to the eligibility or validity of any exercise of the
Survivor's Option will be determined by the Company, in its sole
discretion, which determinations will be final and binding on all parties.
If a General Term Note is represented by a Global Note (as
described in Article VII below), the Depositary or its nominee will be the
Holder of such General Term Note and therefore will be the only entity
that can exercise the Survivor's Option for such General Term Note. To
obtain repayment pursuant to exercise of the Survivor's Option with
respect to such General Term Note, the Representative must provide to the
broker or other entity through which the beneficial interest in such
General Term Note is held by the deceased owner (i) the documents
described in clauses (i) and (iii) of the preceding paragraph and (ii)
instructions to such broker or other entity to notify the Depositary of
such Representative's desire to obtain repayment pursuant to exercise of
the Survivor's Option. Such broker or other entity shall provide to the
Trustee (i) the documents received from the Representative referred to in
clause (i) of the preceding sentence and (ii) a certificate satisfactory
to the Trustee from such broker or other entity stating that it represents
the deceased beneficial owner. Such broker or other entity will be
responsible for disbursing any payments it receives pursuant to exercise
of the Survivor's Option to the appropriate Representative.
ARTICLE V
ADDITIONAL COVENANTS OF THE COMPANY
WITH RESPECT TO THE GENERAL TERM NOTES
SECTION 501. Statement by Officers as to Default. (a)
The Company will deliver to the Trustee, within 120 days after the end of
each fiscal year a brief certificate from the principal executive officer,
principal financial officer or principal accounting officer as to his or
her knowledge of the Company's compliance with all conditions and
covenants under this Second Supplemental Indenture. For such purposes,
such compliance shall be determined without regard to any period of grace
or requirement of notice provided hereunder and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof
of which they may have knowledge.
(b) The Company shall deliver to the Trustee, as
soon as possible and in any event within 10 days after the
Company becomes aware of the occurrence of an Event of
Default or an event which, with notice or the lapse of time
or both, would constitute an Event of Default, an Officers'
Certificate setting forth the details of such Event of
Default or default, and the action which the Company
proposes to take with respect thereto.
SECTION 502. Existence. So long as any of the General
Term Notes are Outstanding, subject to Article 8 of the Indenture, the
Company will do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence and all rights
(charter and statutory) and franchises other than rights or franchises the
loss of which would not be disadvantageous in any material respect to the
Holders of the General Term Notes.
SECTION 503. Maintenance of Properties. So long as any of
the General Term Notes are Outstanding, the Company will cause all
properties used or useful in the conduct of its business to be maintained
and kept in good condition, repair and working order and supplied with all
necessary equipment and will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business carried
on in connection therewith may be properly and advantageously conducted at
all times; provided, however, that nothing in this Section shall prevent
the Company from discontinuing the operation or maintenance of any of such
properties if such discontinuance is, in the judgment of the Company,
desirable in the conduct of its business and not disadvantageous in any
material respect to the Holders.
SECTION 504. Payment of Taxes and Other Claims. So long
as any of the General Term Notes are Outstanding, the Company will pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (1) all taxes, assessments and governmental charges levied or
imposed upon the Company or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary, and (2) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a Lien
upon the property of the Company or any Subsidiary; provided, however,
that the Company shall not be required to pay or discharge or cause to be
paid or discharged any such tax, assessment, charge or claim the amount of
which, applicability or validity is being contested in good faith by
appropriate proceedings.
SECTION 505. Insurance. So long as any of the General
Term Notes are Outstanding, the Company shall, and each of its Restricted
Subsidiaries and Consumers shall, keep insured by financially sound and
reputable insurers all property of a character usually insured by entities
engaged in the same or similar businesses similarly situated against loss
or damage of the kinds and in the amounts customarily insured against by
such entities and carry such amounts of other insurance as is usually
carried by such entities.
SECTION 506. Compliance with Laws. So long as any of the
General Term Notes are Outstanding, the Company shall, and each of its
Restricted Subsidiaries and Consumers shall, comply in all material
respects with all laws applicable to the Company or such Restricted
Subsidiary or Consumers, as the case may be, its respective business and
properties.
SECTION 508. Limitation on Certain Liens. (a) So long as
any of the General Term Notes are outstanding, the Company shall not
create, incur, assume or suffer to exist any lien, mortgage, pledge,
security interest, conditional sale, title retention agreement or other
charge or encumbrance of any kind, or any other type of arrangement
intended or having the effect of conferring upon a creditor of the Company
or any Subsidiary a preferential interest (hereinafter in this Section
referred to as a "Lien") upon or with respect to the Capital Stock of
Consumers, Enterprises or NOMECO without making effective provision
whereby the General Term Notes shall (so long as any such other creditor
shall be so secured) be equally and ratably secured (along with any other
creditor similarly entitled to be secured) by a direct Lien on all
property subject to such Lien, provided, however, that the foregoing
restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental
charges or levies to the extent not past due;
(ii) pledges or deposits to secure (a) obligations
under workmen's compensation laws or similar legislation,
(b) statutory obligations of the Company or (c) Support
Obligations not to exceed $30 million at any one time
outstanding;
(iii) Liens imposed by law, such as materialmen's,
mechanics', carriers', workmen's and repairmen's Liens and
other similar Liens arising in the ordinary course of
business securing obligations which are not overdue or
which have been fully bonded and are being contested in
good faith;
(iv) purchase money Liens upon or in property
acquired and held by the Company in the ordinary course of
business to secure the purchase price of such property or
to secure Indebtedness incurred solely for the purpose of
financing the acquisition of any such property to be
subject to such Liens, or Liens existing on any such
property at the time of acquisition, or extensions,
renewals or replacements of any of the foregoing for the
same or a lesser amount, provided that no such Lien shall
extend to or cover any property other than the property
being acquired and no such extension, renewal or
replacement shall extend to or cover property not
theretofore subject to the Lien being extended, renewed or
replaced, and provided, further, that the aggregate
principal amount of the Indebtedness at any one time
outstanding secured by Liens permitted by this clause (iv)
shall not exceed $10,000,000; and
(v) Liens not otherwise permitted by clauses (i)
through (iv) of this Section securing Indebtedness of the
Company; provided that on the date such Liens are created,
and after giving effect to such Indebtedness, the aggregate
principal amount at maturity of all of the secured
Indebtedness of the Company at such date shall not exceed
10% of Consolidated Assets at such date.
SECTION 509. Limitation on Consolidation, Merger, Sale or
Conveyance. So long as the General Term Notes are Outstanding, and
subject also to Article Eight of the Indenture, the Company shall not
consolidate with or merge into any other Person or sell, lease or convey
the property of the Company in the entirety or substantially as an
entirety, unless (i) immediately after giving effect to such transaction
the Consolidated Net Worth of the surviving entity is at least equal to
the Consolidated Net Worth of the Company immediately prior to the
transaction, and (ii) after giving effect to such transaction, the
surviving entity would be entitled to incur at least one dollar of
additional Indebtedness (other than revolving Indebtedness to banks)
without violation of the limitations in Section 510 hereof.
SECTION 510. Limitation on Consolidated Indebtedness. (a)
So long as any of the General Term Notes are Outstanding, the Company
shall not, and shall not permit any Restricted Subsidiary of the Company
to, issue, create, assume, guarantee, incur or otherwise become liable for
(collectively, "issue"), directly or indirectly, any Indebtedness unless
(i) the Consolidated Coverage Ratio of the Company and its Consolidated
Subsidiaries for the four consecutive fiscal quarters immediately
preceding the issuance of such Indebtedness (as shown by a pro forma
consolidated income statement of the Company and its Consolidated
Subsidiaries for the four most recent fiscal quarters ending at least 30
days prior to the issuance of such Indebtedness after giving effect to (i)
the issuance of such Indebtedness and (if applicable) the application of
the net proceeds thereof to refinance other Indebtedness as if such
Indebtedness was issued at the beginning of the period, (ii) the issuance
and retirement of any other Indebtedness since the first day of the period
as if such Indebtedness was issued or retired at the beginning of the
period and (iii) the acquisition of any company or business acquired by
the Company or any Subsidiary since the first day of the period (including
giving effect to the pro forma historical earnings of such company or
business), including any acquisition which will be consummated
contemporaneously with the issuance of such Indebtedness, as if in each
case such acquisition occurred at the beginning of the period) exceeds a
ratio of 1.6 to 1.0 and (ii), immediately after giving effect to the
issuance of such Indebtedness and (if applicable) the application of the
net proceeds thereof to refinance other Indebtedness, the Consolidated
Leverage Ratio is equal to or less than a ratio of 0.75 to 1.0.
(b) Notwithstanding the foregoing paragraph, the
Company or any Restricted Subsidiary may issue, directly or
indirectly, the following Indebtedness:
(1) Revolving Indebtedness to banks not to exceed
$450,000,000 in the aggregate outstanding principal amount
at any time;
(2) Indebtedness (other than Indebtedness
described in clause (1) of this Subsection) outstanding on
the date of the original Indenture, as set forth on
Schedule 510(b)(2) attached hereto and made a part hereof,
and Indebtedness issued in exchange for, or the proceeds of
which are used to refund or refinance, any Indebtedness
permitted by this clause (2); provided, however, that (i)
the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of the Indebtedness so
issued shall not exceed the principal amount (or accreted
value in the case of Indebtedness issued at a discount) of,
premium, if any, and accrued but unpaid interest on, the
Indebtedness so exchanged, refunded or refinanced and (ii)
the Indebtedness so issued (A) shall not mature prior to
the stated maturity of the Indebtedness so exchanged,
refunded or refinanced, (B) shall have an Average Life
equal to or greater than the remaining Average Life of the
Indebtedness so exchanged, refunded or refinanced and (C)
if the Indebtedness to be exchanged, refunded or refinanced
is subordinated to the General Term Notes, the Indebtedness
is subordinated to the General Term Notes in right of
payment;
(3) Indebtedness of the Company owed to and held
by a Subsidiary and Indebtedness of a Subsidiary owed to
and held by the Company; provided, however, that, in the
case of Indebtedness of the Company owed to and held by a
Subsidiary, (i) any subsequent issuance or transfer of any
Capital Stock that results in any such Subsidiary ceasing
to be a Subsidiary or (ii) any transfer of such
Indebtedness (except to the Company or a Subsidiary) shall
be deemed for the purposes of this Subsection to constitute
the issuance of such Indebtedness by the Company;
(4) Indebtedness of the Company issued in exchange
for, or the proceeds of which are used to refund or
refinance, Indebtedness of the Company issued in accordance
with Subsection (a) of this Section, provided that (i) the
principal amount (or accreted value in the case of
Indebtedness issued at a discount) of the Indebtedness so
issued shall not exceed the principal amount (or accreted
value in the case of Indebtedness issued at a discount) of,
premium, if any, and accrued but unpaid interest on, the
Indebtedness so exchanged, refunded or refinanced and (ii)
the Indebtedness so issued (A) shall not mature prior to
the stated maturity of the Indebtedness so exchanged,
refunded or refinanced, (B) shall have an Average Life
equal to or greater than the remaining Average Life of the
Indebtedness so exchanged, refunded or refinanced and (C)
if the Indebtedness to be exchanged, refunded or refinanced
is subordinated to the General Term Notes, the Indebtedness
so issued is subordinated to the General Term Notes in
right of payment; and
(5) Indebtedness of a Restricted Subsidiary issued
in exchange for, or the proceeds of which are used to
refund or refinance, Indebtedness of a Restricted
Subsidiary issued in accordance with Subsection (a) of this
Section, provided that (i) the principal amount (or
accreted value in the case of Indebtedness issued at a
discount) of the Indebtedness so issued shall not exceed
the principal amount (or accreted value in the case of
Indebtedness issued at a discount) of, premium, if any, and
accrued but unpaid interest on, the Indebtedness so
exchanged, refunded or refinanced and (ii) the Indebtedness
so issued (A) shall not mature prior to the stated maturity
of the Indebtedness so exchanged, refunded or refinanced
and (B) shall have an Average Life equal to or greater than
the remaining Average Life of the Indebtedness so
exchanged, refunded or refinanced.
SECTION 511. Limitation on Restricted Payments.(a) So long
as the General Term Notes are Outstanding and are rated below BBB- by
Standard & Poor's or by Duff & Phelps (or, if Duff & Phelps or Standard &
Poor's shall change its rating system, an equivalent of such rating then
employed by such organization) the Company shall not, and shall not permit
any Restricted Subsidiary of the Company, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on the Capital Stock
of the Company to the direct or indirect holders of the Capital Stock of
the Company (except dividends or distributions payable solely in Non-
Convertible Capital Stock of the Company or in options, warrants or other
rights to purchase such Non-Convertible Capital Stock and except dividends
or distributions payable to the Company or a Subsidiary), (ii) purchase,
redeem or otherwise acquire or retire for value any Capital Stock of the
Company (any such dividend, distribution, purchase, redemption, other
acquisition or retirement being hereinafter referred to as a "Restricted
Payment") if at the time the Company or such Subsidiary makes such
Restricted Payment:
(1) an Event of Default, or an event that with the
lapse of time or the giving of notice or both would
constitute an Event of Default, shall have occurred and be
continuing (or would result therefrom); or
(2) the aggregate amount of such Restricted
Payment and all other Restricted Payments made since
September 30, 1993, would exceed the sum of:
(A) $120,000,000;
(B) 100% of Consolidated Net Income, accrued
during the period (treated as one accounting period) from
September 30, 1993 to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such sum shall be a
deficit, minus 100% of the deficit); and
(C) the aggregate Net Proceeds received by the
Company from the issue or sale of or contribution with
respect to its Capital Stock subsequent to September 30,
1993.
For the purpose of determining the amount of any Restricted Payment not in
the form of cash, the amount shall be the fair value of such Restricted
Payment as determined in good faith by the Board of Directors, provided
that if the value of the non-cash portion of such Restricted Payment as
determined by the Board of Directors is in excess of $25 million, such
value shall be based on the opinion from a nationally recognized firm
experienced in the appraisal of similar types of transactions.
(b) The provisions of Section 511(a) shall not
prohibit:
(i) any purchase or redemption of Capital Stock of
the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the
Company (other than Redeemable Stock or Exchangeable
Stock); provided, however, that such purchase or redemption
shall be excluded from the calculation of the amount of
Restricted Payments;
(ii) dividends or other distributions paid in
respect of any class of the Company's Capital Stock issued
in respect of the acquisition of any business or assets by
the Company or a Restricted Subsidiary if the dividends or
other distributions with respect to such Capital Stock are
payable solely from the net earnings of such business or
assets;
(iii) dividends paid within 60 days after the date
of declaration thereof if at such date of declaration such
dividend would have complied with this Section; provided,
however, that at the time of payment of such dividend, no
Event of Default shall have occurred and be continuing (or
result therefrom), and provided further, however, that such
dividends shall be included (without duplication) in the
calculation of the amount of Restricted Payments; or
(iv) payments pursuant to the Tax-Sharing
Agreement.
SECTION 512. Limitation on Transactions with Affiliates.
So long as any of the General Term Notes are Outstanding, the Company
shall not directly or indirectly, conduct any business or enter into any
transaction or series of related transactions (including the purchase,
sale, lease or exchange of any property or the rendering of any service)
with an Affiliate unless the terms of such business, transaction or series
of transactions are as favorable to the Company as terms that could be
obtainable at the time for a comparable transaction or series of related
transactions in arm's-length dealings with an unrelated third Person.
This Section shall not apply to (x) compensation paid to officers and
directors of the Company which has been approved by the Board of Directors
of the Company or (y) loans to the Company or an Affiliate pursuant to a
global cash management program, which loans mature within one year from
the date thereof.
ARTICLE VI
ADDITIONAL EVENTS OF DEFAULT
WITH RESPECT TO THE GENERAL TERM NOTES
SECTION 601. Definition. All of the events specified in
Section 501 of the Indenture and the events specified in Section 602 of
this Article shall be "Events of Default" with respect to the General Term
Notes.
SECTION 602. Additional Events of Default. As
contemplated by Sections 301(15) and 501(7) of the Indenture, any one of
the following events (whatever the reason for such Event of Default and
whether or not it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court
or any order, rule or regulation of any administrative or governmental
body) shall be an Event of Default with respect to the General Term Notes
for all purposes of the Indenture:
(a) a default or event of default in respect of
any Indebtedness of the Company having an aggregate
outstanding principal amount at the time of such default in
excess of $25,000,000 shall occur which results in the
acceleration of such Indebtedness or Indebtedness of the
Company having an outstanding principal amount at maturity
in excess of $25,000,000 shall not be paid at maturity
thereof, which default shall not have been waived by the
holder or holders of such Indebtedness within 30 days of
such default; or
(b) the entry of a final judgment or judgments
against the Company aggregating in excess of $25,000,000
which remain undischarged or unbonded for a period (during
which execution shall not be effectively stayed) of 60
days.
ARTICLE VII
GLOBAL NOTES
The General Term Notes will be issued initially in the form
of Global Notes. "Global Note" means a registered General Term Note
evidencing one or more General Term Notes issued to a depositary (the
"Depositary") or its nominee, in accordance with this Article and bearing
the legend prescribed in this Article. A single Global Note will
represent all General Term Notes issued on the same date and having the
same terms, including, but not limited to, the same Interest Payment
Dates, rate of interest, Stated Maturity, and redemption provisions (if
any). The Company shall execute and the Trustee shall, in accordance with
this Article and the Company Order with respect to the General Term Notes,
authenticate and deliver one or more Global Notes in temporary or
permanent form that (i) shall represent and shall be denominated in an
aggregate amount equal to the aggregate principal amount of the General
Term Notes to be represented by such Global Note or Notes, (ii) shall be
registered in the name of the Depositary for such Global Note or Notes or
the nominee of such Depositary, (iii) shall be delivered by the Trustee to
such Depositary or pursuant to such Depositary's instructions and (iv)
shall bear a legend substantially to the following effect: "Unless this
Global Note is presented by an authorized representative of the Depositary
to the Company or its agent for registration of transfer, exchange or
payment, and any Note issued is registered in the name of the Depositary
or in such other name as is requested by the Depositary, any transfer,
pledge or other use hereof for value or otherwise by or to any person
shall be wrongful inasmuch as the registered owner hereof, the Depositary,
has an interest herein."
Notwithstanding Section 305 of the Indenture, unless and
until it is exchanged in whole or in part for General Term Notes in
definitive form, a Global Note representing one or more General Term Notes
may not be transferred except as a whole by the Depositary, to a nominee
of such Depositary or by a nominee of such Depositary to such Depositary
or another nominee of such Depositary or by such Depositary or any such
nominee to a successor Depositary for General Term Notes or a nominee of
such successor Depositary.
If at any time the Depositary for the General Term Notes is
unwilling or unable to continue as Depositary for the General Term Notes,
the Company shall appoint a successor Depositary with respect to the
General Term Notes. If a successor Depositary for the General Term Notes
is not appointed by the Company by the earlier of (i) 90 days from the
date the Company receives notice to the effect that the Depositary is
unwilling or unable to act, or the Company determines that the Depositary
is unable to act or (ii) the effectiveness of the Depositary's resignation
or failure to fulfill its duties as Depositary, the Company will execute,
and the Trustee, upon receipt of a Company Order for the authentication
and delivery of definitive General Term Notes, will authenticate and
deliver General Term Notes in definitive form in an aggregate principal
amount equal to the principal amount of the Global Note or Notes
representing such General Term Notes in exchange for such Global Note or
Notes.
The Company may at any time and in its sole discretion
determine that the General Term Notes issued in the form of one or more
Global Notes shall no longer be represented by such Global Note or Notes.
In such event the Company will execute, and the Trustee, upon receipt of a
Company Order for the authentication and delivery of definitive General
Term Notes, will authenticate and deliver General Term Notes in definitive
form in an aggregate principal amount equal to the principal amount of the
Global Note or Notes representing such General Term Notes in exchange for
such Global Note or Notes.
The Depositary for such General Term Notes may surrender a
Global Note or Notes for such General Term Notes in exchange in whole or
in part for General Term Notes in definitive form on such terms as are
acceptable to the Company and such Depositary. Thereupon, the Company
shall execute, and the Trustee shall authenticate and deliver, without
service charge:
(i) to each Person specified by such Depositary a
new General Term Note or Notes, of any authorized
denomination as requested by such Person in aggregate
principal amount equal to and in exchange for such Person's
beneficial interest in the Global Note; and
(ii) to such Depositary a new Global Note in a
denomination equal to the difference, if any, between the
principal amount of the surrendered Global Note and the
aggregate principal amount of General Term Notes in
definitive form delivered to Holders thereof.
In any exchange provided for in this Article, the Company
will execute and the Trustee will authenticate and deliver General Term
Notes in definitive registered form in authorized denominations.
Upon the exchange of a Global Note for General Term Notes
in definitive form, such Global Note shall be cancelled by the Trustee.
General Term Notes in definitive form issued in exchange for a Global Note
pursuant to this Article shall be registered in such names and in such
authorized denominations as the Depositary for such Global Note, pursuant
to instructions from its direct or indirect participants or otherwise,
shall instruct the Trustee or Security Registrar. The Trustee shall
deliver such General Term Notes to the persons in whose names such General
Term Notes are so registered.
ARTICLE VIII
DEFEASANCE
All of the provisions of Article Fourteen of the Original
Indenture shall be applicable to the General Term Notes. Upon
satisfaction by the Company of the requirements of Section 1404 of the
Indenture, in connection with any covenant defeasance (as provided in
Section 1403 of the Indenture), the Company shall be released from its
obligations under Article Eight of the Original Indenture and under
Articles III and V of this Second Supplemental Indenture with respect to
the General Term Notes.
ARTICLE IX
SUPPLEMENTAL INDENTURES
This Second Supplemental Indenture is a supplement to the
Original Indenture. As supplemented by this Second Supplemental
Indenture, the Original Indenture is in all respects ratified, approved
and confirmed, and the Original Indenture and this Second Supplemental
Indenture shall together constitute one and the same instrument.
The Company may, by supplemental indenture, amend this
Second Supplemental Indenture to provide for additional definitions, terms
and provisions relating to General Term Notes. Any such supplemental
indenture shall not adversely affect the rights and privileges of Holders
of General Term Notes issued prior to such supplemental indenture. Any
such supplemental indenture may include, but is not limited to including,
additional provisions permitting payment of General Term Notes prior to
Stated Maturity at the option of the Holders, issuance of General Term
Notes in currencies other than Dollars, and special provisions relating to
interest rate provisions.
TESTIMONIUM
This Second Supplemental Indenture may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and
the same instrument.
<PAGE>
<PAGE> 54
IN WITNESS WHEREOF,the parties hereto have caused this
Second Supplemental Indenture to be duly executed and their respective
corporate seals to be hereunto affixed and attested, all as of the day and
year first written above.
CMS ENERGY CORPORATION
By: /s/ A. M. Wright
_____________________________
Alan M. Wright
Senior Vice President,
Chief Financial Officer
and Treasurer
Attest:
/s/ T. A. McNish (Corporate Seal)
______________________________
Vice President and Secretary
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Trustee
By:
_____________________________
Attest:
(Corporate Seal)
______________________________
<PAGE>
<PAGE> 54
IN WITNESS WHEREOF,the parties hereto have caused this
Second Supplemental Indenture to be duly executed and their respective
corporate seals to be hereunto affixed and attested, all as of the day and
year first written above.
CMS ENERGY CORPORATION
By:
_____________________________
Attest:
(Corporate Seal)
______________________________
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Trustee
By: /s/ Mary Walicki
_____________________________
Mary Walicki
Attest:
/s/ John T. Needham, Jr. (Corporate Seal)
______________________________
John T. Needham, Jr.
<PAGE>
SCHEDULE 510 (b) (2)
____________________
Indebtedness of CMS Energy Corporation outstanding on January 20,
1994:
$146,000,000 of Series A Senior Deferred Coupon Notes due
1997 and $248,000,000 of Series B Senior Deferred Coupon Notes
due 1999.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT between CMS Energy Corporation, a Michigan corporation
(the "Corporation"), and Preston D. Hopper (the "Executive") dated this
20th day of March, 1996.
Whereas the Corporation considers the maintenance of a vital
management essential to protecting and enhancing the best interests of the
Corporation and its shareholders. Whereas the Corporation has determined
to encourage the continuing attention and dedication of the key members of
its management without the distraction arising from the possibility of a
change in control.
Therefore, the parties hereto agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the
date on which a Change of Control (as defined in Section 2) shall occur.
2. Change of Control. As used in this Agreement, "Change of
Control" shall be deemed to have taken place if a person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934 becomes the beneficial owner of shares having 35% or more of the
total number of votes that may be cast in the election of Directors of CMS
Energy Corporation.
3. Employment. The Corporation hereby agrees to continue to
employ and engage the services of the Executive as its Senior Vice
President, Controller and Chief Accounting Officer of CMS Energy
Corporation for the period beginning on the Effective Date and ending on
the earlier of the fifth anniversary of such date or the Normal Retirement
Date of the Executive under the Consumers Power Company's Pension Plan
(hereinafter "Employment Period"). The Executive agrees to serve the
Corporation in such position, unless an event shall occur which is
described in Section 6.
4. Duties. The Executive agrees during the Employment Period to
devote his full business time to the business and affairs of the
Corporation (except for (i) services on corporate, civic or charitable
boards or committees, (ii) such reasonable time as shall be required for
the investment of the Executive's assets, which do not significantly
interfere with the performance of his responsibilities hereunder and
(iii) periods of vacation and sick leave to which he is entitled) and to
use his best efforts to promote the interests of the Corporation and to
perform faithfully and efficiently the responsibilities of Senior Vice
President, Controller and Chief Accounting Officer of CMS Energy
Corporation.
5. Compensation and Other Terms of Employment.
(a) Base Salary. The Executive shall receive an annual
base salary ("Base Salary") of not less than his annual salary immediately
prior to the Effective Date (payable in equal semi-monthly installments)
from the Corporation.
The Base Salary shall be reviewed and may be increased at any
time and from time to time in accordance with the Corporation's regular
practices, and shall be reviewed at least annually by the Organization and
Compensation Committee of its Board of Directors.
(b) Incentive Compensation. As further compensation, the
Executive will be eligible for awards ("Incentive Compensation") under the
Corporation's Executive Incentive Compensation Plan in which he was
participating immediately prior to the Effective Date.
(c) Retirement, Savings and Stock Option Plans. In
addition to the Base Salary and Incentive Compensation payable as
hereinabove provided, the Executive shall be entitled to participate in
savings, stock options and other incentive plans and programs available to
executives of the Corporation or to opportunities provided under any such
plans in which he was participating immediately preceding the Effective
Date, whichever is greater.
(d) Vacation and Employee Benefits.
(i) The Executive shall be entitled to paid vacation
and other employee benefits and perquisites, in accordance with the
policies of the Corporation in effect for executive officers, or the
vacation employee benefits and perquisites to which he was entitled
immediately prior to the Effective Date, whichever is greater.
6. Termination.
(a) Death. This Agreement shall terminate automatically
upon the Executive's death. In the event of such termination, the
Corporation shall pay to the Executive's estate all benefits and
compensation accrued hereunder to the date of death, including a pro rata
portion of incentive compensation.
(b) Disability. In the event the Executive becomes unable
by reason of physical or mental disability to render the services required
hereunder and such disability continues for a continuous period of 6
months, the employment of the Executive hereunder shall terminate, unless
the employment is extended by agreement of the Corporation and the
Executive. Commencing at the date of termination of employment for
disability, the Executive shall receive annually a sum equal to 50% of his
Base Salary at the time of termination of employment, in monthly
installments until his 62nd birthday, or his death if earlier. Disability
payments hereunder shall be reduced by the amount of other
Corporation-sponsored disability benefits paid to the Executive through
insurance or otherwise.
(c) Termination with Cause. The Corporation may terminate
the Executive's employment for Cause. For purposes of this Agreement,
"Cause" shall mean an act or acts of dishonesty, fraud, misappropriation
or intentional material damage to the property or business of the
Corporation or commission of a felony on the Executive's part. If the
Executive's employment is terminated for Cause, the Corporation shall pay
the Executive his full accrued Base Salary through the date of such
termination at the rate in effect at the time of such termination, and the
Corporation shall have no further obligations to the Executive under this
Agreement.
(d) Other Termination or Resignation of Executive.
(i) The Corporation may terminate the Executive's
employment without Cause.
(ii) In the event that the Executive determines in his
sole judgment that his position, authority, or responsibilities have been
diminished as a result of the "Change of Control," the Executive may
terminate his employment with the Corporation upon written notice given
within 12 months after the Effective Date.
(iii) In the event of a termination of employment
under this subsection (d), the Executive shall receive a severance payment
equal to twice his Base Salary at the time of termination of employment
plus either twice his incentive compensation payable with respect to the
last full calendar year prior to the termination of employment or, if no
incentive compensation was awarded to the Executive with respect to the
last full calendar year prior to the termination of employment, twice the
standard incentive award, as defined in the Corporation's Executive
Incentive Compensation Plan for the salary grade of the Executive for such
year. The severance payment shall be paid in a lump sum payment, in cash,
or as otherwise directed by the Executive.
7. No Obligation to Mitigate Damages. The Executive shall not
be obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining
of any such other employment shall in no event effect any reduction of the
Corporation's obligations to make the payments and arrangements required
to be made under this Agreement.
8. Indemnification. The Corporation shall include the Executive
in its Director and Officer Liability Insurance policy, if any, during his
Employment Period and for a period of not less than five years after the
termination of the Executive's employment for any reason whatsoever. In
addition to insurance and any other indemnification available to the
Executive as an Officer, the Corporation shall indemnify, to the extent
permitted by applicable law, the Executive for settlements, judgments and
reasonable expenses in connection with activities arising from services
rendered by the Executive as a Director or Officer of the Corporation or
any affiliated company.
9. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in
writing and if sent by registered or certified mail to the Executive at
the last address he has filed in writing with the Corporation or, in the
case of the Corporation, Attn: Secretary, at its principal executive
offices.
10. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien or security
interest upon any amounts provided under this Agreement; and no benefits
payable hereunder shall be assignable in anticipation of payment either by
voluntary or involuntary acts, or by operation of law, except by will or
the laws of descent and distribution.
11. Governing Law. The provisions of this Agreement shall be
construed in accordance with the laws of the State of Michigan.
12. Amendment. This Agreement may be amended or cancelled only
by mutual agreement of the parties in writing without the consent of any
other person and, so long as the Executive lives, no person, other than
the parties hereto, shall have any rights under or interest in this
Agreement or the subject matter hereof.
13. Successor to the Corporation. Except as may be otherwise
provided herein, this Agreement shall be binding upon and inure to the
benefit of the Corporation and any successor of the Corporation.
14. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
IN WITNESS WHEREOF, the Corporation and the Executive have
executed this Agreement as of the date first above written.
/s/ P.D. Hopper
___________________________________
Preston D. Hopper
CMS ENERGY CORPORATION
By: /s/ William T. McCormick, Jr.
_________________________________
William T. McCormick, Jr.
Chairman of the Board
and Chief Executive Officer
<PAGE>
EXHIBIT (12)
<PAGE>
<PAGE>
<PAGE>
<TABLE>
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges
(Millions of Dollars)
<CAPTION>
Three Months
Ended Years Ended December 31
March 31, 1996 1995 1994 1993 1992 1991
(b) (c)(d)
<S> <C> <C> <C> <C> <C> <C>
Earnings as defined (a)
Net income $ 88 $ 204 $ 179 $ 155 $(297) $(262)
Income taxes 54 118 92 75 (146) (94)
Exclude equity basis subsidiaries (17) (57) (18) (6) 10 10
Fixed charges as defined, adjusted to
exclude capitalized interest of $2,
$8, $6, $5, $3, and $5 million for
the three months ended March 31, 1996
and for the years ended December 31,
1995, 1994, 1993, 1992 and 1991,
respectively 73 280 237 245 228 364
------ ------ ------ ------ ------ ------
Earnings as defined $ 198 $ 545 $ 490 $ 469 $(205) $ 18
====== ====== ====== ====== ====== ======
Fixed charges as defined (a)
Interest on long-term debt $ 57 $ 224 $ 193 $ 204 $ 169 $ 274
Estimated interest portion of lease rental 2 9 9 11 16 17
Other interest charges 7 27 18 24 35 68
Preferred securities dividends and distributions 13 42 36 17 16 15
------ ------ ------ ------ ------ ------
Fixed charges as defined $ 79 $ 302 $ 256 $ 256 $ 236 $ 374
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges 2.51 1.81 1.91 1.83 - -
====== ====== ====== ====== ====== ======
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K.
(b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include
a $520 million pretax loss on the settlement of MCV Power Purchases, $(15) million for potential customer refunds and
other reserves related to 1992 but recorded in 1991, and $6 million relating to CMS Generation Company's reduction in
its investment in The Oxford Energy Company. The ratio of earnings to fixed charges would have been 1.30 excluding
these amounts.
(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.
</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. 33-29681, No. 33-47629, No. 33-57719, No.
33-57719-01, No. 33-64044, No. 33-60007, No. 33-61595, No. 33-62573 and
No. 33-01261 its Form 10-Q for the quarter ended March 31, 1996, which
includes our report dated May 10, 1996 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,
May 10, 1996.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,344
<OTHER-PROPERTY-AND-INVEST> 1,591
<TOTAL-CURRENT-ASSETS> 750
<TOTAL-DEFERRED-CHARGES> 1,358
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,043
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 1,959
<RETAINED-EARNINGS> (411)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,541
100
356
<LONG-TERM-DEBT-NET> 1,868
<SHORT-TERM-NOTES> 38
<LONG-TERM-NOTES-PAYABLE> 1,242
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 52
0
<CAPITAL-LEASE-OBLIGATIONS> 108
<LEASES-CURRENT> 45
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,685
<TOT-CAPITALIZATION-AND-LIAB> 8,043
<GROSS-OPERATING-REVENUE> 1,275
<INCOME-TAX-EXPENSE> 54
<OTHER-OPERATING-EXPENSES> 1,061
<TOTAL-OPERATING-EXPENSES> 1,118
<OPERATING-INCOME-LOSS> 157
<OTHER-INCOME-NET> (2)
<INCOME-BEFORE-INTEREST-EXPEN> 158
<TOTAL-INTEREST-EXPENSE> 62
<NET-INCOME> 96
8
<EARNINGS-AVAILABLE-FOR-COMM> 88
<COMMON-STOCK-DIVIDENDS> 24
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 349
<EPS-PRIMARY> .83<F1>
<EPS-DILUTED> 0
<FN>
<F1> EPS for CMS Energy Common Stock $ .83
EPS for Class G Common Stock $1.50
</FN>
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,344
<OTHER-PROPERTY-AND-INVEST> 698
<TOTAL-CURRENT-ASSETS> 513
<TOTAL-DEFERRED-CHARGES> 1,216
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,771
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 504
<RETAINED-EARNINGS> 331
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,705
100
356
<LONG-TERM-DEBT-NET> 1,520
<SHORT-TERM-NOTES> 38
<LONG-TERM-NOTES-PAYABLE> 403
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 45
0
<CAPITAL-LEASE-OBLIGATIONS> 96
<LEASES-CURRENT> 44
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,493
<TOT-CAPITALIZATION-AND-LIAB> 6,771
<GROSS-OPERATING-REVENUE> 1,141
<INCOME-TAX-EXPENSE> 58
<OTHER-OPERATING-EXPENSES> 944
<TOTAL-OPERATING-EXPENSES> 1,005
<OPERATING-INCOME-LOSS> 136
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 139
<TOTAL-INTEREST-EXPENSE> 37
<NET-INCOME> 102
8
<EARNINGS-AVAILABLE-FOR-COMM> 94
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 308
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
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 March 31,
1996 and 1995, and the related statements of income, common stockholders'
equity and cash flows for the three-month and twelve-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Consumers Gas Group as of December 31,
1995, 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 26, 1996, we expressed an unqualified opinion on
those statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1995, is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
May 10, 1996.
<PAGE>
<PAGE> 2
<TABLE>
Consumers Gas Group
Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C>
OPERATING REVENUE $ 546 $ 482 $1,259 $1,105
------- ------- ------- -------
OPERATING EXPENSES
Operation
Cost of gas sold 345 281 735 608
Other 43 46 194 188
------- ------- ------- -------
Total operation 388 327 929 796
Maintenance 9 10 38 38
Depreciation, depletion and amortization 37 33 87 78
General taxes 21 21 54 50
------- ------- ------- -------
Total operating expenses 455 391 1,108 962
------- ------- ------- -------
PRETAX OPERATING INCOME 91 91 151 143
INCOME TAXES 32 31 49 44
------- ------- ------- -------
NET OPERATING INCOME 59 60 102 99
------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Other income taxes, net - (1) 1 -
Other, net (1) - (1) (2)
------- ------- ------- -------
Total other income (deductions) (1) (1) - (2)
------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 8 8 30 30
Other interest 1 1 6 5
Capitalized interest - - (1) (1)
Preferred dividends 1 1 6 6
------- ------- ------- -------
Net fixed charges 10 10 41 40
------- ------- ------- -------
NET INCOME $ 48 $ 49 $ 61 $ 57
======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO CMS ENERGY SHAREHOLDERS
THROUGH RETAINED INTEREST $ 36 $ 49 $ 46 $ 57
======= ======= ======= =======
NET INCOME ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ 12 $ - $ 15 $ -
======= ======= ======= =======
AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 - 8 -
======= ======= ======= =======
EARNINGS PER AVERAGE CLASS G COMMON SHARE $ 1.50 $ - $ 1.90 $ -
======= ======= ======= =======
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .28 $ - $ .84 $ -
======= ======= ======= =======
<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>
Three Months Ended Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48 $ 49 $ 61 $ 57
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 37 33 87 78
Capital lease and other amortization 1 1 5 4
Deferred income taxes and investment tax credit 6 16 3 16
Changes in other assets and liabilities 6 17 5 (9)
Other - - 1 1
------ ------ ------ ------
Net cash provided by operating activities 98 116 162 147
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (24) (21) (127) (130)
Cost to retire property, net (2) (2) (10) (9)
Other 1 (1) 4 2
------ ------ ------ ------
Net cash used in investing activities (25) (24) (133) (137)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (90) (89) 5 10
Payment of common stock dividends (9) - (67) (38)
Payment of capital lease obligations (1) (1) (5) (4)
Proceeds from long-term note 22 - 22 -
Contribution from CMS Energy stockholders 3 - 21 22
Repayment of bank loans and other long-term debt - (2) (6) (103)
Proceeds from bank loans and other long-term debt - - - 89
------ ------ ------ ------
Net cash used in financing activities (75) (92) (30) (24)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS (2) - (1) (14)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 5 4 4 18
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 3 $ 4 $ 3 $ 4
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 4
<TABLE>
Consumers Gas Group
Balance Sheets
<CAPTION>
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Plant $2,207 $2,169 $2,078
Less accumulated depreciation, depletion and amortization 1,216 1,179 1,145
------ ------ ------
991 990 933
Construction work-in-progress 48 55 50
------ ------ ------
1,039 1,045 983
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 3 5 4
Accounts receivable and accrued revenue, less
allowances of $1, $2 and $2, respectively (Note 6) 254 99 170
Inventories at average cost
Gas in underground storage 39 184 80
Materials and supplies 10 10 10
Trunkline settlement 30 30 30
Deferred income taxes 8 9 8
Prepayments and other 39 49 35
------ ------ ------
383 386 337
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 162 161 157
Trunkline settlement 17 25 48
Deferred income taxes 14 14 -
Other 59 59 71
------ ------ ------
252 259 276
------ ------ ------
TOTAL ASSETS $1,674 $1,690 $1,596
====== ====== ======
</TABLE>
<PAGE>
<PAGE> 5
<TABLE>
<CAPTION>
March 31 March 31
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 381 $ 339 $ 366
Preferred stock 78 78 78
Long-term debt 433 411 425
Non-current portion of capital leases 20 20 18
------ ------ ------
912 848 887
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 23 23 12
Notes payable 15 105 10
Accounts payable 84 79 59
Accrued taxes 70 66 53
Trunkline settlement 30 30 30
Accrued refunds 25 20 25
Accrued interest 6 7 6
Other 46 52 43
------ ------ ------
299 382 238
------ ------ ------
NON-CURRENT LIABILITIES
Postretirement benefits 178 175 175
Regulatory liabilities for income taxes, net 167 162 148
Deferred investment tax credit 28 28 29
Trunkline settlement 18 25 48
Deferred income taxes - - 1
Other 72 70 70
------ ------ ------
463 460 471
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,674 $1,690 $1,596
====== ====== ======
<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 Twelve Months Ended
March 31 March 31
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 184 $ 184 $ 184 $ 184
------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 125 107 107 85
CMS Energy stockholders' contribution 3 - 21 22
------- ------- ------- -------
At end of period 128 107 128 107
------- ------- ------- -------
RETAINED EARNINGS
At beginning of period 30 26 75 56
Net income 48 49 61 57
Common stock dividends declared (9) - (67) (38)
------- ------- ------- -------
At end of period 69 75 69 75
------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 381 $ 366 $ 381 $ 366
======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 7
Consumers Gas Group
Notes to Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the business of CMS Energy, see the
Notes to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
In 1995, CMS Energy issued a total of 7.62 million shares of Class G
Common Stock. This new class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). For further information regarding the Class G Common Stock,
see Note 8 to the Consolidated Financial Statements of CMS Energy included
and incorporated by reference herein.
These financial statements and their related notes should be read along
with the financial statements and notes contained in the 1995 Form 10-K of
CMS Energy that includes the Report of Independent Public Accountants,
included and incorporated by reference herein.
2: Earnings Per Share and Dividends
Earnings per share, for the twelve month period ended March 31, 1996,
reflect 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 are computed by considering the weighted average
number of common shares outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to the Consumers Gas Group's net income (loss) multiplied by a fraction,
the numerator is the weighted average number of Outstanding Shares during
the period and the denominator represents the weighted average number of
Outstanding Shares and Retained Interest Shares during the period. The
earnings attributable to Class G Common Stock on a per share basis, for
the three months ended March 31, 1996, are based on 23.72 percent of the
earnings of the Consumers Gas Group.
Earnings per share are omitted from the statements of income, for the
periods ended March 31, 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 three months ended March 31, 1995, and the year
ended December 31, 1995, which give effect to the issuance and sale of
7.52 million shares of Class G Common Stock (representing 23.50 percent of
the equity attributable to the Consumers Gas Group) on January 1, 1994.
In Millions, Except Per Share Amounts
-------------------------------------
Actual Pro Forma Pro Forma
Three Months EndedThree Months Ended Year Ended
March 31 March 31 December 31
1996 1995 1995
------------- ------------- -----------
Consumers Gas Group
Net Income $ 48 $ 49 $ 62
Net Income attributable to
CMS Energy Common Stock
through Retained Interest $ 36 $ 37 $ 47
Net Income attributable to
outstanding Class G
Common Stock $ 12 $ 12 $ 15
Average shares outstanding
of Class G Common Stock 7.627 7.520 7.536
Earnings per share
attributable to outstanding
Class G Common Stock $1.50 $1.55 $1.93
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 to Consumers' consolidated net income after dividends on preferred
stock. This ratio was then applied to Consumers' total dividend payments
for these periods. Dividends declared on the Class G Common Stock
following the issuance are also reflected in the financial statements. In
July and October 1995, and January and April 1996, the Board of Directors
declared quarterly dividends of $.28 per share 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 Matters" 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 $130 million for
1996, $110 million for 1997 and $105 million for 1998. These estimates
include an attributed portion of Consumers' anticipated capital
expenditures for common plant and equipment.
For further information regarding commitments and contingencies directly
affecting the Consumers Gas Group (including those involving former
manufactured gas plant sites), see the "Environmental Matters," 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. Consumers Gas Group's other cash flow activities and
non-cash investing and financing activities for the periods ended March 31
were:
In Millions
Three Months Ended Twelve Months Ended
1996 1995 1996 1995
---- ---- ---- ----
Cash transactions
Interest paid (net
of amounts capitalized) $ 9 $ 10 $ 34 $ 32
Income taxes paid
(net of refunds) 2 - 27 31
Non-cash transactions
Assets placed under
capital lease $ - $ 1 $ 1 $ 5
Capital leases refinanced - - 9 -
6: Short-Term and Long-Term Financings
Consumers' short-term and long-term financings are discussed in Note 7 to
the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to the
Consumers Gas Group at March 31, 1996 and 1995, is estimated by management
to be $141 million and $135 million, respectively. Accounts receivable
and accrued revenue in the balance sheets have been reduced to reflect
receivables sold. The portions of short-term debt and receivables sold
attributed to Consumers Gas Group reflect the high utilization of
short-term borrowing to finance the purchase of gas for storage in the
summer and fall periods. Management believes these allocations to be
reasonable.
<PAGE>
<PAGE> 10
Consumers Gas Group
Management's Discussion and Analysis
In 1995, CMS Energy issued a total of 7.62 million shares of Class G
Common Stock. This new class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). Accordingly, this MD&A should be read along with the MD&A in
the 1995 Form 10-K of CMS Energy.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. 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 March 31, 1996 and 1995
For the first quarter of 1996, net income for the Consumers Gas Group was
$48 million, compared to $49 million for the comparable 1995 period. The
decrease in net income is affected by the reversal, during the three
months ended March 1995 period, of a gas contract contingency which
benefited the 1995 period (see Note 3 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein).
Additionally, during the first quarter of 1996, there were higher gas
deliveries resulting from customer additions and load conversions to
natural gas from alternative fuels and colder weather than experienced in
the first quarter of 1995.
Earnings for the 12 months ended March 31, 1996 and 1995
Net income for the Consumers Gas Group for the 12 months ended March 31,
1996 totaled $61 million compared to $57 million for the 12 months ended
March 31, 1995. The increase in 1996 net income reflects higher gas
deliveries and higher operating expenses during the 12-months ended March
1996 period compared to the 12 months ended March 1995 period. Also
affecting the comparison of net income for the 12 months ended March 31,
1996 and 1995 periods was the reversal, during the 12 months ended March
1995 period, of previously recorded gas contingencies (see Note 3 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein).
Cash Position, Financing and Investing
Consumers Gas Group's cash requirements are met by its operating and
financing activities. Consumers Gas Group's cash from operations is
derived mainly from Consumers' sale and transportation of natural gas.
Cash from operations for the first quarters of 1996 and 1995 totaled $98
million and $116 million, respectively. The $18 million decrease
primarily reflects the timing of cash payments related to Consumers'
operations. Consumers Gas Group primarily uses its operating cash to
maintain and expand its gas utility transmission and distribution systems
and to retire portions of its long-term debt and pay dividends.
Financing Activities: Net cash used in financing activities in the first
quarters of 1996 and 1995 totaled $75 million and $92 million,
respectively. The $17 million decrease reflects increased cash, primarily
resulting from the sale of Trust Originated Preferred Securities,
partially offset by increased cash used to pay common stock dividends.
Investing Activities: Net cash used in financing activities totaled $25
million and $24 million for the first quarters of 1996 and 1995,
respectively. Increased cash used for capital expenditures was
principally offset by reduced costs to retire property.
Financing and Investing Outlook: Consumers has an agreement permitting
the sales of certain accounts receivable for up to $500 million. At March
31, 1996, receivables sold totaled $280 million. Consumers Gas Group's
attributed portion of such receivables sold totaled $141 million.
For further information, see CMS Energy's MD&A included and incorporated
by reference herein.
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 Rate Proceedings, GCR Matters
and Environmental Matters, see "Consumers Gas Group Issues" in
CMS Energy's MD&A included and incorporated by reference herein.
Forward-Looking Information
Capital Expenditures: CMS Energy estimates that capital expenditures for
the Consumers Gas Group, including new lease commitments, will total $345
million over the next three years.
In Millions
Years Ended December 31 1996 1997 1998
---- ---- ----
Gas Utility (a) $121 $107 $102
Michigan Gas Storage 9 3 3
---- ---- ----
$130 $110 $105
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to
Consumers' gas and electric utility businesses.
These capital expenditures are estimates prepared for planning purposes
and are subject to revision. Consumers Gas Group expects that cash from
operations and the ability to access debt markets will provide necessary
working capital and liquidity to fund future capital expenditures,
required debt payments and other cash needs in the foreseeable future.
For further information regarding Consumers Gas Group's forward looking
information, see the "Gas Outlook, Competition and Deliveries" and "Other
Forward Looking Information" discussions in CMS Energy's MD&A included and
incorporated by reference herein.
<PAGE>
