<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1996:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 92,529,498
CMS Energy Class G Common Stock, no par value 7,809,380
Consumers Power Company, $10 par value,
privately held by CMS Energy 84,108,789
<PAGE>
CMS Energy Corporation
and
Consumers Power Company
Quarterly reports on Form 10-Q
to the Securities and Exchange Commission
for the Quarter Ended September 30, 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. . . . . . . . . . . . . 36
Consolidated Statements of Income . . . . . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 38
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 39
Consolidated Statements of Common Stockholder's Equity. . . . . . 41
Condensed Notes to Consolidated Financial Statements. . . . . . . 42
Management's Discussion and Analysis. . . . . . . . . . . . . . . 50
PART II:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 61
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 62
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
<PAGE>
<PAGE> 3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE . . . . . . . . . . . . Association of Businesses Advocating Tariff
Equity
ABB . . . . . . . . . . . . . ABB Energy Ventures, Inc.
ALJ . . . . . . . . . . . . . Administrative Law Judge
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 and Gas. . . . . CMS Electric and Gas Company, a subsidiary
of Enterprises
CMS Electric Marketing. . . . CMS Electric Marketing Company, a
subsidiary of Enterprises
CMS Energy. . . . . . . . . . CMS Energy Corporation
CMS Energy Common Stock . . . One of two classes of common stock of
CMS Energy, par value $.01 per share
CMS Gas Marketing . . . . . . CMS Gas Marketing Company, a subsidiary of
Enterprises
CMS Gas Transmission. . . . . CMS Gas Transmission and Storage Company, a
subsidiary of Enterprises
CMS Generation. . . . . . . . CMS Generation Co., a subsidiary of
Enterprises
CMS Holdings. . . . . . . . . CMS Midland Holdings Company, a subsidiary
of Consumers
CMS Midland . . . . . . . . . CMS Midland Inc., a subsidiary of Consumers
CMS 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 Delaware business trust formed by
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
DEQ . . . . . . . . . . . . . Michigan Department of Environmental
Quality
DNR . . . . . . . . . . . . . Michigan Department of Natural Resources
DSM . . . . . . . . . . . . . Demand-side management
EDEER . . . . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., an electric distribution
utility in northeastern Argentina
EDEVA . . . . . . . . . . . . Empresa de Energia y Vapor S. A., a
consortium of Argentine investors
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
Ludington . . . . . . . . . . Ludington pumped storage plant, jointly
owned by Consumers and Detroit Edison
mcf . . . . . . . . . . . . . Thousand cubic feet
MCV Facility. . . . . . . . . A natural gas-fueled, combined cycle
cogeneration facility operated by the MCV
Partnership
MCV Partnership . . . . . . . Midland Cogeneration Venture Limited
Partnership
MD&A. . . . . . . . . . . . . Management's Discussion and Analysis
Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
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
Order 888 and Order 889 . . . FERC final rules issued on April 24, 1996
Outstanding Shares. . . . . . Outstanding shares of Class G Common Stock
Palisades . . . . . . . . . . Palisades nuclear plant, owned by Consumers
PPA . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a
35-year term that commenced in March 1990
PSCR. . . . . . . . . . . . . Power supply cost recovery
RCRA. . . . . . . . . . . . . Resource Conservation Recovery Act of 1976
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 and a subsidiary
of CMS NOMECO
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 and a subsidiary of
CMS NOMECO
<PAGE>
<PAGE> 6
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS
ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
income, common stockholders' equity and cash flows for the three-month,
nine-month and twelve-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated 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,
November 11, 1996.
<PAGE>
<PAGE> 7
<TABLE>
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 655 $ 640 $1,827 $1,723 $2,381 $2,246
Gas utility 123 122 880 801 1,274 1,116
Oil and gas exploration and production 32 26 94 82 120 101
Independent power production 44 25 108 71 133 87
Natural gas transmission, storage and marketing 71 52 231 133 294 171
Other 4 4 10 11 17 13
------- ------- ------- ------- ------- -------
Total operating revenue 929 869 3,150 2,821 4,219 3,734
------- ------- ------- ------- ------- -------
OPERATING EXPENSES
Operation
Fuel for electric generation 76 74 219 208 294 284
Purchased power - related parties 150 124 436 369 558 492
Purchased and interchange power 56 72 147 154 189 182
Cost of gas sold 106 93 682 536 967 755
Other 189 168 539 491 746 656
------- ------- ------- ------- ------- -------
Total operation 577 531 2,023 1,758 2,754 2,369
Maintenance 42 48 120 139 167 192
Depreciation, depletion and amortization 99 96 322 302 436 410
General taxes 45 45 149 143 202 189
------- ------- ------- ------- ------- -------
Total operating expenses 763 720 2,614 2,342 3,559 3,160
------- ------- ------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS)
Electric utility 126 125 323 295 390 346
Gas utility (1) 2 112 110 153 139
Oil and gas exploration and production 10 5 28 27 31 24
Independent power production 29 13 62 40 68 48
Natural gas transmission, storage and marketing 5 4 21 9 26 10
Other (3) - (10) (2) (8) 7
------- ------- ------- ------- ------- -------
Total pretax operating income 166 149 536 479 660 574
------- ------- ------- ------- ------- -------
INCOME TAXES 34 32 125 111 143 118
------- ------- ------- ------- ------- -------
NET OPERATING INCOME 132 117 411 368 517 456
------- ------- ------- ------- ------- -------
OTHER INCOME (DEDUCTIONS)
Accretion income 2 3 7 9 10 12
Accretion expense (7) (7) (21) (23) (28) (32)
Other income taxes, net 3 3 9 8 12 10
Other, net 1 (1) 5 6 7 17
------- ------- ------- ------- ------- -------
Total other income (deductions) (1) (2) - - 1 7
------- ------- ------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 58 55 174 168 230 218
Other interest 7 8 19 17 29 25
Capitalized interest (1) (2) (5) (4) (9) (5)
Preferred dividends 7 7 21 21 28 28
Preferred securities distributions 2 - 6 - 6 -
------- ------- ------- ------- ------- -------
Net fixed charges 73 68 215 202 284 266
------- ------- ------- ------- ------- -------
NET INCOME $ 58 $ 47 $ 196 $ 166 $ 234 $ 197
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS
CMS Energy $ 61 $ 48 $ 186 $ 167 $ 220 $ 198
======= ======= ======= ======= ======= =======
Class G $ (3) $ (1) $ 10 $ (1) $ 14 $ (1)
======= ======= ======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
CMS Energy 92 89 92 88 92 88
======= ======= ======= ======= ======= =======
Class G 8 7 8 7 8 7
======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
CMS Energy $ .65 $ .54 $ 2.02 $ 1.90 $ 2.39 $ 2.26
======= ======= ======= ======= ======= =======
Class G $ (.28) $ (.17) $ 1.38 $ (.17) $ 1.92 $ (.17)
======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE
CMS Energy $ .27 $ .24 $ .75 $ .66 $ .99 $ .87
======= ======= ======= ======= ======= =======
Class G $ .295 $ .28 $ .855 $ .28 $ 1.135 $ .28
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 8
<TABLE>
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30 September 30
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 196 $ 166 $ 234 $ 197
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $37, $38,
$49 and $51, respectively) 322 302 436 410
Capital lease and other amortization 33 50 44 70
Deferred income taxes and investment tax credit 25 65 35 60
Accretion expense 21 23 28 32
Accretion income - abandoned Midland project (7) (9) (10) (12)
Undistributed earnings of related parties (54) (47) (60) (58)
MCV power purchases - settlement (Note 2) (43) (102) (78) (118)
Other 11 12 6 (30)
Changes in other assets and liabilities 16 (71) 178 26
------ ------ ------ ------
Net cash provided by operating activities 520 389 813 577
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (430) (380) (585) (540)
Investments in partnerships and unconsolidated subsidiaries (147) (174) (215) (187)
Investments in nuclear decommissioning trust funds (37) (38) (49) (51)
Acquisition of companies, net of cash acquired (20) (147) (19) (147)
Cost to retire property, net (20) (28) (34) (41)
Deferred demand-side management costs (6) (7) (8) (11)
Proceeds from sale of property 34 1 55 11
Other 4 (7) (3) (6)
------ ------ ------ ------
Net cash used in investing activities (622) (780) (858) (972)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans and notes 385 211 507 733
Proceeds from preferred securities 97 - 97 -
Issuance of common stock 29 148 41 154
Increase (decrease) in notes payable, net - 135 (133) 74
Repayment of bank loans (264) (14) (268) (344)
Payment of common stock dividends (75) (60) (99) (78)
Retirement of bonds and other long-term debt (37) (44) (37) (95)
Payment of capital lease obligations (33) (26) (44) (37)
Retirement of common stock (1) (1) (1) (1)
------ ------ ------ ------
Net cash provided by financing activities 101 349 63 406
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (1) (42) 18 11
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 56 79 37 26
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 55 $ 37 $ 55 $ 37
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 9
<TABLE>
CMS Energy Corporation
Consolidated Balance Sheets
<CAPTION>
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT AND PROPERTY (At Cost)
Electric $6,286 $6,103 $6,007
Gas 2,363 2,218 2,180
Oil and gas properties (full-cost method) 1,126 1,074 1,074
Other 87 105 56
------ ------ ------
9,862 9,500 9,317
Less accumulated depreciation, depletion and amortization 4,936 4,627 4,578
------ ------ ------
4,926 4,873 4,739
Construction work-in-progress 251 201 222
------ ------ ------
5,177 5,074 4,961
------ ------ ------
INVESTMENTS
Independent power production 305 275 277
Natural gas transmission, storage and marketing 241 193 186
First Midland Limited Partnership (Note 2) 230 225 222
Midland Cogeneration Venture Limited Partnership (Note 2) 127 103 98
Other 89 22 21
------ ------ ------
992 818 804
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 55 56 37
Accounts receivable and accrued revenue, less
allowances of $3, $4 and $4, respectively (Note 7) 219 296 202
Inventories at average cost
Gas in underground storage 250 184 263
Materials and supplies 82 83 77
Generating plant fuel stock 28 37 28
Deferred income taxes 19 24 18
Prepayments and other 132 230 117
------ ------ ------
785 910 742
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 442 462 466
Nuclear decommissioning trust funds 360 304 283
Abandoned Midland project 117 131 135
Other 418 444 459
------ ------ ------
1,337 1,341 1,343
------ ------ ------
TOTAL ASSETS $8,291 $8,143 $7,850
====== ====== ======
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION (Note 7)
Common stockholders' equity $1,619 $1,469 $1,439
Preferred stock of subsidiary 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 2,996 2,906 2,763
Non-current portion of capital leases 92 106 101
------ ------ ------
5,163 4,837 4,659
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 198 207 207
Notes payable 341 341 474
Accounts payable 260 306 214
Accrued taxes 147 254 106
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 59 53 49
Accrued interest 51 45 32
Accrued refunds 23 22 31
Other 196 192 172
------ ------ ------
1,365 1,510 1,380
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 651 640 628
Postretirement benefits 528 533 547
Power purchases - settlement (Note 2) 197 221 244
Deferred investment tax credits 163 171 173
Regulatory liabilities for income taxes, net 61 44 38
Other 163 187 181
------ ------ ------
1,763 1,796 1,811
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $8,291 $8,143 $7,850
====== ====== ======
<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 Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
------- ------- ------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 1,967 1,740 1,951 1,701 1,935 1,694
Common stock reacquired (1) (1) (1) (1) (1) (1)
Common stock issued:
CMS Energy 12 72 26 111 41 117
Class G 1 123 3 123 4 123
Common stock reissued - 1 - 1 - 2
------- ------- ------- ------- ------- -------
At end of period 1,979 1,935 1,979 1,935 1,979 1,935
------- ------- ------- ------- ------- -------
REVALUATION CAPITAL
At beginning of period (8) 1 (8) - (8) -
Change in unrealized investment-
gain (loss) 1 (9) 1 (8) 1 (8)
------- ------- ------- ------- ------- -------
At end of period (7) (8) (7) (8) (7) (8)
------- ------- ------- ------- ------- -------
RETAINED EARNINGS (DEFICIT)
At beginning of period (385) (513) (475) (595) (489) (608)
Net income 58 47 196 166 234 197
Common stock dividends declared:
CMS Energy (25) (21) (69) (58) (91) (76)
Class G (2) (2) (6) (2) (8) (2)
------- ------- ------- ------- ------- -------
At end of period (354) (489) (354) (489) (354) (489)
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,619 $1,439 $1,619 $1,439 $1,619 $1,439
======= ======= ======= ======= ======= =======
<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 utilities, commercial
and industrial customers, storage and transmission of natural gas, and
electric distribution.
CMS Energy uses the equity method of accounting for investments in
companies and partnerships where it has more than a 20 percent but less
than a majority ownership interest and includes these results in operating
income. For the three, nine and twelve month periods ended September 30,
1996, undistributed equity earnings were $13 million, $54 million and $60
million, respectively and $22 million, $47 million and $58 million for the
three, nine and twelve month periods ended September 30, 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 two wholly owned subsidiaries, holds the following
assets related to the MCV Partnership and MCV Facility: 1) CMS Midland
owns a 49 percent general partnership interest in the MCV Partnership; and
2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in
the MCV Facility.
Results of Operations for CMS Midland and CMS Holdings:
<TABLE>
<CAPTION>
In Millions
Summarized Statements of Income
Quarter Nine months 12 months
Periods Ended September 30 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Pretax operating income $19 $9 $31 $28 $38 $33
Income taxes and other 6 3 9 8 11 7
--- -- --- --- --- ---
Net income $13 $6 $22 $20 $27 $26
=== == === === === ===
</TABLE>
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 termination 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 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 a capacity payment of 1/2 cent per kWh
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. 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. The total estimated cash
underrecoveries are not expected to change under the settlement agreement as
proposed, although the years in which they occur could vary from the
schedule shown in the above table. 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 proposed settlement agreement, see Note 3.
At September 30, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $186 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $28 million, partially offset by
after-tax accretion expense of $12 million. The undiscounted after-tax
amount associated with the liability totaled $564 million at September 30,
1996.
In 1994 and 1995, Consumers paid a total of $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 agreement
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 in
February 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believed this was contrary to the
terms of the Settlement Order and appealed the February 1995 order on this
issue. The MCV Partnership and ABATE filed separate appeals of this order.
In November 1996, the Court of Appeals affirmed the MPSC's 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
CMS Energy's MD&A.
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 during the fourth quarter of 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.
Gas loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers strongly disagrees with this suggestion
but is unable to predict the outcome of any regulatory proceeding where this
issue has arisen.
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, and the Michigan Supreme Court later denied the producers' petition
for review. In September 1996, the producers filed a petition requesting
the U.S. Supreme Court to review the Michigan Supreme Court's decision.
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 will 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 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 that its share of the total liability for
the significant sites will be between $1 million and $9 million. At
September 30, 1996, Consumers has accrued $1 million for its estimated
losses.
Under Part 201 of the Michigan Natural Resources and Environmental
Protection Act, which bears some similarities to Superfund, 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 DEQ. 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 September 30,
1996, Consumers has accrued a liability of $48 million and has established a
regulatory asset for approximately the same amount. Any significant change
in assumptions, such as remediation technique, nature and extent of
contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. In accordance with an MPSC
rate order issued in early 1996, Consumers is deferring environmental clean-
up costs incurred at these sites and amortizing these costs over ten years.
Rate recognition of amortization expense will not begin until after a
prudence review in a general rate case. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the costs
that may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur dioxide
and nitrogen oxides and require emissions monitoring. Consumers' coal-
fueled electric generating units burn low-sulfur coal and are currently
operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. The Clean Air Act's provisions required
Consumers to make capital expenditures totaling $35 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 $40 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
$940 million for 1996, $925 million for 1997 and $900 million for 1998. For
further information regarding capital expenditures, see Forward-Looking
Information in CMS Energy's MD&A.
Other: As of September 30, 1996, CMS Energy or its subsidiaries have
guaranteed up to $93 million in contingent obligations of unconsolidated
affiliates and other parties.
In August 1995 CMS Generation was served a complaint, which was filed in a
U.S. District Court in the State of Colorado, 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.
A number of lawsuits have been filed against Consumers relating to so-called
stray voltage. Claimants contend that stray voltage results when low-level
electrical currents present in grounded electrical systems are diverted from
their intended path. Consumers maintains a policy of investigating all
customer calls regarding stray voltage and working with customers to address
their concerns including, when necessary, modifying the grounding of the
customer's service. At September 30, 1996, Consumers had 31 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 and involving personal injury,
property damage, contractual matters, environmental issues, federal and
state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have been
accrued. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's financial position or results of operations.
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 file a report on the adequacy of the surcharge revenues with the
MPSC at three-year intervals beginning in 1998. Consumers filed its
decommissioning plan for Big Rock with the NRC in 1995. The NRC has
reviewed the plan but does not formally approve decommissioning until
approximately two years before site release.
The NRC has approved the design of the spent fuel dry storage casks now
being used by Consumers at Palisades; however, certain parties, including
the Attorney General, have petitioned the NRC to suspend Consumers' general
license to store spent fuel, claiming that Consumers' cask unloading
procedure does not satisfy NRC regulations. The NRC staff is reviewing the
petitions.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. 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. Consumers has examined radiographs for
all of its casks and has found all other welds acceptable. The cask in
which the minor flaws were detected continues to store spent fuel safely and
there is no requirement for its replacement, but Consumers had nevertheless
planned to remove the spent fuel and insert it into another cask. Consumers
has postponed this action while it monitors an investigation under way at
another utility that uses a similar dry storage cask system for spent
nuclear fuel. The other utility experienced an unexpected ignition of
hydrogen gas following the loading of a cask. Although the event caused no
injuries or releases of radioactive material, and Consumers' procedures had
already precluded a similar event, the NRC has instructed utilities using
the dry storage casks to take certain additional precautions when loading or
unloading casks. Consumers does not plan to load or unload any casks before
the end of 1996.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs during prolonged accidental outages. Such costs
would not be covered by insurance during the first 21 weeks of any outage,
but the major portion of such costs would be covered during the next twelve
months of the outage, followed by reduced coverage to 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 data from testing of similar materials indicated 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; however, an analysis that Consumers
submitted to the NRC for review in April 1996 suggests that the reactor
vessel could be safely operated beyond 1999 without annealing.
Nevertheless, Consumers is currently developing a contingency plan to anneal
the reactor vessel in 1998 at an estimated cost of $20 million to $30
million, which would likely allow for operation of the plant to the end of
its license life in the year 2007 or beyond. Consumers cannot predict
whether the NRC will concur with the April 1996 analysis or, if the NRC does
concur, whether these analyses will result in a future decision to adopt or
postpone annealing.
6: Supplemental Cash Flow Information
The Statement of Cash Flows includes as cash equivalents all highly liquid
investments with an original maturity of three months or less. Other cash
flow activities and non-cash investing and financing activities for the
periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $ 176 $ 159 $ 224 $ 195
Income taxes paid (net
of refunds) 61 25 70 37
Non-cash transactions
Nuclear fuel placed under
capital lease $ 8 $ 24 $ 10 $ 27
Other assets placed under
capital leases 2 3 4 7
Common Stock issued to
acquire companies - 86 4 86
Assumption of debt - 16 - 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 Series B GTNs, with
net proceeds to be used for general corporate purposes. As of September 30,
1996, CMS Energy had issued and outstanding approximately $250 million of
Series A and $82 million of Series B GTNs with weighted-average interest
rates of 7.7 and 8.0 percent, respectively.
In the fourth quarter of 1996, CMS Energy received net proceeds of
approximately $64 million from the issuance of 2.1 million shares of
CMS Energy Common Stock purchased by an underwriter and subsequently sold by
the underwriter in block transactions. The issuance of these shares
completes the remaining amount on a shelf-registration filing by CMS Energy
with the SEC on February 15, 1995 covering the issuance of up to $200
million of securities encompassing Common Stock of CMS Energy. Proceeds
from the sale will be used for general corporate purposes of CMS Energy.
Consumers
In October 1996, Consumers received FERC authorization to issue up to $900
million of short-term securities through 1998. This is the same amount of
short-term securities authorized through 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 September 30, 1996, a total of $340 million was outstanding at a
weighted-average interest rate of 6.0 percent, compared with $474 million
outstanding at September 30, 1995, at a weighted-average interest rate of
6.8 percent. Consumers has an established $500 million trade receivables
purchase and sale program. At September 30, 1996 and 1995, receivables sold
under the agreement totaled $210 million. Accounts receivable and accrued
revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In October 1996, Consumers requested FERC authorization to issue $500
million of long-term securities for refunding purposes. The authorization
would apply to the period from December 1996 through November 1998.
Consumers has been required to seek authorization to issue long-term
securities from the FERC since late 1995, when the Michigan legislature
repealed the MPSC's authority to regulate the issuance of securities. Also
in October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan.
In January 1996, four million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds from
the sale totaled $97 million. The business trust was formed for the sole
purpose of issuing the Trust Originated Preferred Securities, and the
primary asset of the trust is $103 million of 8.36 percent unsecured
subordinated deferrable interest notes issued by Consumers and maturing in
2015. Consumers' obligations with respect to the Trust Originated Preferred
Securities under the notes, the indenture under which the notes are issued,
Consumers' guarantee of the Trust Originated Preferred Securities, and the
declaration of trust constitute a full and unconditional guarantee by
Consumers of the trust's obligations under the Trust Originated Preferred
Securities.
In September 1996, Consumers extended its nuclear fuel lease an additional
year to November 1998.
CMS NOMECO
In March 1996, CMS NOMECO replaced its $140 million revolving credit
agreement with a $225 million revolving credit agreement. As of September
30, 1996, $102 million was outstanding under the new agreement, with a
weighted-average interest rate of 6.3 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 September 30, 1996, $107 million was outstanding with a
weighted-average interest rate of 7.3 percent.
8: Earnings Per Share and Dividends
Earnings (loss) per share attributable to Common Stock, for the periods
ended September 30, 1996 reflect the performance of the Consumers Gas Group.
Earnings (loss) per share attributable to Common Stock, for the periods
ended September 30, 1995 reflect the performance of the Consumers Gas Group
since initial issuance of Class G Common Stock during the third quarter of
1995. The Class G Common Stock 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 nine months ended September 30, 1996, are based on 23.67 percent of the
income of the Consumers Gas Group. The seasonal loss attributable to Class
G Common Stock on a per share basis, for the periods ended September 30,
1995, is based on 23.17 percent of the loss of the Consumers Gas Group. For
purpose of analysis, following are pro forma data for the nine months ended
September 30, 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 nine months ended
September 30, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Nine Months Ended Nine Months Ended Year Ended
September 30 September 30 December 31
1996 1995 1995
Net Income $ 196 $ 166 $ 204
Net Income attributable
to CMS Energy Common Stock $ 186 $ 156 $ 189
Net Income attributable
to outstanding Class G
Common Stock $ 10 $ 10 $ 15
Average shares outstanding:
CMS Energy Common Stock 92.001 88.021 88.810
Class G Common Stock 7.695 7.521 7.536
Earnings per share attributable
to CMS Energy Common Stock $ 2.02 $ 1.76 $ 2.14
Earnings per share attributable
to outstanding Class G
Common Stock $ 1.38 $ 1.38 $ 1.93
In February and May 1996, CMS Energy paid a dividend of $.24 per share on
CMS Energy Common Stock and $.28 per share on Class G Common Stock. In
August 1996, CMS Energy paid a dividend of $.27 per share on CMS Energy
Common Stock and $.295 per share on Class G Common Stock. In October 1996,
the Board of Directors declared a quarterly dividend of $.27 per share on
CMS Energy Common Stock and $.295 per share on Class G Common Stock to be
paid in November 1996.
<PAGE>
<PAGE> 21
CMS Energy Corporation
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in CMS Energy's 1995 Form 10-
K. 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 that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. In
addition to certain contingency matters (and their respective cautionary
statements) discussed elsewhere in this 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 utilities, commercial
and industrial customers, storage and transmission of natural gas, and
electric distribution.
Consolidated Earnings for the Periods Ended September 30, 1996 and 1995
In Millions, Except Per Share Amounts
Consolidated Earnings at September 30 1996 1995 Change
Quarter:
Consolidated Net Income $ 58 $ 47 $ 11
Net Income (Loss) Attributable
to Common Stock:
CMS Energy 61 48 13
Class G (3) (1) (2))
Earnings (Loss) Per Average Common Share:
CMS Energy .65 .54 .11
Class G (.28) (.17) (a) (.11)
Nine months:
Consolidated Net Income $ 196 $ 166 $ 30
Net Income (Loss) Attributable
to Common Stock:
CMS Energy 186 167 19
Class G 10 (1) 11
Earnings (Loss) Per Average Common Share:
CMS Energy 2.02 1.90 .12
Class G 1.38 (.17) (a) 1.55
Twelve months:
Consolidated Net Income $ 234 $ 197 $ 37
Net Income (Loss) Attributable
to Common Stock:
CMS Energy 220 198 22
Class G 14 (1) 15
Earnings (Loss) Per Average Common Share:
CMS Energy 2.39 2.26 .13
Class G 1.92 (.17) (a) 2.09
(a) Class G Shares were issued on July 21, 1995. Pro-forma earnings
(loss) per share, assuming Class G shares were outstanding during the
entire period for the quarter, nine month and twelve month
periods ended September 30, 1995, would be $ (.25), $ 1.38 and $ 1.63
respectively.
The increase in consolidated net income for each period in 1996 primarily
reflects the favorable impact of an electric rate increase and increased
operating income resulting from a refund received by the MCV Partnership.
As a result, in August 1996, the MCV Partnership recognized a $19 million
reduction to fuel costs in its current operating results. This resulted
in a $6 million earnings benefit in 1996 for CMS Energy. Consolidated net
income was also effected by increased earnings from CMS Gas Transmission's
25 percent ownership interest in TGN. The nine-month and twelve-month
periods in 1996 reflect increased electric sales, gas deliveries and
revenues from gas loaning activities. In addition, the nine-month and
twelve-month periods in 1996 reflect the equity earnings resulting from
the buy-out of a power purchase agreement involving a partnership in which
CMS Generation owns a 50 percent ownership interest. For further
information, see the individual results of operations sections of this
MD&A.
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. CMS Energy's consolidated operating cash requirements
are met by its operating and financing activities. CMS Energy's
consolidated cash from operations is derived mainly from Consumers' sale
and transportation of natural gas, Consumers' generation, transmission,
and sale of electricity and CMS NOMECO's sale of oil and natural gas.
Consolidated cash from operations totaled $520 million and $389 million
for the first nine months of 1996 and 1995, respectively. The $131
million increase resulted from increased electricity sales and gas
deliveries, lower cash losses associated with the PPA, CMS NOMECO's
increased sale of oil and natural gas and changes in the timing of cash
payments related to Consumers' operations. CMS Energy uses its operating
cash primarily to expand its international businesses, maintain and expand
its electric and gas utility systems, retire portions of its long-term
debt and pay dividends.
Investing Activities: Net cash used in investing activities totaled $622
million and $780 million for the first nine months of 1996 and 1995,
respectively. The decrease of $158 million primarily reflects the
acquisition of HYDRA-CO in the first quarter of 1995 and an increase in
proceeds from the sale of property during 1996. These changes were
partially offset by an increase in capital expenditures. CMS Energy's
expenditures for its utility and international businesses were $314
million and $299 million, respectively.
Financing Activities: Net cash provided by financing activities totaled
$101 million and $349 million for the first nine months of 1996 and 1995,
respectively. The net decrease of $248 million primarily reflects an
increase in cash used to repay bank loans partially offset by increased
proceeds due to refinancing bank loans and issuing notes, a decrease in
the sale of Common Stock, and a net decrease in cash received from short
term-borrowings, compared with 1995. These changes were partially offset
by proceeds from the sale of Trust Originated Preferred Securities (see
Note 7) in 1996.
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
Series B GTNs, with net proceeds to be used for general corporate
purposes. As of September 30, 1996, CMS Energy had issued and outstanding
approximately $250 million of Series A GTNs and $82 million of Series B
GTNs with weighted-average interest rates of 7.7 percent and 8.0 percent,
respectively.
In the first quarter of 1996, CMS Generation refinanced the $118 million
bridge credit facility obtained in connection with the acquisition of
HYDRA-CO with a $110 million, five-year term loan. As of September 30,
1996, $107 million was outstanding with a weighted-average interest rate
of 7.3 percent.
In the first quarter of 1996, CMS NOMECO replaced its $140 million
revolving credit agreement with a $225 million revolving credit agreement.
As of September 30, 1996, $102 million was outstanding under the new
agreement with a weighted-average interest rate of 6.3 percent.
Through September 30, 1996, CMS Energy paid $69 million in cash dividends
to holders of CMS Energy Common Stock and $6 million in cash dividends to
holders of Class G Common Stock. In October 1996, the Board of Directors
declared a quarterly dividend of $.27 per share on CMS Energy Common Stock
and $.295 per share on Class G Common Stock to be paid in November 1996.
In July 1996, the Board of Directors declared quarterly dividends of $.27
per share on CMS Energy Common Stock and $.295 per share on Class G Common
Stock, representing an increase in the annualized dividend on CMS Energy
Common Stock to $1.08 per share from the previous amount of $.96 per share
(a 12.5 percent increase) and an increase in the annualized dividend on
Class G Common Stock to $1.18 per share from the previous dividend of
$1.12 per share (a 5.4 percent increase).
In the second quarter of 1996, Consumers declared and paid a $75 million
common dividend to CMS Energy from its first quarter earnings. In the
third quarter of 1996, Consumers declared and paid a $40 million common
dividend to CMS Energy from its second quarter earnings. In October 1996,
Consumers declared a $48 million common dividend to CMS Energy, from its
third quarter earnings, to be paid in November 1996. Consumers had
temporarily suspended its common dividends from mid-1995 until early 1996
to improve its capital structure.
In the second quarter of 1996, CMS Enterprises declared and paid a common
dividend of $42 million to CMS Energy. In the third quarter of 1996,
CMS Enterprises declared and paid a $23 million common dividend to
CMS Energy.
In the fourth quarter of 1996, CMS Energy received net proceeds of
approximately $64 million from the issuance of 2.1 million shares of
CMS Energy Common Stock purchased by an underwriter and subsequently sold
by the underwriter in block transactions. The issuance of these shares
completes the remaining amount on a shelf-registration filing by
CMS Energy with the SEC on February 15, 1995 covering the issuance of up
to $200 million of securities encompassing Common Stock of CMS Energy.
Proceeds from the sale will be used for general corporate purposes of
CMS Energy.
Other Investing and Financing Matters: CMS Energy has available,
unsecured, committed lines of credit totaling $105 million and a $450
million credit facility. At September 30, 1996, CMS Energy had utilized a
total of $179 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
September 30, 1996, Consumers had a total of $340 million outstanding
under these facilities. In October 1996, Consumers received FERC
authorization to issue up to $900 million of short-term securities through
1998. This is the same amount of short-term securities authorized through
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 September 30, 1996 and
1995, receivables sold totaled $210 million. In October 1996, Consumers
requested FERC authorization to issue $500 million of long-term securities
for refunding purposes. Also in October 1996, Michigan Gas Storage
entered into a $23 million secured, variable rate, seven-year term loan.
At September 30, 1996 the book value per share for CMS Energy Common Stock
and Class G Common Stock was $16.57 and $11.07, respectively.
Electric Utility Results of Operations
Electric Pretax Operating Income for the Periods Ended September 30, 1996
and 1995:
In Millions
Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $(12) $ (3) $11
Rate increases and other
regulatory issues 13 32 32
Operations and maintenance - 8 12
General taxes and depreciation (1) (12) (19)
Other 1 3 8
----- --- ---
Total change $ 1 $28 $44
===== === ===
Electric Sales: Total electric sales increased for the quarter ended (2.7
percent), nine months ended (3.7 percent), and twelve months ended
September 30, 1996 (3.4 percent) over the comparable 1995 periods. The
table below reflects these electric kWh sales increases by class of
customer for the various periods.
<TABLE>
<CAPTION> In Billions of kWh
Electric Sales
Quarter ended Sept. 30 Nine months ended Sept. 30 12 months ended Sept. 30
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 2.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2
Commercial 2.7 2.7 - 7.5 7.3 0.2 9.8 9.5 0.3
Industrial 3.4 3.2 0.2 9.5 9.5 - 12.7 12.6 0.1
Other 0.9 0.6 0.3 2.5 1.8 0.7 3.2 2.6 0.6
--- --- --- ---- ---- --- ---- ---- ---
Total sales 9.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2
=== === === ==== ==== === ==== ==== ===
</TABLE>
Power Costs:
In Millions
Power Costs at September 30 1996 1995 Change
Quarter $ 282 $270 $ 12
Nine months 802 731 71
Twelve months 1,041 958 83
The increases in each period resulted primarily from 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 termination of the PPA in 2025. 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. 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 $28 million for the first nine 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. The total estimated cash
underrecoveries are not expected to change under the settlement agreement as
proposed, although the years in which they occur could vary from the
schedule shown in the above table. 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 proposed settlement agreement, 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: In early 1996, the MPSC granted Consumers
authority to increase its annual electric retail rates by $46 million, in
response to Consumers' 1994 request. 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 during the fourth quarter of 1996. For more information
regarding the electric rate order and the proposed settlement agreement, 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 in depreciation expense associated with
this transfer. If the MPSC approves both aspects of the request, the net
result will 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 agreement. In the
proposed settlement, the depreciation of the Palisades and Big Rock nuclear
generating plants would be accelerated while overall depreciation rates
would remain the same.
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 Environmental Matters: The 1990 amendment of the Clean Air Act
significantly increased the environmental constraints that utilities will
operate under in the future. While the Clean Air Act's provisions require
Consumers to make certain capital expenditures in order to comply with the
amendments for nitrogen oxide reductions, Consumers' generating units are
currently operating at or near the sulfur dioxide emission limits that will
be effective in the year 2000. Final acid rain program nitrogen oxide
regulations are expected to be issued in late 1996. Management believes
that Consumers' annual operating costs will not be materially affected.
Part 201 of the Michigan Natural Resources and Environmental Protection Act
was substantially amended in 1995 and bears some similarities to Superfund.
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 that 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. Consumers
does not plan to load or unload any casks before the end of 1996, including
a cask in which 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 data from testing of similar materials indicated that the
Palisades reactor vessel can be safely operated through late 1999; however,
an analysis that Consumers submitted to the NRC for review in April 1996
suggests that the reactor vessel could be safely operated beyond 1999
without annealing. Nevertheless, Consumers is currently developing a
contingency plan to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million, which would likely allow for operation of the
plant to the end of its license life in the year 2007 or beyond. Consumers
cannot predict whether the NRC will concur with the April 1996 analysis or,
if the NRC does concur, whether these analyses will result in a future
decision to adopt or postpone annealing.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock. At
September 30, 1996, Consumers had 31 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,
liquidity or results of operations.
Consumers Gas Group Results of Operations
In Millions
Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $24 $50
Reversal of gas contingencies - (23) (23)
Recovery of gas costs and
other issues 2 3 3
Gas loaning activities - 7 7
Operations and maintenance (6) (5) (16)
General taxes and depreciation - (4) (7)
--- --- ---
Total change $(3) $ 2 $14
=== === ===
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility, decreased for the quarter ended (5.1 percent), but increased for
the nine months ended (8.9 percent), and twelve-months ended September 30,
1996 (14.2 percent) when compared with the corresponding 1995 periods. The
increased deliveries reflect growth resulting from customer additions,
conversions to natural gas from alternative fuels, continued strength in the
Michigan economy and, for the nine months ended and twelve-months ended
September 30, 1996, colder temperatures. Although the industrial sector,
for the nine months ended September 30, 1996, accounted for approximately
20% of total deliveries, it contributed almost 40% of the weather-adjusted
growth. The table below indicates total system deliveries and the impact of
weather:
In Bcf
Gas Deliveries
Nine months ended 12 months ended
Sept. 30 Sept. 30
1996 1995 Var. 1996 1995 Var.
Weather-adjusted deliveries 234.5 223.5 11.0 337.1 321.0 16.1
(variance reflects growth)
Impact of weather 6.6 (2.1) 8.7 17.4 (10.5) 27.9
----- ----- ---- ----- ----- ----
System deliveries
excluding transport
to MCV 241.1 221.4 19.7 354.5 310.5 44.0
Transport to MCV 48.6 39.9 8.7 62.4 58.2 4.2
----- ----- ---- ----- ----- ----
Total system deliveries 289.7 261.3 28.4 416.9 368.7 48.2
===== ===== ==== ===== ===== ====
Cost of Gas Sold:
In Millions
Cost of Gas Sold at September 30 1996 1995 Change
Quarter $ 51 53 $ (2)
Nine months 504 435 69
Twelve months 740 622 118
The increases for the nine-month and twelve-month periods were the result of
increased sales and the reversal of a $23 million gas contract contingency
during the first quarter of 1995.
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 filed a petition for rehearing with the MPSC, requesting
reconsideration of certain issues. This petition was denied in June 1996
and the matter is now closed.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to bypass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In 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 will vigorously oppose any claims
they may raise, but cannot predict the outcome of this issue.
Gas loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers strongly disagrees with this suggestion
but is unable to predict the outcome of any regulatory proceeding where this
issue has arisen.
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 September 30,
1996, Consumers has accrued a liability for $48 million and has established
a regulatory asset for approximately the same amount. Any significant
change in assumptions such as remediation technique, nature and extent of
contamination and regulatory requirements, could affect the estimate of
remedial action costs for the sites.
In accordance with an MPSC rate order, 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 that may be incurred for these sites. For further
information regarding environmental matters, see Note 4.
Oil and Gas Exploration and Production
Pretax Operating Income: Pretax operating income for the three months ended
September 30, 1996 increased $5 million over the comparable period in 1995,
primarily reflecting higher oil and gas prices and higher gas volumes.
Pretax operating income for the nine months ended September 30, 1996
increased $1 million from the same period in 1995, primarily due to higher
oil and gas prices and volumes, mostly offset by the recognition of a $9.9
million gain from assignment and novation of a gas supply contract recorded
in the first quarter of 1995. Pretax operating income for the twelve months
ended September 30, 1996 increased $7 million from the 12 months ended
September 30, 1995, primarily due to higher sales volumes and prices,
partially offset by the gain from the assignment and novation of a gas
supply contract.
Capital Expenditures: Capital expenditures during 1996 relate primarily to
the development of existing oil and gas reserves.
Independent Power Production
Pretax Operating Income: Pretax operating income for the three, nine and
twelve months ended September 30, 1996 increased $16 million, $22 million
and $20 million, respectively, over the comparable periods in 1995,
primarily reflecting a gain on the sale of a power purchase agreement by a
partnership in which CMS Generation owns a 50 percent interest, a gain on
the sale of a partnership interest and increased operating income resulting
from a refund received by the MCV Partnership.
Capital Expenditures and Other: In the second quarter of 1996,
CMS Generation commenced construction of the La Plata Cogeneration Plant, a
128 MW natural gas fueled, combined cycle power plant in Buenos Aires
Province, Argentina. Construction of the $110 million plant being built on
the site of a petroleum refinery owned and operated by YPF S.A., Argentina's
largest oil company, is scheduled to be completed by the fall of 1997. In
July 1996, CMS Generation increased its ownership interest in the project
from 39 percent to 100 percent by purchasing the remaining 61 percent from
EDEVA, a consortium of Argentine investors. The Overseas Private Investment
Corporation is expected to provide approximately $75 million in non-recourse
project financing for the facility.
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 electric generating units and construction and operation of
another two 330 MW electric generating units by CMS Generation and ABB.
CMS Generation and ABB each will hold a 50 percent interest in the
transaction. CMS Energy posted a $30 million conditional letter of credit
to ensure performance under the agreements. Financial closing is targeted
for year end 1996, with construction of the second two units to begin
shortly thereafter.
In July 1996, CMS Generation began construction on repowering its Centrales
Termicas Mendoza electric generating plant in western Argentina's Mendoza
Province. In the first quarter of 1996, CMS Generation increased its
ownership interest in the plant to 81 percent. The company currently plans
to invest $185 million to refurbish and repower the facility resulting in an
increase in its generating capacity from 242 MW to 506 MW. Capital markets
financing is targeted for early 1997.
During August 1996, CMS Generation's GVK Industries independent power
project in Jegurupadu, Andhra Pradesh, India began generating electricity
from the plant's first gas-fueled turbine. CMS Generation holds a 25.25
percent interest in, and operates, the 235 MW plant. Construction is
continuing on two additional gas turbines and one steam turbine unit of the
combined cycle facility with an estimated total cost of $260 million. The
project has received a Government of India counter-guarantee and expects to
complete international financing during late 1996 or early 1997.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: Pretax operating income for the three, nine and
twelve months ended September 30, 1996 increased $1 million, $12 million and
$16 million respectively over the comparable periods in 1995, reflecting
earnings from new pipeline and storage investments, primarily TGN, the
continued growth of existing projects, gas marketed to end-users and the
gain resulting from the dissolution of the Moss Bluff and Grands Lacs
partnerships (see below).
Capital Expenditures and Other: In June 1996, CMS Gas Transmission sold its
50 percent ownership interest in Moss Bluff Gas Storage Systems, a
partnership that owns a gas storage facility, to its partner, MHP, and
purchased the remaining 50 percent ownership interest in the Grands Lacs
Limited Partnership, a marketing center for natural gas, from MHP. This
transaction resulted in CMS Gas Transmission receiving approximately $26
million.
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 January 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.
International Electric Distribution
Capital Expenditures: In April 1996, a seven-company consortium in which
CMS Electric and Gas holds a 40 percent interest acquired 90 percent of the
outstanding shares of EDEER for approximately $160 million, of which
CMS Energy's portion was $65 million. EDEER, 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. In May 1996, the Entre Rios Province transferred ownership
and operating management of EDEER to the consortium.
Forward-Looking Information
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.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include
prevailing governmental policies and regulatory actions both domestic and
international (including those of the FERC and the MPSC) with respect to
rates, industry and rate structure, operation of nuclear power facilities,
acquisition and disposal of assets and facilities, operation and
construction of plant facilities, operation and construction of natural gas
pipeline and storage facilities, recovery of the cost of purchased power or
natural gas, decommissioning costs, and present or prospective wholesale and
retail competition, among others. The business and profitability of
CMS Energy are also influenced by economic and geographic factors including
political and economic risks (particularly those associated with
international development and operations, including currency fluctuation),
changes in environmental laws and policies, weather conditions, competition
for retail and wholesale customers, pricing and transportation of
commodities, market demand for energy, inflation, capital market conditions,
unanticipated development project delays or changes in project costs, and
the ability to secure agreement in pending negotiations (particularly for
projects in development), among other important factors. All such factors
are difficult to predict, contain uncertainties that may materially affect
actual results, and may be beyond the control of CMS Energy.
Capital Expenditures: CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total approximately $2.8 billion over the
next three years. Cash generated by operations is expected to satisfy a
substantial portion of capital expenditures. Nevertheless, CMS Energy will
continue to evaluate capital markets in 1996 as a potential source of
financing its subsidiaries' investing activities. CMS Energy estimates the
following capital expenditures by business segment over the next three
years:
In Millions
Years Ended December 31 1996 1997 1998
Electric utility (a) $315 $260 $275
Gas utility (a) 135 110 100
Oil and gas exploration and production 120 135 150
Independent power production 164 162 162
Natural gas transmission, storage
and marketing 140 58 113
International electric distribution 66 200 100
---- ---- ----
$940 $925 $900
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and
gas utility businesses.
CMS Energy currently plans to invest $405 million from 1996 to 1998 in its
oil and gas exploration and production operations which will be concentrated
in North and South America and offshore west Africa. CMS Energy also plans
to invest $488 million relating to its independent power production
operations from 1996 to 1998 to pursue acquisitions and development of
electric generating plants in the United States, Latin America, southern
Asia, the Pacific Rim region and North Africa. An investment of $311 million
from 1996 to 1998, relating to non-utility gas operations, is planned to
continue 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.
These estimates are prepared for planning purposes and are subject to
revision.
Electric Outlook, Sales and Competition: 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. In April 1996, the MPSC directed
Consumers, Detroit Edison, and other electric utilities to file applications
addressing the recommendation of the Michigan Jobs Commission to allow a
choice of power suppliers for new industrial and commercial electric load.
Consumers filed a proposed plan for open access transmission services, under
which Consumers could meet new demand in its service area by delivering
electricity from any supplier capable of providing power to Consumers'
electric system, provided certain reciprocity and other conditions were met.
Among the other conditions was a requirement that stranded costs would be
fully recovered from existing customers. 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, Detroit Edison,
and the Jobs Commission have continued to meet for the purpose of confirming
the principles, such as full recovery of stranded costs in the event of
expanded choice by retail customers, upon which a new regulatory and
statutory framework for the electric utility business in Michigan would be
based. Once established, those principles could in turn form the basis for
definitive agreements, filings with the MPSC, and revised statutes. These
parties are hopeful that the principles and definitive agreements would
receive the support of other interested parties such as the MPSC staff.
There can be no assurance that the necessary agreements will be reached,
that regulatory approvals will be granted, and that necessary legislation
will be passed, nor can a definitive timetable be established at this time
for realization of these events.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid. Order 888
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access tariffs
that contain minimum terms and conditions of non-discriminatory service,
allows utilities to charge their current conforming transmission rates or
apply for new rates, and provides for the full recovery of stranded costs.
Order 888 also requires power pools to restructure their ongoing operations
and open up to non-utility members. Order 889 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 became effective in July 1996. In addition, the FERC issued a
NOPR in April 1996 that 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 Order 888 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 full impact of
the FERC's Orders on its financial position, liquidity or results of
operations. In July 1996, Consumers filed an open access transmission
tariff and conforming transmission rate change in response to Order 888.
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 that would displace retail service by Consumers to an
entire community; and competition from neighboring utilities that offer
flexible rate arrangements designed to encourage movement of facilities or
production to their service areas. Consumers continues to work toward
retaining its current retail service customers.
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, 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 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,
and has since approved long-term sales contracts with other major customers
representing a substantial percentage of Consumers' industrial load deemed
to have viable cogeneration alternatives. These orders have been appealed
by the Attorney General.
In addition to offering electric rates that are competitive with those of
other energy providers, Consumers is pursuing numerous other strategies to
retain its other large customers. These strategies include improving
reliability, power quality and customer communications, and providing
consulting services to help customers use energy efficiently. Consumers is
also taking steps to prepare for a future environment in which open access
is the predominant means by which large industrial and commercial customers
provide for their power requirements.
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 July 1996, an electric marketer filed applications with the MPSC for
approval to sell electricity generated outside of Michigan to certain of
Consumers' industrial customers. These customers purchase approximately 100
MW annually from Consumers. There is currently no MPSC-approved program of
retail access that would allow the transactions requested by this electric
marketer to take place. Consumers intends to vigorously oppose the creation
of any such program before the MPSC and in the courts; however, Consumers
cannot predict the ultimate outcome of this matter.
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 might 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 that will support increased load
requirements in the future. These strategies include increased efforts to
promote natural gas to both current and potential customers that are using
other fuels for space and water heating. In addition, as air quality
standards continue to become more stringent, management believes that
greater opportunities exist for converting industrial boiler load and other
processes to natural gas. Consumers also plans additional capital
expenditures to construct new gas mains that are expected to expand
Consumers' system. Actual gas deliveries in future periods may be affected
by abnormal weather, alternative energy prices, changes in competitive
conditions, and the level of natural gas consumption.
In 1996, the Low Income Home Energy Assistance Program provided $58 million
in heating assistance to Michigan households, with approximately 19 percent
of funds going to Consumers' customers. Federal legislative approval
provided Michigan residents with $55 million of funding for 1997. Consumers
therefore does not anticipate a significant change in its revenues from this
program in 1997.
In October 1996, the MPSC issued an order requesting Consumers and other
local distribution companies whose rates are regulated by the MPSC to
develop pilot programs that would allow any customers to purchase gas from
other suppliers and have the gas transported through local pipelines. These
pilot programs, which are to be implemented in the second quarter of 1997,
are intended to help the MPSC determine whether it is appropriate to allow
all customers access to the competitive gas transportation market.
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.
<PAGE>
<PAGE> 36
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Power Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS
Energy Corporation) and subsidiaries as of September 30, 1996 and 1995,
and the related consolidated statements of income, common stockholder's
equity and cash flows for the three-month, nine-month and twelve-month
periods then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statements of
long-term debt and preferred stock of Consumers Power Company and
subsidiaries as of December 31, 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,
November 11, 1996.
<PAGE>
<PAGE> 37
<TABLE>
Consumers Power Company
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric $ 655 $ 640 $1,827 $1,723 $2,381 $2,246
Gas 123 122 880 801 1,274 1,116
Other 20 10 33 30 41 36
---------------------------------------------------------
Total operating revenue 798 772 2,740 2,554 3,696 3,398
---------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 76 74 219 208 294 284
Purchased power - related parties 150 124 436 369 558 492
Purchased and interchange power 56 72 147 154 189 182
Cost of gas sold 51 53 504 435 740 622
Other 154 142 435 419 607 573
---------------------------------------------------------
Total operation 487 465 1,741 1,585 2,388 2,153
Maintenance 41 47 117 136 164 188
Depreciation, depletion and amortization 83 81 273 262 369 354
General taxes 43 43 141 138 192 183
---------------------------------------------------------
Total operating expenses 654 636 2,272 2,121 3,113 2,878
---------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric 126 125 323 295 390 346
Gas (1) 2 112 110 153 139
Other 19 9 33 28 40 35
---------------------------------------------------------
Total pretax operating income 144 136 468 433 583 520
INCOME TAXES 38 36 134 121 158 132
---------------------------------------------------------
NET OPERATING INCOME 106 100 334 312 425 388
---------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Dividends from affiliates 4 4 13 13 17 17
Accretion income 2 3 7 9 10 12
Accretion expense (7) (7) (21) (23) (28) (32)
Other income taxes, net 3 3 9 9 13 11
Other, net - 1 1 2 1 11
---------------------------------------------------------
Total other income 2 4 9 10 13 19
---------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 34 35 104 106 139 140
Other interest 5 7 11 16 19 24
Capitalized interest - (1) (2) (2) (3) (2)
---------------------------------------------------------
Net interest charges 39 41 113 120 155 162
---------------------------------------------------------
Net Income 69 63 230 202 283 245
Preferred Stock Dividends 7 7 21 21 28 28
Preferred Securities Distribution 2 - 6 - 6 -
---------------------------------------------------------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK
AND DISTRIBUTIONS ON PREFERRED SECURITIES $ 60 $ 56 $ 203 $ 181 $ 249 $ 217
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 38
<TABLE>
Consumers Power Company
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30 September 30
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 230 $ 202 $ 283 $ 245
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $37, $38,
$49 and $51, respectively) 273 262 369 354
Capital lease and other amortization 32 27 44 38
Deferred income taxes and investment tax credit 27 52 32 52
Accretion expense 21 23 28 32
Accretion income - abandoned Midland project (7) (9) (10) (12)
Undistributed earnings of related parties (30) (28) (39) (35)
MCV power purchases - settlement (Note 2) (43) (102) (78) (118)
Other 4 4 5 4
Changes in other assets and liabilities (49) (113) 148 6
------ ------ ------ ------
Net cash provided by operating activities 458 318 782 566
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (298) (278) (434) (411)
Investments in nuclear decommissioning trust funds (37) (38) (49) (51)
Cost to retire property, net (20) (28) (34) (41)
Deferred demand-side management costs (6) (7) (8) (11)
Proceeds from sale of property - 1 1 4
Other 2 (5) 1 (5)
------ ------ ------ ------
Net cash used in investing activities (359) (355) (523) (515)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (114) (70) (114) (133)
Retirement of bonds and other long-term debt (37) (1) (37) (1)
Payment of capital lease obligations (32) (26) (43) (37)
Payment of preferred stock dividends (21) (21) (28) (28)
Preferred securities distributions (6) - (6) -
Increase (decrease) in notes payable, net (1) 135 (134) 74
Proceeds from preferred securities 97 - 97 -
Contribution from stockholder 13 - 13 -
Repayment of bank loans - - - (328)
Proceeds from bank loans - - - 400
------ ------ ------ ------
Net cash provided by (used in) financing activities (101) 17 (252) (53)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) (20) 7 (2)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 14 25 5 7
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 12 $ 5 $ 12 $ 5
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 39
<TABLE>
Consumers Power Company
Consolidated Balance Sheets
<CAPTION>
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Electric $6,286 $6,103 $6,007
Gas 2,268 2,169 2,132
Other 25 30 30
-----------------------------------
8,579 8,302 8,169
Less accumulated depreciation, depletion and amortization 4,354 4,090 4,041
-----------------------------------
4,225 4,212 4,128
Construction work-in-progress 194 190 217
-----------------------------------
4,419 4,402 4,345
-----------------------------------
INVESTMENTS
Stock of affiliates 338 337 326
First Midland Limited Partnership (Note 2) 230 225 222
Midland Cogeneration Venture Limited Partnership (Note 2) 127 103 98
Other 8 7 8
-----------------------------------
703 672 654
-----------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 12 14 5
Accounts receivable and accrued revenue, less
allowances of $2, $3 and $3, respectively (Note 7) 64 137 78
Accounts receivable - related parties 27 10 49
Inventories at average cost
Gas in underground storage 250 184 263
Materials and supplies 71 72 73
Generating plant fuel stock 28 37 28
Postretirement benefits 25 25 25
Deferred income taxes 21 26 20
Prepayments and other 81 181 77
-----------------------------------
579 686 618
-----------------------------------
NON-CURRENT ASSETS
Postretirement benefits 442 462 466
Nuclear decommissioning trust funds 360 304 283
Abandoned Midland Project 117 131 135
Other 278 297 316
-----------------------------------
1,197 1,194 1,200
-----------------------------------
TOTAL ASSETS $6,898 $6,954 $6,817
===================================
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
September 30 September 30
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 30 29 22
Retained earnings since December 31, 1992 326 237 191
-----------------------------------
1,701 1,598 1,545
Preferred stock 356 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 - -
Long-term debt 1,876 1,922 1,921
Non-current portion of capital leases 89 104 101
-----------------------------------
4,122 3,980 3,923
-----------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 97 90 88
Notes payable 340 341 474
Accounts payable 161 207 133
Accrued taxes 96 225 73
Power purchases - settlement (Note 2) 90 90 95
Accounts payable - related parties 65 56 53
Accrued interest 28 32 26
Accrued refunds 23 22 31
Other 173 178 161
-----------------------------------
1,073 1,241 1,134
-----------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 618 605 593
Postretirement benefits 509 517 534
Power purchases - settlement (Note 2) 197 221 244
Deferred investment tax credit 162 169 172
Regulatory liabilities for income taxes, net 61 44 38
Other (Note 4) 156 177 179
-----------------------------------
1,703 1,733 1,760
-----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,898 $6,954 $6,817
===================================
<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> 41
<TABLE>
Consumers Power Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
---------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 504 491 491 491 491 491
Stockholder's contribution - - 13 - 13 -
---------------------------------------------------------
At end of period 504 491 504 491 504 491
---------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 31 19 29 15 22 14
Change in unrealized investment-gain (loss) (1) 3 1 7 8 8
---------------------------------------------------------
At end of period 30 22 30 22 30 22
---------------------------------------------------------
RETAINED EARNINGS
At beginning of period 305 135 237 80 191 107
Net income 69 63 230 202 283 245
Common stock dividends declared (39) - (114) (70) (114) (133)
Preferred stock dividends declared (7) (7) (21) (21) (28) (28)
Preferred securities distributions (2) - (6) - (6) -
---------------------------------------------------------
At end of period 326 191 326 191 326 191
---------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,701 $1,545 $1,701 $1,545 $1,701 $1,545
=========================================================
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 42
Consumers Power Company
Condensed Notes to Consolidated Financial Statements
These financial statements and their related condensed notes should be
read along with the consolidated financial statements and notes contained
in the 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 two wholly owned subsidiaries, holds the following
assets related to the MCV Partnership and MCV Facility: 1) CMS Midland
owns a 49 percent general partnership interest in the MCV Partnership; and
2) CMS Holdings holds, through the FMLP, a 35 percent lessor interest in
the MCV Facility.
Results of Operations for CMS Midland and CMS Holdings:
<TABLE>
<CAPTION>
In Millions
Summarized Statements of Income
Quarter Nine months 12 months
Periods Ended September 30 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Pretax operating income $19 $9 $31 $28 $38 $33
Income taxes and other 6 3 9 8 11 7
--- -- --- --- --- ---
Net income $13 $6 $22 $20 $27 $26
=== == === === === ===
</TABLE>
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 termination 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 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 a capacity payment of 1/2 cent per kWh
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. 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. The total estimated cash
underrecoveries are not expected to change under the settlement agreement as
proposed, although the years in which they occur could vary from the
schedule shown in the above table. 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 proposed settlement agreement, see Note 3.
At September 30, 1996 and December 31, 1995, the after-tax present value of
the Settlement Order liability totaled $186 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $28 million, partially offset by
after-tax accretion expense of $12 million. The undiscounted after-tax
amount associated with the liability totaled $564 million at September 30,
1996.
In 1994 and 1995, Consumers paid a total of $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 agreement
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 in
February 1995, the MPSC disallowed a portion of the costs related to
purchases from the MCV Partnership, and instead assumed recovery of those
costs from wholesale customers. Consumers believed this was contrary to the
terms of the Settlement Order and appealed the February 1995 order on this
issue. The MCV Partnership and ABATE filed separate appeals of this order.
In November 1996, the Court of Appeals affirmed the MPSC's 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
Consumers' MD&A.
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 during the fourth quarter of 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.
Gas loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers strongly disagrees with this suggestion
but is unable to predict the outcome of any regulatory proceeding where this
issue has arisen.
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, and the Michigan Supreme Court later denied the producers' petition
for review. In September 1996, the producers filed a petition requesting
the U.S. Supreme Court to review the Michigan Supreme Court's decision.
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 will 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 that its share of the total liability for
the significant sites will be between $1 million and $9 million. At
September 30, 1996, Consumers has accrued $1 million for its estimated
losses.
Under Part 201 of the Michigan Natural Resources and Environmental
Protection Act, which bears some similarities to Superfund, 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 DEQ. 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 September 30,
1996, Consumers has accrued a liability of $48 million and has established a
regulatory asset for approximately the same amount. Any significant change
in assumptions, such as remediation technique, nature and extent of
contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. In accordance with an MPSC
rate order issued in early 1996, Consumers is deferring environmental clean-
up costs incurred at these sites and amortizing these costs over ten years.
Rate recognition of amortization expense will not begin until after a
prudence review in a general rate case. The order authorizes current
recovery of $1 million annually. Consumers is continuing discussions with
certain insurance companies regarding coverage for some or all of the costs
that may be incurred for these sites.
The Clean Air Act contains provisions that limit emissions of sulfur dioxide
and nitrogen oxides and require emissions monitoring. Consumers' coal-
fueled electric generating units burn low-sulfur coal and are currently
operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. The Clean Air Act's provisions required
Consumers to make capital expenditures totaling $35 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 $40 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 $450 million for 1996, $370 million for 1997, and
$375 million for 1998. For further information regarding capital
expenditures, see Forward-Looking Information in Consumers' MD&A.
Other: A number of lawsuits have been filed against Consumers relating to
so-called stray voltage. Claimants contend that stray voltage results when
low-level electrical currents present in grounded electrical systems are
diverted from their intended path. Consumers maintains a policy of
investigating all customer calls regarding stray voltage and working with
customers to address their concerns including, when necessary, modifying the
grounding of the customer's service. At September 30, 1996, Consumers had
31 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 and involving personal injury, property damage,
contractual matters, environmental issues, federal and state taxes, rates,
licensing and other matters.
Estimated losses for certain contingencies discussed in this note have been
accrued. Resolution of these contingencies is not expected to have a
material impact on Consumers' financial position or results of operations.
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 file a report on the adequacy of the surcharge revenues with the
MPSC at three-year intervals beginning in 1998. Consumers filed its
decommissioning plan for Big Rock with the NRC in 1995. The NRC has
reviewed the plan but does not formally approve decommissioning until
approximately two years before site release.
The NRC has approved the design of the spent fuel dry storage casks now
being used by Consumers at Palisades; however, certain parties, including
the Attorney General, have petitioned the NRC to suspend Consumers' general
license to store spent fuel, claiming that Consumers' cask unloading
procedure does not satisfy NRC regulations. The NRC staff is reviewing the
petitions.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. 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. Consumers has examined radiographs for
all of its casks and has found all other welds acceptable. The cask in
which the minor flaws were detected continues to store spent fuel safely and
there is no requirement for its replacement, but Consumers had nevertheless
planned to remove the spent fuel and insert it into another cask. Consumers
has postponed this action while it monitors an investigation under way at
another utility that uses a similar dry storage cask system for spent
nuclear fuel. The other utility experienced an unexpected ignition of
hydrogen gas following the loading of a cask. Although the event caused no
injuries or releases of radioactive material, and Consumers' procedures had
already precluded a similar event, the NRC has instructed utilities using
the dry storage casks to take certain additional precautions when loading or
unloading casks. Consumers does not plan to load or unload any casks before
the end of 1996.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs during prolonged accidental outages. Such costs
would not be covered by insurance during the first 21 weeks of any outage,
but the major portion of such costs would be covered during the next twelve
months of the outage, followed by reduced coverage to 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 data from testing of similar materials indicated 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; however, an analysis that Consumers
submitted to the NRC for review in April 1996 suggests that the reactor
vessel could be safely operated beyond 1999 without annealing.
Nevertheless, Consumers is currently developing a contingency plan to anneal
the reactor vessel in 1998 at an estimated cost of $20 million to $30
million, which would likely allow for operation of the plant to the end of
its license life in the year 2007 or beyond. Consumers cannot predict
whether the NRC will concur with the April 1996 analysis or, if the NRC does
concur, whether these analyses will result in a future decision to adopt or
postpone annealing.
6: Supplemental Cash Flow Information
The Statement of Cash Flows includes as cash equivalents all highly liquid
investments with an original maturity of three months or less. Other cash
flow activities and non-cash investing and financing activities for the
periods ended September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $111 $125 $145 $155
Income taxes paid (net
of refunds) 105 72 76 41
Non-cash transactions
Nuclear fuel placed under
capital lease $ 8 $ 24 $ 10 $ 27
Other assets placed under
capital leases 2 3 4 7
Capital leases refinanced - - 21 -
7: Short-Term and Long-Term Financings and Capitalization
In October 1996, Consumers received FERC authorization to issue up to $900
million of short-term securities through 1998. This is the same amount of
short-term securities authorized through 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 September 30, 1996, a total of $340 million was outstanding at a
weighted-average interest rate of 6.0 percent, compared with $474 million
outstanding at September 30, 1995, at a weighted-average interest rate of
6.8 percent. Consumers has an established $500 million trade receivables
purchase and sale program. At September 30, 1996 and 1995, receivables sold
under the agreement totaled $210 million. Accounts receivable and accrued
revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In October 1996, Consumers requested FERC authorization to issue $500
million of long-term securities for refunding purposes. The authorization
would apply to the period from December 1996 through November 1998.
Consumers has been required to seek authorization to issue long-term
securities from the FERC since late 1995, when the Michigan legislature
repealed the MPSC's authority to regulate the issuance of securities. Also
in October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan.
In January 1996, four million shares of 8.36 percent Trust Originated
Preferred Securities were issued and sold through Consumers Power Company
Financing I, a business trust wholly owned by Consumers. Net proceeds from
the sale totaled $97 million. The business trust was formed for the sole
purpose of issuing the Trust Originated Preferred Securities, and the
primary asset of the trust is $103 million of 8.36 percent unsecured
subordinated deferrable interest notes issued by Consumers and maturing in
2015. Consumers' obligations with respect to the Trust Originated Preferred
Securities under the notes, the indenture under which the notes are issued,
Consumers' guarantee of the Trust Originated Preferred Securities, and the
declaration of trust constitute a full and unconditional guarantee by
Consumers of the trust's obligations under the Trust Originated Preferred
Securities.
In September 1996, Consumers extended its nuclear fuel lease an additional
year to November 1998.
In October 1996, Consumers declared a $48 million common dividend to be paid
in November 1996.
<PAGE>
<PAGE> 50
Consumers Power Company
Management's Discussion and Analysis
This MD&A should be read along with the MD&A in Consumers' 1995 Form 10-K.
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 that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. In
addition to certain contingency matters (and their respective cautionary
statements) discussed elsewhere in this 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 Periods Ended September 30, 1996 and 1995
In Millions
Consolidated Earnings at September 30 1996 1995 Change
Quarter $ 60 $ 56 $ 4
Nine months 203 181 22
Twelve months 249 217 32
The earnings in each period in 1996 reflect the favorable impact of an
electric rate increase received in February 1996. The nine-month and
twelve-month periods in 1996 reflect increased electric sales, gas
deliveries, and revenues from gas loaning activities. In addition, other
operating income increased for all periods in 1996 due to a FERC-ordered
refund received by the MCV Partnership from a gas pipeline supplier. The
FERC Order required combining the capital cost of common-use facility
additions with the cost of existing common-use facilities for the purpose
of determining the gas transportation rates to be charged to all system
shippers, including the MCV Facility. As a result, in August 1996, the
MCV Partnership recognized a $19 million reduction to fuel costs in its
current operating results. This resulted in a $6 million earnings benefit
in 1996 for Consumers. For further information, see the Electric and Gas
Utility Results of Operations sections of this MD&A.
Cash Position, Investing and Financing
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 $458 million and $318 million for the first
nine months of 1996 and 1995, respectively. The $140 million increase
resulted from increased electricity sales and gas deliveries, lower cash
losses associated with the PPA, and changes in the timing of cash payments
related to Consumers' operations. Consumers uses its operating cash
primarily to maintain and expand its electric and gas systems, retire
portions of its long-term debt, and pay dividends.
Investing Activities: Net cash used in investing activities totaled $359
million and $355 million for the first nine months of 1996 and 1995,
respectively. Cash used for increased capital expenditures was largely
offset by reduced costs to retire property.
Financing Activities: Net cash used in financing activities totaled $101
million for the first nine months of 1996, compared with $17 million
provided by financing activities for the corresponding period in 1995.
The net increase of $118 million in cash used in 1996 reflects an
additional $44 million in common dividends paid, the redemption of $36
million of maturing first mortgage bonds, and a net decrease of $136
million in cash received from short-term borrowings compared with 1995.
These changes were partially offset by $97 million in proceeds from the
sale of Trust Originated Preferred Securities (see Note 7) in 1996.
In October 1996, Consumers declared a $48 million common dividend to be
paid in November 1996. Consumers temporarily suspended its common
dividends from mid-1995 until early 1996 to improve its capital structure.
Other Investing and Financing Matters: Consumers has several available,
unsecured, committed lines of credit totaling $145 million and a $425
million working capital facility. At September 30, 1996, Consumers had a
total of $340 million outstanding under these facilities. In October
1996, Consumers received FERC authorization to issue up to $900 million of
short-term securities through 1998. This is the same amount of short-term
securities authorized through 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 September 30, 1996 and 1995, receivables sold totaled $210
million. In October 1996, Consumers requested FERC authorization to issue
$500 million of long-term securities for refunding purposes. Also in
October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan.
Electric Utility Results of Operations
Electric Pretax Operating Income for the Periods Ended September 30, 1996
and 1995:
In Millions
Electric Pretax Operating
Income at September 30 1996 1995 Change
Quarter $ 126 $ 125 $ 1
Nine months 323 295 28
Twelve months 390 346 44
Electric pretax operating income in each period in 1996 reflects the
favorable impact of an electric rate increase received in February 1996.
The nine-month and twelve-month periods also reflect the benefit of
increased sales and lower maintenance expenses. The increases in each
period were partly offset by decreased revenues due to special contract
discounts negotiated with large industrial customers and increased
depreciation and operation expenses, and, for the nine-month and twelve-
month periods, higher general taxes. The following table quantifies these
impacts:
In Millions
Impact on Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales (net of special
contract discounts) $(12) $ (3) $11
Rate increases and other
regulatory issues 13 32 32
Operations and maintenance - 8 12
General taxes and
depreciation (1) (12) (19)
Other 1 3 8
----- --- ---
Total change $ 1 $28 $44
===== === ===
Electric Sales: Total electric sales increased for the quarter ended (2.7
percent), nine months ended (3.7 percent), and twelve months ended
September 30, 1996 (3.4 percent) over the comparable 1995 periods. The
table below reflects these electric kWh sales increases by class of
customer for the various periods.
<TABLE>
<CAPTION>
In Billions of kWh
Electric Sales
Quarter ended Sept. 30 Nine months ended Sept. 30 12 months ended Sept. 30
1996 1995 Var. 1996 1995 Var. 1996 1995 Var.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 2.8 3.0 (0.2) 8.2 8.1 0.1 10.8 10.6 0.2
Commercial 2.7 2.7 - 7.5 7.3 0.2 9.8 9.5 0.3
Industrial 3.4 3.2 0.2 9.5 9.5 - 12.7 12.6 0.1
Other 0.9 0.6 0.3 2.5 1.8 0.7 3.2 2.6 0.6
--- --- --- ---- ---- --- ---- ---- ---
Total sales 9.8 9.5 0.3 27.7 26.7 1.0 36.5 35.3 1.2
=== === === ==== ==== === ==== ==== ===
</TABLE>
Power Costs:
In Millions
Power Costs at September 30 1996 1995 Change
Quarter $ 282 $270 $ 12
Nine months 802 731 71
Twelve months 1,041 958 83
The increases in each period resulted primarily from 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 termination of the PPA in 2025. 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. 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 $28 million for the first nine 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. The total estimated cash
underrecoveries are not expected to change under the settlement agreement as
proposed, although the years in which they occur could vary from the
schedule shown in the above table. 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 proposed settlement agreement, 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: In early 1996, the MPSC granted Consumers
authority to increase its annual electric retail rates by $46 million, in
response to Consumers' 1994 request. 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 during the fourth quarter of 1996. For more information
regarding the electric rate order and the proposed settlement agreement, 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 in depreciation expense associated with
this transfer. If the MPSC approves both aspects of the request, the net
result will 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 agreement. In the
proposed settlement, the depreciation of the Palisades and Big Rock nuclear
generating plants would be accelerated while overall depreciation rates
would remain the same.
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 Environmental Matters: The 1990 amendment of the Clean Air Act
significantly increased the environmental constraints that utilities will
operate under in the future. While the Clean Air Act's provisions require
Consumers to make certain capital expenditures in order to comply with the
amendments for nitrogen oxide reductions, Consumers' generating units are
currently operating at or near the sulfur dioxide emission limits that will
be effective in the year 2000. Final acid rain program nitrogen oxide
regulations are expected to be issued in late 1996. Management believes
that Consumers' annual operating costs will not be materially affected.
Part 201 of the Michigan Natural Resources and Environmental Protection Act
was substantially amended in 1995 and bears some similarities to Superfund.
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 that 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. Consumers
does not plan to load or unload any casks before the end of 1996, including
a cask in which 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 data from testing of similar materials indicated that the
Palisades reactor vessel can be safely operated through late 1999; however,
an analysis that Consumers submitted to the NRC for review in April 1996
suggests that the reactor vessel could be safely operated beyond 1999
without annealing. Nevertheless, Consumers is currently developing a
contingency plan to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million, which would likely allow for operation of the
plant to the end of its license life in the year 2007 or beyond. Consumers
cannot predict whether the NRC will concur with the April 1996 analysis or,
if the NRC does concur, whether these analyses will result in a future
decision to adopt or postpone annealing.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock. At
September 30, 1996, Consumers had 31 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,
liquidity or results of operations.
Gas Utility Results of Operations
Gas Pretax Operating Income for the Periods Ended September 30, 1996 and
1995:
In Millions
Gas Pretax Operating Income (Loss)
at September 30 1996 1995 Change
Quarter $ (1) $ 2 $ (3)
Nine months 112 110 2
Twelve months 153 139 14
The quarter ended September 30, 1996 reflects lower deliveries and higher
operating costs. The nine-month and twelve-month periods ended in 1996
benefited from increased gas deliveries due to growth and colder weather,
and revenues from gas loaning activities. During the comparable periods in
1995, a previously recorded gas contract contingency (see Note 3) was
reversed, and operation, depreciation and general tax expenses were lower.
The following table quantifies these impacts:
In Millions
Impact on Pretax Operating Income
Quarter ended Nine months ended 12 months ended
1996 compared 1996 compared 1996 compared
with 1995 with 1995 with 1995
Sales $ 1 $24 $50
Reversal of gas contingencies - (23) (23)
Recovery of gas costs and
other issues 2 3 3
Gas loaning activities - 7 7
Operations and maintenance (6) (5) (16)
General taxes and depreciation - (4) (7)
--- --- ----
Total change $(3) $ 2 $14
=== === ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility, decreased for the quarter ended (5.1 percent), but increased for
the nine months ended (8.9 percent), and twelve-months ended September 30,
1996 (14.2 percent) when compared with the corresponding 1995 periods. The
increased deliveries reflect growth resulting from customer additions,
conversions to natural gas from alternative fuels, continued strength in the
Michigan economy and, for the nine months ended and twelve-months ended
September 30, 1996, colder temperatures. Although the industrial sector,
for the nine months ended September 30, 1996, accounted for approximately
20% of total deliveries, it contributed almost 40% of the weather-adjusted
growth. The table below indicates total system deliveries and the impact of
weather:
In Bcf
Gas Deliveries
Nine months ended 12 months ended
Sept. 30 Sept. 30
1996 1995 Var. 1996 1995 Var.
Weather-adjusted deliveries 234.5 223.5 11.0 337.1 321.0 16.1
(variance reflects growth)
Impact of weather 6.6 (2.1) 8.7 17.4 (10.5) 27.9
----- ----- ---- ----- ------ ----
System deliveries
excluding transport
to MCV 241.1 221.4 19.7 354.5 310.5 44.0
Transport to MCV 48.6 39.9 8.7 62.4 58.2 4.2
----- ----- ---- ----- ----- ----
Total system deliveries 289.7 261.3 28.4 416.9 368.7 48.2
===== ===== ==== ===== ===== ====
Cost of Gas Sold:
In Millions
Cost of Gas Sold at September 30 1996 1995 Change
Quarter $ 51 53 $ (2)
Nine months 504 435 69
Twelve months 740 622 118
The increases for the nine-month and twelve-month periods were the result of
increased sales and the reversal of a $23 million gas contract contingency
during the first quarter of 1995.
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 filed a petition for rehearing with the MPSC, requesting
reconsideration of certain issues. This petition was denied in June 1996
and the matter is now closed.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to bypass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In 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 will vigorously oppose any claims
they may raise, but cannot predict the outcome of this issue.
Gas loaning activities are new transactions for Consumers. In that regard,
an issue has arisen about whether revenue from these activities should be
transferred to customers. Consumers strongly disagrees with this suggestion
but is unable to predict the outcome of any regulatory proceeding where this
issue has arisen.
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 September 30,
1996, Consumers has accrued a liability for $48 million and has established
a regulatory asset for approximately the same amount. Any significant
change in assumptions such as remediation technique, nature and extent of
contamination and regulatory requirements, could affect the estimate of
remedial action costs for the sites.
In accordance with an MPSC rate order, 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 that may be incurred for these sites. For further
information regarding environmental matters, see Note 4.
Forward-Looking Information
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.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include
prevailing governmental policies and regulatory actions (including those of
the FERC and the MPSC) with respect to rates, industry and rate structure,
operation of nuclear power facilities, acquisition and disposal of assets
and facilities, operation and construction of plant facilities, operation
and construction of natural gas pipeline and storage facilities, recovery of
the cost of purchased power or natural gas, decommissioning costs, and
present or prospective wholesale and retail competition, among others. The
business and profitability of Consumers are also influenced by economic and
geographic factors including political and economic risks, changes in
environmental laws and policies, weather conditions, competition for retail
and wholesale customers, pricing and transportation of commodities, market
demand for energy, inflation, capital market conditions, and the ability to
secure agreement in pending negotiations, among other important factors.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond the control of
Consumers.
Capital Expenditures: Consumers estimates the following capital
expenditures, including new lease commitments, by company and by business
segment over the next three years:
In Millions
Years Ended December 31 1996 1997 1998
Consumers
Construction $403 $344 $334
Nuclear fuel lease 34 4 27
Capital leases other than
nuclear fuel 4 19 11
Michigan Gas Storage 9 3 3
---- ---- ----
$450 $370 $375
==== ==== ====
Electric utility operations (a) $315 $260 $275
Gas utility operations (a) 135 110 100
---- ---- ----
$450 $370 $375
==== ==== ====
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric and
gas utility businesses.
These estimates are prepared for planning purposes and are subject to
revision.
Electric Outlook, Sales and Competition: 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. In April 1996, the MPSC directed
Consumers, Detroit Edison, and other electric utilities to file applications
addressing the recommendation of the Michigan Jobs Commission to allow a
choice of power suppliers for new industrial and commercial electric load.
Consumers filed a proposed plan for open access transmission services, under
which Consumers could meet new demand in its service area by delivering
electricity from any supplier capable of providing power to Consumers'
electric system, provided certain reciprocity and other conditions were met.
Among the other conditions was a requirement that stranded costs would be
fully recovered from existing customers. 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, Detroit Edison,
and the Jobs Commission have continued to meet for the purpose of confirming
the principles, such as full recovery of stranded costs in the event of
expanded choice by retail customers, upon which a new regulatory and
statutory framework for the electric utility business in Michigan would be
based. Once established, those principles could in turn form the basis for
definitive agreements, filings with the MPSC, and revised statutes. These
parties are hopeful that the principles and definitive agreements would
receive the support of other interested parties such as the MPSC staff.
There can be no assurance that the necessary agreements will be reached,
that regulatory approvals will be granted, and that necessary legislation
will be passed, nor can a definitive timetable be established at this time
for realization of these events.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid. Order 888
requires public utilities owning, controlling, or operating transmission
lines in interstate commerce to file non-discriminatory open access tariffs
that contain minimum terms and conditions of non-discriminatory service,
allows utilities to charge their current conforming transmission rates or
apply for new rates, and provides for the full recovery of stranded costs.
Order 888 also requires power pools to restructure their ongoing operations
and open up to non-utility members. Order 889 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 became effective in July 1996. In addition, the FERC issued a
NOPR in April 1996 that 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 Order 888 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 full impact of
the FERC's Orders on its financial position, liquidity or results of
operations. In July 1996, Consumers filed an open access transmission
tariff and conforming transmission rate change in response to Order 888.
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 that would displace retail service by Consumers to an
entire community; and competition from neighboring utilities that offer
flexible rate arrangements designed to encourage movement of facilities or
production to their service areas. Consumers continues to work toward
retaining its current retail service customers.
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, 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 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,
and has since approved long-term sales contracts with other major customers
representing a substantial percentage of Consumers' industrial load deemed
to have viable cogeneration alternatives. These orders have been appealed
by the Attorney General.
In addition to offering electric rates that are competitive with those of
other energy providers, Consumers is pursuing numerous other strategies to
retain its other large customers. These strategies include improving
reliability, power quality and customer communications, and providing
consulting services to help customers use energy efficiently. Consumers is
also taking steps to prepare for a future environment in which open access
is the predominant means by which large industrial and commercial customers
provide for their power requirements.
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 July 1996, an electric marketer filed applications with the MPSC for
approval to sell electricity generated outside of Michigan to certain of
Consumers' industrial customers. These customers purchase approximately 100
MW annually from Consumers. There is currently no MPSC-approved program of
retail access that would allow the transactions requested by this electric
marketer to take place. Consumers intends to vigorously oppose the creation
of any such program before the MPSC and in the courts; however, Consumers
cannot predict the ultimate outcome of this matter.
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 might 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 that will support increased load
requirements in the future. These strategies include increased efforts to
promote natural gas to both current and potential customers that are using
other fuels for space and water heating. In addition, as air quality
standards continue to become more stringent, management believes that
greater opportunities exist for converting industrial boiler load and other
processes to natural gas. Consumers also plans additional capital
expenditures to construct new gas mains that are expected to expand
Consumers' system. Actual gas deliveries in future periods may be affected
by abnormal weather, alternative energy prices, changes in competitive
conditions, and the level of natural gas consumption.
In 1996, the Low Income Home Energy Assistance Program provided $58 million
in heating assistance to Michigan households, with approximately 19 percent
of funds going to Consumers' customers. Federal legislative approval
provided Michigan residents with $55 million of funding for 1997. Consumers
therefore does not anticipate a significant change in its revenues from this
program in 1997.
In October 1996, the MPSC issued an order requesting Consumers and other
local distribution companies whose rates are regulated by the MPSC to
develop pilot programs that would allow any customers to purchase gas from
other suppliers and have the gas transported through local pipelines. These
pilot programs, which are to be implemented in the second quarter of 1997,
are intended to help the MPSC determine whether it is appropriate to allow
all customers access to the competitive gas transportation market.
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.
<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' Form 10-K for the
year ended December 31, 1995, and in Forms 10-Q for the quarters ended
March 31, 1996 and June 30, 1996. 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.
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, which upheld the Commission's orders. In the meantime, the MPSC
has been implementing the settlement in reconciliation cases for 1993,
1994 and subsequent years. As part of its decision in the 1993 PSCR
reconciliation case issued in February 1995, the MPSC disallowed
approximately 2.5% of the costs related to purchases from the MCV
Partnership, and instead assumed recovery of those costs from wholesale
customers. Consumers believed this was contrary to the terms of the
Settlement Order and appealed the February 1995 order on this issue. The
MCV Partnership and ABATE filed separate appeals of this order. In
November 1996, the Court of Appeals affirmed the MPSC's order in all
respects. This proceeding is now closed.
STRAY VOLTAGE LAWSUITS
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when low level electrical currents present in grounded
electric systems are diverted from their intended path. At September 30,
1996, Consumers had 31 separate stray voltage cases awaiting action at the
trial court level and 10 cases on appeal or involved in the post-trial
process.
MPSC CASE NO. U-10029 - INTRASTATE GAS SUPPLY
In February 1993, the MPSC issued an order granting Consumers' request to
lower the price to be paid an intrastate gas supplier, North Michigan, who
then filed an appeal with the Court of Appeals. The Court of Appeals
affirmed the MPSC order and denied North Michigan's motion for
reconsideration. The Michigan Supreme Court denied North Michigan's
application for leave to appeal the Court of Appeals' decision. In
September 1996, North Michigan filed a petition for a writ of certiorari
with the U.S. Supreme Court to review the Michigan Supreme Court's
decision. The petition alleges that the procedures under Public Act 9 of
the Michigan statutes, and Act 9 as applied and on its face, denied North
Michigan its constitutional rights to due process of law. Collateral
suits are still pending in the Court of Appeals.
ENVIRONMENTAL MATTERS
INDEPENDENT POWER PRODUCTION PROJECT
In June 1996, CMS Generation Operating Company, a CMS Generation
subsidiary, was informed by the U.S. Attorney's Office and the EPA of a
criminal investigation involving alleged violations of RCRA and
Superfund. These officials were investigating allegedly improper ash
disposal that may have occurred during 1993 at a plant in California
operated by CMS Generation Operating Company during the period in
question. In October 1996, CMS Generation Operating Company and the
officials investigating the matter signed a pretrial diversion agreement
under which CMS Generation Operating Company agrees to pay an amount
toward cleanup costs to the entity conducting the cleanup at the plant,
and the U.S. Attorney's Office agrees that there will be no prosecution of
CMS Generation Operating Company with respect to the matters alleged.
Payment of restitution under the pretrial diversion agreement will not
have a material adverse effect on the financial condition of CMS Energy.
This matter is now closed as it relates to CMS Energy and its
subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(12) - CMS Energy: Statements regarding computation of
Ratio of Earnings to Fixed Charges
(15) - CMS Energy: Letter of Independent Public
Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) Reports on Form 8-K
There have been no Current Reports on Form 8-K filed since the filing of
CMS Energy Corporation's and Consumers Power Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
<PAGE>
<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Date: November 12, 1996 By A M Wright
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CONSUMERS POWER COMPANY
(Registrant)
Date: November 12, 1996 By A M Wright
Alan M. Wright
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE>
<TABLE>
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges
(Millions of Dollars)
<CAPTION>
Nine Months
Ended Years Ended December 31
Sept. 30, 1996 1995 1994 1993 1992 1991
(b) (c)(d)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings as defined (a)
- -----------------------
Net income $ 196 $ 204 $ 179 $ 155 $(297) $(262)
Income taxes 116 118 92 75 (146) (94)
Exclude equity basis subsidiaries (61) (57) (18) (6) 10 10
Fixed charges as defined, adjusted to
exclude capitalized interest of $5,
$8, $6, $5, $3, and $5 million for
the nine months ended September 30,
1996 and for the years ended
December 31, 1995, 1994, 1993,
1992 and 1991, respectively 222 280 237 245 228 364
------------------------------------------------------------
Earnings as defined $ 473 $ 545 $ 490 $ 469 $(205) $ 18
============================================================
Fixed charges as defined (a)
- ----------------------------
Interest on long-term debt $ 174 $ 224 $ 193 $ 204 $ 169 $ 274
Estimated interest portion of lease rental 7 9 9 11 16 17
Other interest charges 19 27 18 24 35 68
Preferred securities dividends
and distributions 41 42 36 17 16 15
------------------------------------------------------------
Fixed charges as defined $ 241 $ 302 $ 256 $ 256 $ 236 $ 374
============================================================
Ratio of earnings to fixed charges 1.96 1.81 1.91 1.83 - -
============================================================
<FN>
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K.
(b) For the year ended December 31, 1992, fixed charges exceeded earnings by $441 million. Earnings as defined include
a $520 million 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>
Exhibit (15)
ARTHUR ANDERSEN LLP
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
its Registration Statements No. 33-29681, No. 33-47629, No. 33-57719, No.
33-57719-01, No. 33-64044, No. 33-60007, No. 33-61595, No. 33-62573 and
No. 333-01261 its Form 10-Q for the quarter ended September 30, 1996,
which includes our report dated November 11, 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,
November 11, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,396
<OTHER-PROPERTY-AND-INVEST> 1,773
<TOTAL-CURRENT-ASSETS> 785
<TOTAL-DEFERRED-CHARGES> 1,337
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,291
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 1,979
<RETAINED-EARNINGS> (354)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,619
100
356
<LONG-TERM-DEBT-NET> 2,044
<SHORT-TERM-NOTES> 341
<LONG-TERM-NOTES-PAYABLE> 952
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 161
0
<CAPITAL-LEASE-OBLIGATIONS> 92
<LEASES-CURRENT> 37
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,582
<TOT-CAPITALIZATION-AND-LIAB> 8,291
<GROSS-OPERATING-REVENUE> 3,150
<INCOME-TAX-EXPENSE> 116
<OTHER-OPERATING-EXPENSES> 2,614
<TOTAL-OPERATING-EXPENSES> 2,739
<OPERATING-INCOME-LOSS> 411
<OTHER-INCOME-NET> (9)
<INCOME-BEFORE-INTEREST-EXPEN> 411
<TOTAL-INTEREST-EXPENSE> 188
<NET-INCOME> 223
27
<EARNINGS-AVAILABLE-FOR-COMM> 196
<COMMON-STOCK-DIVIDENDS> 75
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 520
<EPS-PRIMARY> 2.02<F1>
<EPS-DILUTED> 0
<FN>
<F1> EPS for CMS Energy Common Stock $2.02
EPS for Class G Common Stock $1.38
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,396
<OTHER-PROPERTY-AND-INVEST> 726
<TOTAL-CURRENT-ASSETS> 579
<TOTAL-DEFERRED-CHARGES> 1,197
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,898
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 504
<RETAINED-EARNINGS> 326
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,701
100
356
<LONG-TERM-DEBT-NET> 1,473
<SHORT-TERM-NOTES> 340
<LONG-TERM-NOTES-PAYABLE> 403
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 60
0
<CAPITAL-LEASE-OBLIGATIONS> 89
<LEASES-CURRENT> 37
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,369
<TOT-CAPITALIZATION-AND-LIAB> 6,898
<GROSS-OPERATING-REVENUE> 2,740
<INCOME-TAX-EXPENSE> 125
<OTHER-OPERATING-EXPENSES> 2,272
<TOTAL-OPERATING-EXPENSES> 2,406
<OPERATING-INCOME-LOSS> 334
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 343
<TOTAL-INTEREST-EXPENSE> 113
<NET-INCOME> 230
27
<EARNINGS-AVAILABLE-FOR-COMM> 203
<COMMON-STOCK-DIVIDENDS> 114
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 458
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Power Company ("Consumers") and
its wholly-owned subsidiary, Michigan Gas Storage Company) as of September
30, 1996 and 1995, and the related statements of income, common
stockholders' equity and cash flows for the three-month, nine-month and
twelve-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Consumers Gas Group as of December 31,
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,
November 11, 1996.
<PAGE>
<PAGE> 2
<TABLE>
Consumers Gas Group
Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE $ 123 $ 122 $ 880 $ 801 $1,274 $1,116
------- ------- ------- ------- ------- -------
OPERATING EXPENSES
Operation
Cost of gas sold 51 53 504 435 740 622
Other 48 42 139 135 201 183
------- ------- ------- ------- ------- -------
Total operation 99 95 643 570 941 805
Maintenance 9 9 27 27 39 37
Depreciation, depletion and amortization 9 10 60 57 86 82
General taxes 7 6 38 37 55 53
------- ------- ------- ------- ------- -------
Total operating expenses 124 120 768 691 1,121 977
------- ------- ------- ------- ------- -------
PRETAX OPERATING INCOME (LOSS) (1) 2 112 110 153 139
INCOME TAXES (3) (1) 35 35 48 44
------- ------- ------- ------- ------- -------
NET OPERATING INCOME 2 3 77 75 105 95
------- ------- ------- ------- ------- -------
OTHER INCOME (DEDUCTIONS) - - (2) - (2) (1)
------- ------- ------- ------- ------- -------
FIXED CHARGES
Interest on long-term debt 7 8 22 23 29 31
Other interest 2 2 4 4 6 6
Capitalized interest - (1) - (1) - (1)
Preferred dividends 2 2 5 5 6 6
------- ------- ------- ------- ------- -------
Net fixed charges 11 11 31 31 41 42
------- ------- ------- ------- ------- -------
NET INCOME (LOSS) $ (9) $ (8) $ 44 $ 44 $ 62 $ 52
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) ATTRIBUTABLE TO CMS ENERGY
SHAREHOLDERS THROUGH RETAINED INTEREST $ (6) $ (7) $ 34 $ 45 $ 48 $ 53
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) ATTRIBUTABLE TO
CLASS G SHAREHOLDERS $ (3) $ (1) $ 10 $ (1) $ 14 $ (1)
======= ======= ======= ======= ======= =======
AVERAGE CLASS G COMMON SHARES OUTSTANDING 8 7 8 7 8 7
======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER AVERAGE CLASS G COMMON SHARE $ (.28) $ (.17) $ 1.38 $ (.17) $ 1.92 $ (.17)
======= ======= ======= ======= ======= =======
DIVIDENDS DECLARED PER CLASS G COMMON SHARE $ .295 $ .28 $ .855 $ .28 $ 1.135 $ .28
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 3
<TABLE>
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30 September 30
1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 44 $ 44 $ 62 $ 52
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 60 57 86 82
Capital lease and other amortization 3 3 5 4
Deferred income taxes and investment tax credit 10 19 4 17
Other 1 1 1 1
Changes in other assets and liabilities (39) (59) 36 (53)
------ ------ ------ ------
Net cash provided by operating activities 79 65 194 103
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under
capital lease) (94) (77) (141) (124)
Cost to retire property, net (7) (6) (11) (9)
Other 1 1 2 2
------ ------ ------ ------
Net cash used in investing activities (100) (82) (150) (131)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net 48 59 (5) 77
Proceeds from long-term note 22 - 22 -
Contribution from CMS Energy stockholders 3 9 12 9
Payment of common stock dividends (27) (49) (36) (65)
Retirement of bonds and other long-term debt (8) (2) (14) (3)
Payment of capital lease obligations (3) (2) (6) (3)
Repayment of bank loans - - - (76)
Proceeds from bank loans - - - 88
------ ------ ------ ------
Net cash provided by (used in) financing activities 35 15 (27) 27
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 14 (2) 17 (1)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 5 4 2 3
------ ------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 19 $ 2 $ 19 $ 2
====== ====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 4
<TABLE>
Consumers Gas Group
Balance Sheets
<CAPTION>
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
ASSETS
<S> <C> <C> <C>
PLANT (At original cost)
Plant $2,268 $2,169 $2,132
Less accumulated depreciation, depletion and amortization 1,232 1,179 1,164
------ ------ ------
1,036 990 968
Construction work-in-progress 53 55 48
------ ------ ------
1,089 1,045 1,016
------ ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost,
which approximates market 19 5 2
Accounts receivable and accrued revenue, less
allowances of $1, $2 and $2, respectively (Note 6) 39 99 49
Inventories at average cost
Gas in underground storage 250 184 263
Materials and supplies 9 10 10
Trunkline settlement 30 30 30
Deferred income taxes 7 9 1
Prepayments and other 22 49 22
------ ------ ------
376 386 377
------ ------ ------
NON-CURRENT ASSETS
Postretirement benefits 156 161 160
Deferred income taxes 14 14 7
Trunkline settlement 2 25 33
Other 58 59 65
------ ------ ------
230 259 265
------ ------ ------
TOTAL ASSETS $1,695 $1,690 $1,658
====== ====== ======
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
September 30 September 30
1996 December 31 1995
(Unaudited) 1995 (Unaudited)
In Millions
STOCKHOLDERS' INVESTMENT AND LIABILITIES
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 359 $ 339 $ 321
Preferred stock 78 78 78
Long-term debt 423 411 417
Non-current portion of capital leases 18 20 16
------ ------ ------
878 848 832
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 24 23 21
Notes payable 153 105 158
Accounts payable 69 79 56
Trunkline settlement 30 30 30
Accrued taxes 27 66 22
Accrued refunds 22 20 30
Accrued interest 6 7 7
Other 44 52 40
------ ------ ------
375 382 364
------ ------ ------
NON-CURRENT LIABILITIES
Postretirement benefits 174 175 177
Regulatory liabilities for income taxes, net 171 162 153
Deferred investment tax credit 27 28 29
Trunkline settlement 2 25 33
Other 68 70 70
------ ------ ------
442 460 462
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $1,695 $1,690 $1,658
====== ====== ======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 6
<TABLE>
Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1996 1995 1996 1995 1996 1995
In Millions
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
At beginning and end of period $ 184 $ 184 $ 184 $ 184 $ 184 $ 184
------- ------- ------- ------- ------- -------
OTHER PAID-IN CAPITAL
At beginning of period 128 107 125 107 116 107
Stockholder's contribution - 9 3 9 12 9
------- ------- ------- ------- ------- -------
At end of period 128 116 128 116 128 116
------- ------- ------- ------- ------- -------
RETAINED EARNINGS
At beginning of period 65 38 30 26 21 34
Net income (loss) (9) (8) 44 44 62 52
Common stock dividends declared (9) (9) (27) (49) (36) (65)
------- ------- ------- ------- ------- -------
At end of period 47 21 47 21 47 21
------- ------- ------- ------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 359 $ 321 $ 359 $ 321 $ 359 $ 321
======= ======= ======= ======= ======= =======
<FN>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
<PAGE> 7
Consumers Gas Group
Condensed 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 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 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 (loss) per share for the periods ended September 30, 1996 reflect
the performance of Consumers Gas Group. Loss per share for the periods
ended September 30, 1995 reflects the performance of Consumers Gas Group
since initial issuance of Class G Common Stock in the third quarter of
1995. The earnings (loss) attributable to Class G Common Stock and the
related amounts per share are computed by considering the weighted-average
number of shares of Class G Common Stock outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to 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 is the weighted-average number of Outstanding
Shares and Retained Interest Shares during the period. The earnings
attributable to Class G Common Stock on a per-share basis for the nine
months ended September 30, 1996 are based on 23.67 percent of the
earnings of Consumers Gas Group. The seasonal loss attributable to Class
G Common Stock on a per-share basis for the periods ended September 30,
1995 is based on 23.17 percent of the loss of Consumers Gas Group.
For purpose of analysis, following are pro forma data for the nine months
ended September 30, 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 Consumers
Gas Group) on January 1, 1994, and actual data for the nine months ended
September 30, 1996.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Nine Months Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
1996 1995 1995
Consumers Gas Group net income $ 44 $ 44 $ 62
Net income attributable to
CMS Energy Common Stock
through Retained Interest $ 34 $ 34 $ 47
Net income attributable to
outstanding Class G
Common Stock $ 10 $ 10 $ 15
Average shares outstanding
of Class G Common Stock 7.695 7.521 7.536
Earnings per share attributable
to outstanding Class G
Common Stock $1.38 $1.38 $1.93
The portion of Consumers' common dividends attributed to Consumers Gas
Group, for periods prior to the July 1995 issuance of Class G Common
Stock, have been reflected in the financial statements. These dividend
amounts were allocated based on the ratio of Consumers Gas Group's net
income to Consumers' consolidated net income after dividends on preferred
stock. This ratio was then applied to Consumers' total dividend payments
for these periods. Dividends declared on 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. In July
and October 1996, the Board of Directors declared quarterly dividends of
$.295 per share on Class G Common Stock.
3: Rate Matters
For information regarding rate matters directly affecting 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: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $135 million for 1996, $110 million
for 1997, and $100 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 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
September 30 were:
In Millions
Nine Months Ended Twelve Months Ended
1996 1995 1996 1995
Cash transactions
Interest paid (net of
amounts capitalized) $25 $26 $34 $33
Income taxes paid
(net of refunds) 29 27 27 40
Non-cash transactions
Assets placed under
capital lease $ 1 $ 1 $ 2 $ 3
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
Consumers Gas Group at September 30, 1996 and 1995 is estimated by
management to be $28 million and $29 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 are
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 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 Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the businesses of CMS Energy, including
the nature and issuance of Class G Common Stock, see the MD&A of
CMS Energy included and incorporated by reference herein.
Earnings for the Periods Ended September 30, 1996 and 1995
In Millions
Earnings (loss) at September 30 1996 1995 Change
Quarter $ (9) $ (8) $(1)
Nine months 44 44 -
Twelve months 62 52 10
The quarter reflects lower deliveries and higher operation, maintenance
and general tax expenses. These impacts were partially offset by lower
depreciation expenses. While the nine-month and twelve-month periods
reflect revenues from gas loaning activities and higher gas deliveries,
these benefits were partially offset by the reversal of a previously
recorded gas contract contingency in 1995 and higher operation,
depreciation and general tax expenses during 1996.
Cash Position, Investing and Financing
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 nine months of 1996 and 1995 totaled
$79 million and $65 million, respectively. The $14 million increase
primarily reflects changes in the timing of cash payments related to
Consumers Gas Group's operations. Consumers Gas Group uses its operating
cash mainly to maintain and expand its gas utility transmission and
distribution systems and to retire portions of its long-term debt and pay
dividends.
Investing Activities: Net cash used in investing activities totaled $100
million and $82 million for the first nine months of 1996 and 1995,
respectively. The $18 million increase resulted from higher capital
expenditures.
Financing Activities: Net cash provided by financing activities in the
first nine months of 1996 and 1995 totaled $35 million and $15 million,
respectively. The $20 million increase reflects cash from the sale of
Trust Originated Preferred Securities and a reduction in cash used to pay
common stock dividends, partially offset by a net decrease in cash
received from short-term borrowings.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At September 30, 1996, receivables sold totaled $210 million. Consumers
Gas Group's attributed portion of these receivables sold totaled $28
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
For cautionary statements relating to Consumers Gas Group's forward-
looking information, see "Forward-Looking Information" in CMS Energy's
MD&A included and incorporated by reference herein.
Capital Expenditures: CMS Energy estimates the following capital
expenditures for Consumers Gas Group, including new lease commitments,
over the next three years.
In Millions
Years Ended December 31 1996 1997 1998
Gas utility (a) $126 $107 $ 97
Michigan Gas Storage 9 3 3
---- ---- ----
$135 $110 $100
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to
Consumers' gas and electric utility businesses.
These estimates are 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 Forward-
Looking Information discussions in CMS Energy's MD&A included and
incorporated by reference herein.
<PAGE>
