<PAGE> 1
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue
Jackson, Michigan 49201
(517)788-0550
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Exchange on
Registrant Title of Class Which Registered
New York
CMS Energy Corporation Common Stock, $.01 par value Stock Exchange
New York
Class G Common Stock, no par value Stock Exchange
Consumers Energy Company Listed on inside cover
Consumers Power Company 8.36% Trust Originated New York
Financing I Preferred Securities Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE>
<PAGE> 2
Consumers Energy Company securities registered pursuant to Section 12(b)
of the Act:
PREFERRED STOCK - Cumulative FIRST MORTGAGE BONDS:
No par value: 6-7/8% Series due 1998
$2.08 Series 6-5/8% Series due 1998
7-1/2% Series due 2001
$100 par value: 7-1/2% Series due 2002
$4.16 Series $7.68 Series
$4.50 Series $7.72 Series
$7.45 Series $7.76 Series
These securities are listed on the New York Stock Exchange.
The aggregate market value of the voting stock of CMS Energy Corporation
held by non-affiliates was $3,258,739,364 based on the closing sale price
of $32-3/4 per share for the 94,968,080 common shares, $.01 par value
CMS Energy Common Stock and $18-3/4 per share for the 7,921,853 common
shares, no par value Class G Common Stock, each outstanding on
February 28, 1997.
CMS Energy held all 84,108,789 outstanding common shares, $10 par value,
of Consumers Energy Company, and the aggregate market value of the voting
preferred stock of Consumers held by non-affiliates was $141,288,486 based
on the closing sale prices shown below.
Aggregate market value of Consumers' voting stock held by non-affiliates.
Number Shares Transaction
Type of Stock Outstanding Price/Share Date Market Value
(2/28/97)
Preferred:
$4.16 68,451 $57 2/27/97 $ 3,901,707
4.50 373,148 58 2/28/97 21,642,584
7.45 379,549 96 2/28/97 36,436,704
7.68 207,565 97 2/26/97 20,133,805
7.72 289,642 99 2/18/97 28,674,558
7.76 308,072 99 2/28/97 30,499,128
--------- ------------
Total 1,626,427 $141,288,486
========= ============
Documents incorporated by reference:
The Registrants' proxy statements relating to the 1997 annual meetings of
shareholders to be held May 27, 1997, are incorporated by reference in
Part III, except for the organization and compensation committee report
and cumulative total return performance graph contained therein.
<PAGE>
<PAGE> 3
CMS ENERGY CORPORATION
and
CONSUMERS ENERGY COMPANY
ANNUAL REPORTS ON FORM 10-K
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1996
This combined Form 10-K is separately filed by CMS Energy Corporation and
Consumers Energy Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Energy Company makes
no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 37
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 40
PART II
Item 5. Market for CMS Energy's and Consumers' Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . . 41
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 41
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 41
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . 42
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . .140
PART III
Item 10. Directors and Executive Officers of CMS Energy and Consumers. .140
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . .140
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . .140
Item 13. Certain Relationships and Related Transactions. . . . . . . . .140
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . .140
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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
AMT . . . . . . . . . . . . . Alternative minimum tax
Articles. . . . . . . . . . . Articles of Incorporation
Attorney General. . . . . . . Michigan Attorney General
bcf . . . . . . . . . . . . . Billion cubic feet
Big Rock. . . . . . . . . . . Big Rock Point nuclear power plant, owned by
Consumers
Board of Directors. . . . . . Board of Directors of CMS Energy
Btu . . . . . . . . . . . . . British thermal unit
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
Cherokee. . . . . . . . . . . Cherokee Gas Processing, a partnership of
CMS Gas Transmission and Heritage Gas
Services of Tulsa
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 MST . . . . . . . . . . . CMS Marketing, Services and Trading Company,
a subsidiary of Enterprises
CMS NOMECO. . . . . . . . . . CMS NOMECO Oil & Gas Co., a subsidiary of
Enterprises
Common Stock. . . . . . . . . CMS Energy Common Stock and Class G Common
Stock
Consumers . . . . . . . . . . Consumers Energy Company (formerly Consumers
Power Company), a subsidiary of CMS Energy
Consumers Gas Group . . . . . The gas distribution, storage and
transportation businesses currently
conducted by Consumers and Michigan Gas
Storage
Court of Appeals. . . . . . . Michigan Court of Appeals
CTM . . . . . . . . . . . . . Centrales Termicas Mendoza, an indirect
subsidiary of CMS Generation
Detroit Edison. . . . . . . . The Detroit Edison Company
DOE . . . . . . . . . . . . . U.S. Department of Energy
Dow . . . . . . . . . . . . . The Dow Chemical Company
DSM . . . . . . . . . . . . . Demand-side management
EDEER S.A.. . . . . . . . . . Empresa Distribuidora de Electricidad de
Entre Rios S. A., the electric distribution
utility in Entre Rios Province, Argentina
Energy Act. . . . . . . . . . Energy Policy Act of 1992
Enterprises . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
FASB. . . . . . . . . . . . . Financial Accounting Standards Board
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(Registered
Trademark), $250 million Series A, $125
million Series B and $150 million Series C
GVK . . . . . . . . . . . . . GVK Industries, the developer of an
independent power project in Jegurupadu,
Andhra Pradesh, India
Huron . . . . . . . . . . . . Huron Hydrocarbons, Inc., a subsidiary of
Consumers
Hydra-Co. . . . . . . . . . . Hydra-Co Enterprises, Inc., a subsidiary of
CMS Generation
ITC . . . . . . . . . . . . . Investment tax credit
Karn Unit 4 . . . . . . . . . D. E. Karn, Essexville, Michigan
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
MichCon . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage. . . . . Michigan Gas Storage Company, a subsidiary
of Consumers
MHP . . . . . . . . . . . . . Moss Bluff Hub Partners, L. P.
Mbbls . . . . . . . . . . . . Thousand barrels
MMbbls. . . . . . . . . . . . Million barrels
MMBtu . . . . . . . . . . . . Million British thermal unit
MMcf. . . . . . . . . . . . . Million cubic feet
MPSC. . . . . . . . . . . . . Michigan Public Service Commission
MW. . . . . . . . . . . . . . Megawatts
Natural Gas Act . . . . . . . Federal Natural Gas Act
NEIL. . . . . . . . . . . . . Nuclear Electric Insurance Ltd.
Nitrotec. . . . . . . . . . . Nitrotech Corporation, a propriety gas
technology company
NML . . . . . . . . . . . . . Nuclear Mutual Ltd.
NOPR. . . . . . . . . . . . . Notice of Proposed Rulemaking
North Michigan. . . . . . . . North Michigan Land & Oil Corporation
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 power plant, owned by
Consumers
PCB . . . . . . . . . . . . . Polychlorinated biphenyls
Pension Plan. . . . . . . . . The trusteed, non-contributory, defined
benefit pension plan of Consumers and
CMS Energy
PPA . . . . . . . . . . . . . The Power Purchase Agreement between
Consumers and the MCV Partnership with a 35-
year term commencing in March 1990
ppm . . . . . . . . . . . . . Parts per million
PSCR. . . . . . . . . . . . . Power supply cost recovery
PUHCA . . . . . . . . . . . . Public Utility Holding Company Act of 1935
PURPA . . . . . . . . . . . . Public Utility Regulatory Policies Act of
1978
Qualifying Facility . . . . . A facility that produces electricity or
steam and electricity and meets the
ownership and technical requirements of
PURPA.
Rate Reduction Bonds. . . . . A potential financing for Consumers which
has the dual advantages of funding potential
transition costs while simultaneously
reducing customer rates
SEC . . . . . . . . . . . . . Securities and Exchange Commission
SERP. . . . . . . . . . . . . Supplemental Executive Retirement Plan
Settlement Agreement. . . . . MPSC Order issued November 14, 1996 in MPSC
Case Nos. U-10685, U-10754 and U-10787
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 subsidiary of
CMS NOMECO
TGN . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in Argentina
Union . . . . . . . . . . . . Utility Workers of America, AFL-CIO
Unsecured Revolving Credit
Facility. . . . . . . . . . $450 million unsecured revolving credit and
letter of credit facility dated November 21,
1995
UST . . . . . . . . . . . . . Underground storage tanks
Voluntary Employee
Beneficiary Association . . A legal entity, established under guidelines
of the Internal Revenue Code, through which
the company can provide certain benefits for
its employees or retirees
Walter. . . . . . . . . . . . Walter International, Inc., an oil and gas
exploration and production subsidiary of
CMS NOMECO
<PAGE>
<PAGE> 8
PART I
ITEM 1. BUSINESS.
GENERAL
CMS Energy
CMS Energy, incorporated in Michigan in 1987, is the parent holding
company of Consumers and Enterprises. Consumers, a combination electric
and gas utility company serving in all 68 counties of Michigan's Lower
Peninsula, is the largest subsidiary of CMS Energy. Enterprises is engaged
in several domestic and international energy-related businesses including:
oil and gas exploration and production; acquisition, development and
operation of independent power production facilities; energy marketing to
utility, commercial and industrial customers, storage, transmission and
processing of natural gas; and international energy distribution.
CMS Energy is exempt from registration under PUHCA, as described in Item
3. Legal Proceedings.
CMS Energy had consolidated operating revenue in 1996 of $4.3 billion
which was derived 57 percent from its electric utility operations,
30 percent from its gas utility operations, 7 percent from gas
transmission, storage and marketing, 3 percent from oil and gas
exploration and production activities and 3 percent from independent
power production and other non-utility activities. Consumers'
consolidated operations in the electric and gas utility businesses account
for the majority of CMS Energy's total assets, revenue and income. The
unconsolidated share of non-utility electric generation and distribution
and gas transmission and storage revenue for 1996 was $557 million.
Consumers
Consumers was incorporated in Michigan in 1968 and is the successor to a
corporation which was organized in Maine in 1910 and which did business in
Michigan from 1915 to 1968. Consumers was named Consumers Power Company
from 1910 to the first quarter of 1997, when the name was changed to
Consumers Energy Company to reflect its increasing focus on providing
customers with total energy solutions.
Consumers' customer base includes a mix of residential, commercial and
diversified industrial customers, the largest segment of which is the
automotive industry. Consumers is a public utility serving gas or
electricity to almost 6 million of Michigan's 9.5 million residents in all
68 counties in Michigan's Lower Peninsula. Consumers' service area
includes automotive, metal, chemical, food and wood products industries
and a diversified group of other industries.
Consumers had consolidated operating revenue in 1996 of $3.8 billion which
was derived 65 percent from its electric business, 34 percent from its gas
business and 1 percent from its non-utility business. Consumers' rates
and certain other aspects of its business are subject to the jurisdiction
of the MPSC and FERC, as described in CMS Energy and Consumers Regulation
later in this Item.
BUSINESS SEGMENTS
CMS Energy and Consumers Financial Information
For information with respect to operating revenue, net operating income,
assets and liabilities attributable to all of CMS Energy's business
segments, see Item 8. Financial Statements and Supplementary Data -
CMS Energy's Consolidated Financial Statements and Notes to Consolidated
Financial Statements.
For information with respect to the operating revenue, net operating
income, assets and liabilities attributable only to Consumers' business
segments, see Item 8. Financial Statements and Supplementary Data -
Consumers' Consolidated Financial Statements and Notes to Consolidated
Financial Statements.
CMS Energy and Consumers Principal Operations
CMS Energy conducts its principal operations through the following seven
business segments: electric utility operations; gas utility operations;
oil and gas exploration and production operations; independent power
production; energy marketing, services and trading; natural gas storage,
transmission and processing; and international energy distribution.
Consumers conducts CMS Energy's domestic electric and gas utility
operations.
Consumers Electric Utility Operations
Consumers generates, purchases, transmits and distributes electricity in
61 of the 68 counties in the Lower Peninsula of Michigan. Principal
cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers had 1.6 million
electric customers at December 31, 1996. Total electric sales in 1996
were a record 37.1 billion kWh, a 4.4 percent increase from the 1995
levels including a 1.7 percent increase in system sales to Consumers'
ultimate customers. Electric operating revenue in 1996 was $2.4 billion,
an increase of 7.4 percent from 1995. A peak demand of 7,167 MW was
achieved in August 1996, exceeding the 1995 peak by 0.1 percent (or 9 MW).
Peak demand has increased 10.2 percent from the peak achieved in 1994.
Based on actual peaks, Consumers' reserve margin was 12.7 percent in 1996
and 3 percent in 1995. Based on weather-adjusted peaks, Consumers' reserve
margin was 13.3 percent in 1996 and 3.5 percent in 1995.
Including Ludington, in which Consumers has a 51 percent ownership and
capacity entitlement, Consumers owns and operates 28 electric generating
plants with an aggregate net demonstrated capability of 6,256 MW,
available under summer conditions in 1996. In 1996, Consumers purchased
up to 1,648 MW of net capacity, which amounted to 34.3 percent of
Consumers' total system requirements, from independent power producers and
cogenerators, the most significant being the MCV Partnership. See Item 2.
Properties - Consumers Electric Utility Properties.
Consumers' electric generating plants are interconnected by a transmission
system which is itself interconnected at a number of locations with
transmission facilities of unaffiliated systems, including those of other
utilities in Michigan and Indiana. These interconnections permit a
sharing of the reserve capacity of the systems. This allows mutual
assistance during emergencies and substantially reduces investment in
utility plant facilities.
Consumers' electric utility customer base includes a mix of residential,
commercial, and diversified industrial customers, the largest segment of
which is the automotive industry; however, Consumers' electric operations
are not dependent upon a single customer, or even a few customers, the
loss of which would have a material adverse effect on its financial
condition. Consumers' electric operations are seasonal to the extent the
weather may have an effect on revenues. Peak demands for 1996 were
5,925 MW in the winter and 7,167 MW in the summer. For sales by customer
class, see CMS Energy's and Consumers' Sales by Business Segment later in
this Item.
MCV Issues: The MCV Partnership was formed in January 1987 by
subsidiaries of Consumers and Dow to convert a portion of Consumers'
abandoned Midland nuclear plant into a natural gas-fueled, combined-cycle
cogeneration facility. The MCV Facility has been certified as a
Qualifying Facility under PURPA. Consumers' current interests in the MCV
Partnership and the MCV Facility are discussed more fully in Item 8.
Financial Statements and Supplementary Data - Note 3 of Consumers' Notes
to Consolidated Financial Statements.
Fuel: Consumers has five generating plants which use coal as a fuel
source and which constitute 77 percent of its baseload capacity. These
plants combined to produce a total of 16,928 million kWhs in 1996
requiring 7.5 million tons of coal. At December 31, 1996, Consumers had
long-term contracts covering 60 to 70 percent of its coal requirements for
1997. Consumers' coal requirements not under long-term contract must be
supplied through short-term agreements or spot purchases. Consumers' coal
inventory as of December 31, 1996 amounted to approximately 38 days'
supply.
Consumers owns and operates two nuclear power plants, Palisades, near
South Haven, Michigan, and Big Rock, near Charlevoix, Michigan. In 1996,
the combined net generation of these plants was 5,653 million kWhs, which
constitutes 25 percent of Consumers' baseload generation. Consumers
currently has one contract for uranium concentrates sufficient to cover up
to approximately 10 percent of its requirements. Consumers intends to
purchase the balance of its 1997 concentrate and conversion requirements
in the spot market. Consumers has contracts for nuclear fuel services,
including enrichment of uranium hexafluoride and fabrication of nuclear
fuel assemblies. The enrichment contract covers 70 percent of Consumers'
requirements until the year 2000. The fabrication contract was
renegotiated in 1995 for Palisades and remains in effect for the next six
Palisades reloads with options to extend for an additional two reloads.
The Big Rock fabrication contract remains in effect through the end of the
operating license in the year 2000. These contracts are with major
private industrial suppliers of nuclear fuel and related services and with
the United States Government.<PAGE>
<PAGE> 11
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
Power Generated Millions of kWhs
- -----------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------
Coal 16,928 15,956 17,401 16,520 17,024
Nuclear 5,653 5,353 4,904 3,938 5,093
Oil (a) 364 318 322 238 206
Gas (a) 74 238 91 110 12
Hydro 473 420 481 489 490
Net pumped storage (b) (419) (373) (414) (394) (393)
------- ------- ------- ------- -------
Total net generation 23,073 21,912 22,785 20,901 22,432
=======================================================================
(a) Beginning in 1993, reflects the conversion of Karn Unit 4 to a dual
fuel capability enabling the unit to burn natural gas or oil or a
combination of both, having previously only burned oil.
(b) Represents Consumers' share of net generation from Ludington. This
facility pumps water into a storage pond using electricity generated
during off-peak hours, in order to later generate electricity during peak
demand hours.
The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.
Fuel Consumed Cost per Million Btu
- -----------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------
Coal $1.50 $1.51 $1.57 $1.60 $1.62
Oil 2.67 2.64 2.96 2.90 2.73
Gas (a) 3.60 2.18 2.81 3.13 4.73
Nuclear .50 .49 .46 .40 .38
All Fuels (b) 1.27 1.27 1.34 1.39 1.33
=======================================================================
(a) Beginning in 1993, includes combustion turbines and Karn Unit 4.
(b) Weighted average fuel costs.
Under the Nuclear Waste Policy Act of 1982, the federal government is
responsible for the permanent disposal of spent nuclear fuel and high-
level radioactive waste beginning not later than 1998. To date, the DOE
has been unable to arrange for storage facilities to meet this obligation
and has given notice that it anticipates that it will be unable to accept
spent nuclear fuel for storage by 1998. For a discussion of pending
litigation and legislative action relating to the DOE's obligations in
this regard, see Item 3. Legal Proceedings and Item 8. Financial
Statements and Supplementary Data - Note 2 of Consumers' Notes to
Consolidated Financial Statements. Big Rock has the capacity to
accommodate normal spent fuel discharge through the end of its operating
license in 2000. Consumers' on-site storage pool at Palisades is at
capacity and Consumers is currently storing spent nuclear fuel in an on-
site dry cask storage facility. For a discussion relating to the NRC
approval of dry storage casks and Consumers' use of the casks, see Item 8.
Financial Statements and Supplementary Data - Note 13 of Consumers' Notes
to Consolidated Financial Statements.
Consumers Gas Utility Operations
Consumers purchases, transports, stores and distributes gas and renders
gas service to 1.5 million customers and is authorized to serve in 54 of
the 68 counties in Michigan's Lower Peninsula. Principal cities served
include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw,
as well as the suburban Detroit area. It owns gas transmission and
distribution mains and other gas lines, compressor stations and
facilities, storage rights, wells and gathering facilities in several
fields in Michigan. See Item 2. Properties. Consumers and Michigan Gas
Storage store gas during the warmer months of the year for use in the
colder months when demand is higher. Consumers' gas operations are not
dependent upon a single customer, or even a few customers, and the loss of
any one or even a few of such customers would not have a material adverse
effect on its financial condition.
Consumers' gas operations are seasonal to the extent that peak demand
occurs in winter due to colder temperatures. Consumers' consolidated gas
operating revenue was $1.3 billion in 1996, an increase of 7 percent from
1995. The all-time record 24 hour send-out of natural gas for Consumers
on January 19, 1994 was 3.1 bcf. Consumers considers the peak-day
transportation and distribution capacity of the system to be 3.6 bcf.
Deliveries of gas sold by Consumers, and from other sellers over
Consumers' pipeline and distribution network, to ultimate customers,
including the MCV Partnership, totaled 448 bcf in 1996. See CMS Energy's
and Consumers' Sales by Business Segment later in this Item.
Consumers Gas Supply: In 1996, Consumers contracted to purchase
78 percent of its required gas supply. The contract supply included 38
percent from United States producers outside of Michigan, 22 percent from
Canadian producers and 18 percent from Michigan producers. The remaining
22 percent of Consumers' 1996 gas supply requirements were met by
purchases on the spot market.
Consumers' firm transportation agreements are with Trunkline Gas Company,
Panhandle Eastern Pipeline Company, ANR Pipeline Company and Great Lakes
Gas Transmission, L.P. These agreements are utilized by Consumers to
transport its required gas supplies to market and to replenish its storage
fields. In total, Consumers' firm transportation arrangements will carry
almost 90 percent of Consumers' total gas supply requirements. Consumers'
portfolio of firm transportation from pipelines is as follows:
<PAGE>
<PAGE> 13
Volume (dekatherms/day) Expiration
- --------------------------------------------------------------------------
Trunkline Gas Company 41,400 February 1997
336,375 October 2002
Panhandle Eastern Pipeline
Company 40,000 March 2000
25,000 March 2000
ANR Pipeline Company 20,000 October 1999
40,000 October 1999
10,000 December 2001
6,000 December 2002
24,900 October 2003
58,765 October 2003
Great Lakes Gas Transmission,
L.P. 84,000 March 2004
The balance of Consumers' required gas supply is transported on
interruptible contracts. The amount of interruptible capacity and the
utilization thereof is primarily a function of the price for such service
and the availability and price of the spot supplies to be purchased and
transported. Consumers' utilization of interruptible transportation is
generally in off-peak summer months and after its firm capacity has been
fully subscribed.
CMS Energy Oil and Gas Exploration and Production
CMS NOMECO is an oil and natural gas producer with activities in Michigan
and 12 other states, the Gulf of Mexico, Colombia, Congo, Ecuador,
Equatorial Guinea, Tunisia, Venezuela and Yemen. In 1996, it produced 4.8
MMbbls of oil, condensate and plant products and 29.4 bcf of gas, compared
to 4.5 MMbbls and 26.3 bcf in 1995.
During 1996, CMS NOMECO participated with a working interest in drilling
wells as follows:
Number of
Number of Wells Successful Wells Success Ratio
Type of Well Gross Net Gross Net Gross Net
- ------------------------------------------------------------------------
Exploratory 9 2.11 - - 0% 0%
Development 28 7.64 25 6.89 89% 90%
------------ -------------
Total 37 9.75 25 6.89 68% 71%
========================================================================
The previous table does not include CMS NOMECO's participation in Devonian
Shale gas wells in Michigan and Indiana, where CMS NOMECO drilled 297
wells (46.88 net) during 1996 with a 99 percent success rate.
CMS NOMECO has a 14 percent working interest in a consortium which is
conducting oil development and production operations in Block 16 and the
adjoining Tivacuno Block of the Oriente Basin of Ecuador. Production
commenced from these Blocks in 1994. At the end of 1996, the six fields
were producing at a pipeline-constrained rate of 32,900 barrels per day
compared to total production capacity of 44,000 barrels per day. During
the course of 1996, the consortium and the Ecuadorian Ministry of Energy
and Mines negotiated a conversion of the Risk Service Contract (under
which the parties were operating) into a Production Sharing Agreement.
For additional information, see Item 2. Properties - CMS Energy Oil and
Gas Exploration and Production Properties and Item 7. CMS Energy
Management's Discussion and Analysis - Oil and Gas Exploration and
Production.
CMS Energy Independent Power Production
CMS Generation was formed in 1986 and invests in, develops, converts,
constructs and operates non-utility power generation projects both
domestically and internationally. As of January 1997, CMS Generation had
ownership interests in 2,878 MW (gross) capacity in 30 operating power
projects throughout the United States and in Argentina, India, Jamaica,
and the Philippines. These plants are powered by natural gas, wood, coal,
oil, water, scrap tires, naptha and wind. For additional information, see
Item 2. Properties - CMS Energy Other Properties and Item 7. CMS Energy
Management's Discussion and Analysis - Independent Power Production.
CMS Energy Natural Gas Transmission, Storage and Processing
CMS Gas Transmission, which commenced operations in 1989, owns, develops
and manages domestic and international natural gas transmission,
processing and storage projects. For additional information, see Item 7.
CMS Energy Management's Discussion and Analysis - Natural Gas
Transmission, Storage and Marketing.
CMS Energy International Energy Distribution
CMS Electric and Gas was formed in 1996 to invest in, manage, and operate
international natural gas and electric distribution systems. In 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 S.A. For
additional information, see Item 7. CMS Energy Management's Discussion and
Analysis - International Energy Distribution.
CMS Energy Marketing, Services and Trading
In 1996, CMS MST was formed to provide gas, oil, coal and electric
marketing, risk management and energy management services to industrial,
commercial, utility and municipal energy users throughout the United
States and internationally. The creation of CMS MST is part of a
restructuring of CMS Energy's energy marketing business which included the
merging of CMS Gas Marketing into CMS MST and the transfer of CMS Electric
Marketing's assets to CMS MST.
<PAGE>
<PAGE> 15
CMS ENERGY'S AND CONSUMERS' CONSOLIDATED REVENUE BY BUSINESS SEGMENT
In Millions
- --------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- --------------------------------------------------------------------
Electric Operations
Residential $ 878 $ 809 $ 756
Commercial 739 675 646
Industrial 704 687 672
Other system sales 80 78 80
Intersystem sales 45 28 35
-----------------------------
Total Electric Operations 2,446 2,277 2,189
-----------------------------
Gas Operations
Residential 869 821 791
Commercial 254 239 230
Industrial 62 59 57
Other 39 26 19
Transportation 58 50 54
-----------------------------
Total Gas Operations 1,282 1,195 1,151
-----------------------------
Other Consumers Operations 42 39 16
-----------------------------
Total Consumers Revenue 3,770 3,511 3,356
-----------------------------
Oil and Gas Exploration and
Production Operations 130 108 78
-----------------------------
Independent Power Production (a) 140 96 46
-----------------------------
Gas Transmission and Marketing
Operations (b)
Marketing 258 171 129
Transmission 62 25 16
-----------------------------
Total Gas Transmission and
Marketing Operations 320 196 145
-----------------------------
Other CMS Energy Operations (c) 15 18 5
-----------------------------
Reclassification adjustment (d) (42) (39) (16)
-----------------------------
Total CMS Energy Revenue $4,333 $3,890 $3,614
====================================================================
(a) Does not include CMS Energy's share of unconsolidated independent
power production revenue of $493 million in 1996, $497 million in 1995,
and $385 million in 1994.
(b) Does not include CMS Energy's share of unconsolidated natural gas
transmission, storage and marketing revenue of $42 million in 1996, $26
million in 1995, and $7 million in 1994.
<PAGE>
<PAGE> 16
(c) Does not include CMS Energy's share of unconsolidated international
energy distribution revenue of $22 million in 1996.
(d) Represents the reclassification of Other Consumers Operations to
CMS Energy segments including the consolidated interest in the MCV to
Independent Power Production of $40 million for 1996, $36 million for 1995
and $15 million for 1994, and the remainder to Other CMS Energy
Operations.
CMS ENERGY'S AND CONSUMERS' SALES BY BUSINESS SEGMENT
Consumers Electric and Gas Sales
Years Ended December 31 1996 1995 1994
- --------------------------------------------------------------------
Electric Sales (millions of kWh)
Residential 10,921 10,712 10,222
Commercial 9,978 9,649 9,174
Industrial 12,897 12,688 12,321
Other system sales 1,182 1,351 1,285
Intersystem sales 2,073 1,106 1,460
----------------------------
Total Electric Sales 37,051 35,506 34,462
====================================================================
Gas Sales and Deliveries (bcf)
Residential 190 180 171
Commercial 61 58 55
Industrial 16 15 14
Transportation 181 151 169
---------------------------
Total Gas Sales and Deliveries 448 404 409
====================================================================
CMS Energy Other Sales
Years Ended December 31 1996 1995 1994
- --------------------------------------------------------------------
Oil and Gas Exploration and Production
Sales (net equiv. MMbbls) 9.7 8.9 5.6
====================================================================
Independent Power Production Sales
(millions of kWh) 7,823 7,422 6,216
====================================================================
Gas Marketed for End-users (bcf) 108 101 66
====================================================================
<PAGE>
<PAGE> 17
CMS ENERGY AND CONSUMERS REGULATION
CMS Energy, Consumers and their subsidiaries are subject to regulation by
various federal, state, local and foreign governmental agencies, including
those specifically described below.
Michigan Public Service Commission
Consumers is subject to the jurisdiction of the MPSC, which regulates
public utilities in Michigan with respect to retail utility rates,
accounting, services, certain facilities and various other matters. The
MPSC also has or will have rate jurisdiction over several limited part-
nerships in which CMS Gas Transmission has ownership interests. These
partnerships own or will own and operate intrastate gas transmission
pipelines.
The Attorney General, ABATE, and the MPSC staff typically intervene in
MPSC proceedings concerning Consumers. Unless otherwise noted herein,
these parties have intervened in such proceedings. For many years, almost
every significant MPSC order affecting Consumers has been appealed.
Appeals from such MPSC orders are pending in the Michigan Court of Appeals
and the Michigan Supreme Court. Consumers is vigorously pursuing these
matters. Under Michigan civil procedure, parties may file a claim of
appeal with the Michigan Court of Appeals which serves as a notice of
appeal. The grounds on which the appeal is being made are not finally set
forth until a later date when the parties file their briefs.
MPSC Regulatory Changes: In January 1996, the Governor of the State of
Michigan requested that the MPSC review the existing statutory and
regulatory framework governing Michigan utilities in light of increasing
competition in the utility industry. In response, the MPSC Staff issued
the "Staff Report on Electric Industry Restructuring" in December 1996.
The report recommends a phased-in program of direct access by customers
to electricity suppliers, with a rate freeze for temporarily captive
customers, choice of suppliers, transition cost recovery, and new bond
legislation to securitize transition costs. Consumers and various parties
filed comments on the Staff's report in January 1997. In March 1997,
Consumers and Detroit Edison filed their responses to a February 1997 MPSC
order asking the utilities to provide additional information concerning
certain elements of the plan. At this time, no new legislation has been
introduced. For additional information concerning the MPSC staff report
and Consumers' filings, see Item 7. Consumers Management's Discussion and
Analysis - Forward-Looking Information - Electric Outlook.
In late 1996, the MPSC requested Consumers and other local gas
distribution companies regulated by the MPSC to develop pilot programs
that would allow customers to purchase gas from other suppliers and have
the gas transported through local pipelines. Consumers subsequently
received MPSC approval to initiate a two-year experimental gas
transportation program, Choice Energy, in Bay County, Michigan. For
additional information concerning the MPSC order, see Item 8. Financial
Statements and Supplementary Data - Note 4 to Consumers' Notes to
Consolidated Financial Statements.
Retail Wheeling Proceedings: In April 1994, the MPSC issued an opinion
and interim order which approved the framework for a five-year
experimental retail open access program for "wheeling" of electric power
purchased by customers from other suppliers over the transmission systems
of Consumers and Detroit Edison, and remanded the case to the ALJ to
determine appropriate rates and charges. The MPSC stated that the purpose
of the experiment is to gather and evaluate information regarding whether
retail wheeling is in the public interest and should occur on a permanent
basis. The experimental program will commence with each utility's next
solicitation of additional supply side resources. In June 1995, the MPSC
issued an order that set rates and charges for retail delivery service
under the experiment. In September 1995, the MPSC denied Consumers' and
ABATE's petitions for rehearing of this order. Consumers, ABATE and Dow
have filed claims of appeal of the MPSC's order with the Court of Appeals,
joining Detroit Edison and the Attorney General who had previously
appealed. The Court of Appeals subsequently consolidated the appellate
cases of these parties. This matter is still pending.
Rate Proceedings: In September 1995, Consumers and the MPSC staff reached
a proposed settlement agreement that addressed several outstanding
regulatory issues before the MPSC in three separate proceedings, (i) a
request for approval of a competitive tariff for certain industrial
customers, (ii) a general electric rate case increase request and a
request for approval of cost recovery of the remaining 325 MW of contract
capacity from the MCV Facility and (iii) approval of certain revised
depreciation and accounting practices. In November 1996, the MPSC issued a
final order in the Settlement Agreement which combined the separate
requests. For additional information concerning Settlement Agreement, see
Item 8. Financial Statements and Supplementary Data - Notes 3 and 4 of
Consumers' Notes to Consolidated Financial Statements.
Intrastate Gas Supplier Contract Pricing Dispute: In October 1995, the
MPSC issued an opinion and order in a proceeding that had been initiated
by Consumers regarding a gas contract pricing dispute under three gas
supply contracts. The MPSC found that the pricing mechanism at issue,
that operates within definite ceiling and floor prices, is a definite
pricing provision within the meaning of the state statutes and was
properly implemented by Consumers to reduce gas prices without the prior
approval of the MPSC. The producers subsequently filed a claim of appeal
of the MPSC order with the Court of Appeals, where the case awaits
scheduling of oral arguments.
Prior to the issuance of the MPSC's order, the intrastate gas producers
involved in this MPSC proceeding filed a complaint against Consumers in
Kent County Circuit Court alleging breach of contract. On Consumers'
motion, the court dismissed the lawsuit. The gas suppliers subsequently
filed a petition for rehearing with the court where the matter is still
pending.
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
to one of its intrastate gas suppliers, North Michigan, who then filed an
appeal with the Court of Appeals. In June 1995, the Court of Appeals
affirmed the MPSC's decision and North Michigan's motion for
reconsideration was denied in August 1995. North Michigan filed an
application with the Michigan Supreme Court for leave to appeal the Court
of Appeals' order, which the Michigan Supreme Court subsequently denied.
North Michigan filed a petition for a writ of certiorari with the U.S.
Supreme Court to review the Michigan Supreme Court's decision. In
December 1996, the U.S. Supreme Court denied this petition. This
proceeding is now closed.
Collateral suits claiming relief based on a theory of breach of contract,
among other things, were filed by the producers in the Grand Traverse
County Circuit Court and in the Clinton County Circuit Court, which was
subsequently transferred to Jackson County Circuit Court. The dismissals
of the Grand Traverse County Circuit Court suit and the Jackson County
Circuit Court suit were appealed by the producers to the Court of Appeals,
which affirmed the dismissals in an opinion issued in January 1997. The
producers have filed a motion, which is still pending, for rehearing in
the Court of Appeals.
Federal Energy Regulatory Commission
FERC has limited jurisdiction over 26 independent power projects in which
CMS Generation has an ownership interest which are Qualifying Facilities
under PURPA. FERC also has more comprehensive jurisdiction over Michigan
Gas Storage as a natural gas company within the meaning of the Natural Gas
Act. The FERC jurisdiction relates, among other things, to the
acquisition, operation and disposal of assets and facilities and to
service provided and rates charged by Michigan Gas Storage. Under certain
circumstances, the FERC also has the power to modify gas tariffs of
interstate pipeline companies. Some of Consumers' gas business is also
subject to regulation by the FERC including a blanket transportation
tariff pursuant to which Consumers can transport gas in interstate
commerce.
Certain aspects of Consumers' electric operations are also subject to
regulation by the FERC, including compliance with the FERC's accounting
rules and other regulations applicable to "public utilities" and
"licensees", the transmission of electric energy in interstate commerce
and the rates and charges for the sale of electric energy at wholesale,
the consummation of certain mergers, the sale of certain facilities, the
construction, operation and maintenance of hydroelectric projects and the
issuance of securities, as provided by the Federal Power Act.
FERC Regulatory Changes: In April 1996, FERC issued Orders 888 and 889,
which require utilities to file conforming open access tariffs and
functionally unbundle transmission and wholesale sales activities.
Consumers made compliance filings in July and December 1996, which are
still pending FERC resolution. Consumers' open access tariff proceeding
filed in 1992 still awaits FERC decision. Orders 888 and 889 are more
fully discussed in Item 7. Consumers Management's Discussion and Analysis
- - Forward-Looking Information - Electric Outlook.
Nuclear Regulatory Commission
Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of
the NRC with respect to the design, construction and operation of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with
respect to certain other uses of nuclear material. These and other
matters concerning Consumers' nuclear plants are more fully discussed in
Item 8. Financial Statements and Supplementary Data - Notes 2 and 13 to
Consumers' Consolidated Financial Statements.
CMS ENERGY AND CONSUMERS INSURANCE
Consumers maintains $500 million of primary property damage insurance from
NML at each of its operating nuclear plants, Big Rock and Palisades,
covering all risks of physical loss, subject to certain exclusions and
deductibles. Consumers is also insured by NEIL and obtains excess
property damage insurance in the amount of $2 billion for Palisades.
These nuclear property insurance policies cover decontamination, debris
removal and direct property loss. The NEIL excess property damage
policies for Palisades would also cover much of the cost arising from an
accidental premature decommissioning which was not already funded and part
of the remaining book value of the plant. For any loss over $100 million,
stabilization and decontamination expenses must be satisfied before other
claims proceeds are received from the insurers. Under all these policies,
Consumers retains the risk of loss to the extent the loss is within the
policy deductibles ($1 million for Palisades and $250,000 for Big Rock) or
policy exclusions or if the loss exceeds the combined property damage
policy limits ($2.5 billion for Palisades and $500 million for Big Rock)
at either location. Because NML and NEIL are mutual insurance companies,
Consumers would be subject to assessments under the NML and NEIL excess
property damage policies which could total $20.7 million in any one policy
year in the event of covered losses at its own or any other member's
nuclear facility. Consumers has also procured NEIL I coverage which would
partially cover the cost of replacement power during certain prolonged
accidental outages of the Big Rock or Palisades units. Such costs would
not be covered by the insurance during the first 21 weeks of any outage,
but the major portion of such costs would be covered during the next 12
months of the outage, followed by a reduced level of coverage for a period
up to two additional years. Consumers would be subject to a maximum
assessment under the replacement power insurance of $2.2 million in any
one policy year in the event of covered losses at its own or any other
member's nuclear facility or facilities.
Consumers maintains nuclear liability insurance and other forms of
financial protection (including an agreement of government indemnity under
the Price-Anderson Act, applicable to the Big Rock) for injuries and off-
site property damage due to the nuclear hazard at such facilities. Such
insurance and financial protection covers Consumers up to the aggregate
limits of liability established by the Price-Anderson Act, which are
presently $544 million for Big Rock and approximately $8.9 billion for
Palisades. Part of such financial protection consists of a mandatory
industry-wide program under which owners of nuclear generating facilities
could be assessed in the event of a nuclear incident at any of such
facilities. Consumers would be subject to a maximum assessment of $79
million per occurrence in the event of a nuclear incident at certain
nuclear facilities, limited to a maximum installment payment of $10
million per occurrence in any year. Consumers also maintains insurance
under a master worker program that covers tort claims for bodily injury
caused by a nuclear hazard to workers who began their nuclear related
employment after January 1, 1988. The policies contain a $200 million
nuclear industry aggregate limit and could subject Consumers to a maximum
assessment of up to $6.3 million in the event of claims thereunder.
Property insurance is also maintained on CMS Energy's and Consumers' non-
nuclear facilities and operations. Conventional (non-nuclear) property
insurance is maintained on buildings, equipment, boilers, machinery and
gas stored underground. The applicable policies insure the full
replacement value of all major operating locations. However, the
insurance policies are subject to standard terms, conditions, exclusions
and coverage limits similar to those of other companies with similar
facilities and operations. Consumers maintains deductibles ranging from
$500,000 to $1 million on plant and facility losses. Certain CMS Energy
projects are specifically insured with lower deductibles. Consumers
insures its overhead electric transmission and distribution system for a
$25 million maximum loss limit subject to a $7.5 million deductible.
CMS Energy's and Consumers' non-nuclear public liability insurance
policies provide a $125 million policy limit, with a $500,000 deductible.
Other policies include $125 million of excess workers' compensation
insurance, subject to the $500,000 deductible; $125 million of fiduciary
and employee benefit liability insurance, subject to the $500,000
deductible; $10 million of crime insurance coverage subject to a $100,000
deductible; $50 million (offshore) and $20 million (onshore) of oil and
gas well blow-out insurance subject to a $250,000 deductible; and a
maximum of $225 million of aircraft insurance. Certain CMS Energy non-
utility operations and projects maintain special insurance with lower
deductibles.
CMS Energy and Consumers are not insured with regard to certain risks,
most notably for damage to its underground gas and electrical equipment,
because it believes that these properties are not subject to large loss
risks. Consumers has also not obtained insurance for flood and earthquake
property damage at its nuclear plants because it believes that the
protective systems built into these plants and the low probability of an
event of this type at the locations of these plants makes such insurance
unnecessary. In addition, Consumers' current insurance coverages do not
extend to certain environmental clean-up costs, such as claims for air
pollution, some past PCB contamination and for some long-term storage or
disposal of pollutants. See CMS Energy and Consumers Environmental
Compliance below.
Insurance policy terms, limits and conditions are subject to change during
the year as policies are renewed; however, CMS Energy and Consumers
believe that they and their subsidiaries are adequately insured for the
various risk exposures incidental to their respective businesses.
CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE
CMS Energy and Consumers and their subsidiaries are subject to regulation
with regard to environmental quality, including air and water quality,
waste management, zoning and other matters, by various federal, state and
local authorities. Management believes that the responsible administration
of its energy resources includes reasonable programs for the protection
and enhancement of the environment. For additional information concerning
environmental matters, see Item 8. Financial Statements and Supplementary
Data - Note 12 of Consumers' Notes to Consolidated Financial Statements.
Consumers has installed modern stack emission controls and monitoring
systems at its electric generating plants and converted electric gener-
ating units to burn cleaner fuels. It has worked with others to use bottom
ash as final cover for ash disposal areas in place of topsoil and flyash
as a filler for asphalt in road shoulders. It has also worked with local,
state and national organizations on waste minimization and pollution
prevention initiatives and enhanced certain of Consumers' lands for the
benefit of wildlife, as well as provided recreational access to its lands.
Finally, it has worked with universities and other institutions on
projects to protect and, in some instances, propagate threatened or
endangered species, and made financial contributions to a variety of
environmental enhancement projects. Capital expenditures by Consumers for
environmental protection additions were $34 million in 1996 and are
estimated to be $21 million in 1997.
Air use permits are required under federal and state law for certain of
Consumers' and CMS Generation's affiliates' sources of air emissions.
These laws require that certain affected facilities control their sources'
air emissions. Permits for Consumers' affected steam electric generating
facilities and other affected sources of air emissions have been issued by
the Michigan Air Pollution Control Commission, and more recently, the
Department of Environmental Quality, pursuant to a delegation of authority
from the Environmental Protection Agency under the Clean Air Act and
Michigan Air Pollution Act, as amended. Consumers believes that it is in
substantial compliance with all air use permits.
Consumers has engaged in an aggressive testing and removal program for
USTs. Since 1985, Consumers and its subsidiaries have reduced the number
of regulated UST systems from 256 to 31. At 116 of the sites from which
UST systems were removed, there had been hydrocarbon releases, either from
tank system leaks or from spillage on the surface during transfer of
contents to or from the tanks. Consumers' response activities have
resulted in Department of Natural Resources/Department of Environmental
Quality concurrence in closure of 100 of those releases. The remaining
releases are at various stages of cleanup completion. The Michigan
Underground Storage Tank Financial Assurance Act provided a fund to help
pay for the cost of response activities associated with leaking USTs.
Through December 1996, Consumers was reimbursed $4.7 million by this state
fund. This fund was eliminated in 1996, and no future reimbursements will
be available.
Like most electric utilities, Consumers has PCB in some of its electrical
equipment. Although it has been unlawful to manufacture or sell PCB or
PCB contaminated equipment since the 1970's, its continued use in
preexisting electrical equipment is lawful. Consumers has engaged in a
number of programs to reduce the risk of exposure to the environment from
possible PCB spills. These included such actions as a contingency program
of removing PCB capacitors outside of substations and replacing them with
non-PCB capacitors, draining large transformers and refilling them with
non-PCB mineral oil, removing PCB equipment which was found to pose a risk
to food supplies or animal feed, and other such programs. Consumers still
has a limited number of PCB capacitors in substations. It has
approximately 460,000 untested distribution transformers. By regulation,
unless the PCB level is known, transformers are presumed to be PCB-
contaminated. There may also be PCB in certain other types of equipment.
Based upon results of sampling in 1981, it is thought that about 1 percent
of the pole-top transformers had over 500 ppm of PCB, and about 12 percent
had from 50 to 500 ppm. Those percentages should decline over time with
the retirement of older equipment and its replacement with non-PCB
equipment. From time to time there are accidental releases from such
equipment. Consumers typically spends less than $1 million per year for
all cleanup and disposal of debris and equipment from PCB releases.
National Pollutant Discharge Elimination System and ground water discharge
permits authorize the discharge of certain waste waters from Consumers'
facilities and pipeline construction projects pursuant to state water
quality standards and federal effluent limitation guidelines.
Authorizations for discharges from all of Consumers' major operating steam
electric generating facilities and for certain discharges from Consumers'
other facilities, including hydroelectric projects and pipeline
construction projects, have been issued by the State of Michigan pursuant
to a delegation of authority from the Environmental Protection Agency
under the Federal Water Pollution Control Act of 1972, as amended.
Consumers believes that it is in substantial compliance with National
Pollutant Discharge Elimination System and groundwater discharge/exemption
permits.
CMS ENERGY AND CONSUMERS COMPETITION
Electric Competition
The electric utility operations of Consumers are regulated at the
wholesale and retail level. The wholesale utility operations of Consumers
are regulated by the FERC while the retail utility operations are
regulated by the MPSC. Competitors in the electric utility operations of
Consumers must also be similarly regulated or specifically exempted from
such regulation. CMS Energy's non-utility electric generation businesses
are exempt from most state and many federal regulations regarding electric
generation and compete in the non-utility power market with other non-
utility energy companies that have similar exemptions. The electric
utility industry has experienced retail load competition in recent years
from cogeneration and self-generation, the possible formation of municipal
utilities, and competition from other utilities offering flexible rate
arrangements, as discussed below. The electric utility industry is now
also experiencing increased competition in the wholesale power markets.
The factors driving this trend include the enactment of PURPA, the
enactment of the Energy Act and increased transmission access. These
initiatives provide both opportunities for Consumers in competing for new
customers and potential risks because of alternative energy supplies
available to existing customers. CMS Energy is similarly faced with
expanded opportunities and competition for customers in the non-utility
electric generation market.
PURPA created a special class of independent power producers that,
providing the requirements of Qualifying Facility status are met, are
entitled by statute to have their production purchased by a utility.
Under PURPA, Qualifying Facilities are generally exempt from federal and
state rate regulation. Consumers last signed a PURPA contract in 1993.
Similar to PURPA, the Energy Act was designed, among other things, to
foster competition in the wholesale electric market by facilitating the
ownership and operation of generating facilities by "exempt wholesale
generators" (which may include independent power producers as well as
affiliates of electric utilities), by excluding them from regulation under
PUHCA and by authorizing the FERC under certain conditions to order
utilities that own transmission facilities to provide wholesale
transmission services to or for other utilities and other entities
generating electric energy for sale or resale. One effect of the reduced
regulation has been to encourage investment in wholesale power production
facilities that will compete with utilities to provide generation to meet
future system demand and provide competition for CMS Energy in the
domestic and foreign non-utility electric generation markets.
Some of Consumers' larger industrial customers have explored the
possibility of constructing and operating their own on-site generating
facilities. Consumers has worked with these customers to develop rate and
service alternatives that are competitive with self-generation options.
In an effort to meet the challenge of competition, Consumers has signed
sales contracts with some of its largest industrial customers, including
its largest customer, General Motors.
In addition, a number of municipalities distribute electricity within
their corporate limits and some of these generate all or a portion of
their requirements. These municipalities and various rural electric
cooperative corporations serve a growing number of retail customers in the
same or adjacent areas served by Consumers. In one case, a community
currently served by Consumers is considering the formation of a new
municipal utility which could displace retail service by Consumers.
Consumers has on file with the FERC an open-access transmission tariff as
discussed above in CMS Energy and Consumers Regulation. During 1996
Consumers filed wholesale power sales agreements with FERC to supply power
to six municipal and two cooperative electric utilities which had pre-
existing contracts with Consumers. The new contracts are for a five-year
term beginning January 1997. The rates are unbundled to reflect the cost
of power and transmission and to reflect open access. Other similar
open-access transmission tariffs have been made effective by the FERC for
several large utility companies or systems and more open-access
transmission tariffs are anticipated. These developments produce
increased marketing opportunities for utility systems such as Consumers'
and expose Consumers' system to loss of wholesale load or reduced revenues
due to possible displacement of Consumers' wholesale transactions by
alternative suppliers with access to Consumers' primary areas of service.
Because wholesale transactions by Consumers generated less than 2 percent
of Consumers' 1996 revenue from electric operations, Consumers does not
believe that this potential loss is significant.
For additional information concerning electric competition, see Item 7.
Consumers Management's discussion and Analysis - Forward-Looking
Information - Electric Outlook.
Gas Competition
Competition has existed for several years for Consumers' gas operations
and comes primarily from alternate energy sources such as electricity and
alternate fuel sources. In the industrial market segment, customers have
traditionally used alternate fuels such as coal, oil and propane. In the
residential market segment, some customers use propane, fuel oil or
electricity for space heating and water heating; in Consumers' gas
territory, natural gas maintains 96.9 percent market share for residential
space heating and 88 percent for residential water heating. The Natural
Gas Policy Act of 1978 resulted in the deregulation of wellhead gas
prices, substituting supply and demand effects of the marketplace for
regulation. This effectively eliminated artificially-induced curtailments
of gas supply experienced earlier in the decade. Gas competition among
various wellhead suppliers subsequently increased. Order 636 effectively
unbundled the transportation of natural gas from the sale of natural gas
by interstate pipelines thereby requiring pipelines to become common
carriers. Consequently, pipelines must compete for shippers in search of
low priced capacity. Consumers offers unbundled services (transportation
and storage) to its larger end-use customers who choose to acquire gas
supplies from alternate sources. Since Consumers' earnings from its gas
operations are not dependent on gas purchased and resold to its customer
base, Consumers has not suffered any negative earnings impact as a result
of such competition, nor does it believe that any such impact is likely in
the future.
CMS Energy's non-regulated gas subsidiaries face significant competition
from other gas pipeline companies, gas producers, gas storage companies,
and brokers/marketers.
For additional information concerning gas competition, see Item 7.
Consumers Management's discussion and Analysis - Forward-Looking
Information - Gas Outlook.
EMPLOYEES
CMS Energy
As of February 28, 1997, CMS Energy and its subsidiaries had 9,663 full-
time equivalent employees of which 9,541 are full-time employees; the rest
equate to 122 full-time equivalent employees associated with the part-time
work force.
Consumers
As of February 28, 1997, Consumers and its subsidiaries had 8,873 full-
time equivalent employees of which 8,758 are full-time employees; the rest
equate to 115 full-time equivalent employees associated with the part-time
work force. Included in the total are 3,953 full-time operating,
maintenance and construction employees of Consumers who are represented by
the Union. A collective bargaining agreement was negotiated between
Consumers and the Union which became effective as of June 1, 1995 and, by
its terms, will continue in full force and effect until June 1, 2000.
<PAGE>
<PAGE> 25
CMS ENERGY AND CONSUMERS EXECUTIVE OFFICERS
As of February 28, 1997
Name Age Position Period
- --------------------------------------------------------------------------
William T. McCormick, Jr. 52 Chairman of the Board and
Chief Executive Officer
of CMS Energy 1987-Present
Chairman of the Board of
Consumers 1992-Present
Chairman of the Board of
Enterprises 1995-Present
Chairman of the Board and
Chief Executive Officer
of Enterprises 1988-1995
Chairman of the Board and
Chief Executive Officer
of Consumers 1985-1992
Victor J. Fryling 49 President and Chief
Operating Officer
of CMS Energy 1996-Present
Vice Chairman of the Board
of Consumers 1992-Present
President and Chief
Executive Officer
of Enterprises 1995-Present
President of CMS Energy 1992-1995
President of Enterprises 1993-1995
President and Chief
Financial Officer
of Enterprises 1992-1993
Executive Vice President
and Chief Financial
Officer of CMS Energy
and Consumers 1988-1992
Michael G. Morris 50 Executive Vice President
of CMS Energy 1996-Present
President and Chief
Executive Officer
of Consumers 1994-Present
Executive Vice President
and Chief Operating
Officer of Consumers 1992-1994
Executive Vice President
of Consumers 1988-1992
Alan M. Wright 51 Senior Vice President,
Chief Financial Officer
and Treasurer of
CMS Energy 1994-Present
Senior Vice President and
Chief Financial Officer
of Consumers 1993-Present
Senior Vice President,
Chief Financial Officer
and Treasurer of
Enterprises 1994-Present
Senior Vice President
and Chief Financial
Officer of CMS Energy 1992-1994
Senior Vice President
and Chief Financial
Officer of Enterprises 1993-1994
Senior Vice President,
Chief Financial Officer
and Treasurer of Consumers 1992-1993
Vice President and
Treasurer of Consumers 1991-1992
Rodger A. Kershner 48 Senior Vice President and
General Counsel
of CMS Energy 1996-Present
Senior Vice President and
General Counsel of
Enterprises 1996-Present
Vice President and
General Counsel
of Enterprises 1989-1996
Deputy General Counsel
and Assistant Secretary
of CMS Energy 1994-1995
Assistant General Counsel
and Assistant
Secretary of CMS Energy 1989-1994
John W. Clark 52 Senior Vice President
of CMS Energy 1987-Present
Senior Vice President
of Consumers 1985-Present
James W. Cook 56 Senior Vice President
of CMS Energy 1995-Present
Senior Vice President
of Enterprises 1994-Present
Executive Vice President
of Enterprises 1989-1994
President and Chief
Executive Officer
of CMS Generation 1989-1995
Preston D. Hopper 46 Senior Vice President,
Controller and Chief
Accounting Officer
of CMS Energy 1996-Present
Vice President, Controller
and Chief Accounting
Officer of CMS Energy 1992-1996
Senior Vice President
and Chief Accounting
Officer of Enterprises 1997-Present
Senior Vice President and
Controller of
Enterprises 1996-1997
Vice President and
Controller of Enterprises 1992-1996
Vice President and
Controller of CMS Energy 1991-1992
Rodney E. Boulanger 56 Senior Vice President
of Enterprises 1996-Present
President and Chief
Executive Officer of
CMS Generation 1995-Present
William J. Haener 55 President and Chief
Executive Officer of
CMS Gas Transmission 1994-Present
Gordon L. Wright 54 President and Chief
Executive Officer of
CMS NOMECO 1995-Present
Executive Vice President
and Chief Operating
Officer of CMS NOMECO 1993-1995
Vice President of
Operations of CMS NOMECO 1981-1993
Paul A. Elbert 47 Executive Vice President
and Chief Operating
Officer - Gas of Consumers 1994-Present
Senior Vice President
of Consumers 1991-1994
David W. Joos 43 Executive Vice President
and Chief Operating
Officer - Electric
of Consumers 1994-Present
Senior Vice President
of Consumers 1994-1994
Vice President of Consumers 1990-1994
David A. Mikelonis 48 Senior Vice President
and General Counsel
of Consumers 1988-Present
Robert A. Fenech 49 Senior Vice President
of Consumers 1997-Present
Vice President of Consumers 1994-1997
Dennis DaPra* 54 Vice President and
Controller of Consumers 1991-Present
*Mr. DaPra is an executive officer of Consumers but not of CMS Energy.
All other individuals are executive officers of both CMS Energy and
Consumers.
The present term of office of each of the executive officers extends to
the first meeting of the Board of Directors after the next annual election
of Directors of each of CMS Energy and Consumers (scheduled to be held May
27, 1997).
There are no family relationships among executive officers and directors
of CMS Energy and Consumers.
<PAGE>
<PAGE> 28
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy, Consumers and their subsidiaries
are owned in fee, except that most electric lines and gas mains are
located, pursuant to easements and other rights, in public roads or on
land owned by others. The statements under this item as to ownership of
properties are made without regard to tax and assessment liens, judgments,
easements, rights of way, contracts, reservations, exceptions, conditions,
immaterial liens and encumbrances, and other outstanding rights. None of
these outstanding rights impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its
First Mortgage Bond Indenture. Substantially all properties of the
subsidiaries of CMS Generation that own interests in operating plants are
subject to liens of creditors of the respective subsidiaries. Properties
of certain Consumers, CMS Gas Transmission and CMS NOMECO subsidiaries are
also subject to liens of creditors of the respective subsidiaries.
CONSUMERS ELECTRIC UTILITY PROPERTIES
Consumers' electric generating system consists of five fossil-fueled
plants, two nuclear plants, one pumped storage hydroelectric facility,
seven gas combustion turbine plants and 13 hydroelectric plants.
<TABLE>
<CAPTION>
1996 Summer Net 1996 Net
Demonstrated Generation
Size and Year Capability (Thousands
Name and Location (Michigan) Entering Service (Kilowatts) of kWhs)
<S> <C> <C> <C>
Coal Generation
J H Campbell - West Olive 3 Units, 1962-1980 1,346,100(a) 8,168,527
D E Karn - Essexville 2 Units, 1959-1961 515,000 3,324,179
B C Cobb - Muskegon 2 Units, 1956-1957 296,000 1,931,212
J R Whiting - Erie 3 Units, 1952-1953 310,000 1,796,964
J C Weadock - Essexville 2 Units, 1955-1958 310,000 1,706,846
--------- ----------
Total coal generation 2,777,100 16,927,728
--------- ----------
Oil/Gas Generation
D E Karn - Essexville 2 Units, 1975-1977 1,276,000 428,567
--------- ----------
Ludington Pumped Storage 6 Units, 1973 954,700(b) (418,371)(c)
--------- ----------
Nuclear Generation
Palisades - South Haven 1 Unit, 1971 762,000 5,290,683
Big Rock Point - Charlevoix 1 Unit, 1962 67,000 362,303
--------- ----------
Total nuclear generation 829,000 5,652,986
--------- ----------
Gas/Oil Combustion Turbine
Generation 7 Plants, 1966-1971 345,000 9,373
--------- ----------
Hydro Generation 13 Plants, 1907-1949 73,800 472,892
--------- ----------
Total owned generation 6,255,600 23,073,175
==========
Purchased and Interchange Power Capacity 1,820,600(d)
---------
Total 8,076,200
=========
<FN>
(a) Represents Consumers' share of the capacity of the Campbell Plant Unit 3, net of 6.69 percent (ownership interests
of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of Ludington. Consumers and Detroit Edison have 51 percent and 49
percent undivided ownership, respectively, in the plant, and the capacity of the plant is shared accordingly.
(c) Represents Consumers' share of net pumped storage generation. This facility electrically pumps water during off-
peak hours for storage to later generate electricity during peak-demand hours.
(d) Includes 1,240 MW of purchased contract capacity from the MCV Facility.
/TABLE
<PAGE>
<PAGE> 30
Consumers' electric transmission and distribution lines owned and in
service are shown in the following table.
<TABLE>
<CAPTION>
Structure Sub-Surface
(Miles) (Miles)
Transmission
<S> <C> <C>
345,000 volt 1,137 -
138,000 volt 3,276 4
120,000 volt 20 -
46,000 volt 4,102 9
23,000 volt 30 7
------ -----
Total transmission 8,565 20
Distribution (2,400-24,900 volt) 52,071 5,722
------ -----
Total transmission and distribution 60,636 5,742
====== =====
</TABLE>
Consumers owns substations having an aggregate transformer capacity of
38,016,960 kilovoltamperes.
CONSUMERS GAS UTILITY PROPERTIES
Consumers' gas distribution and transmission system consists of
22,309 miles of distribution mains and 1,041 miles of transmission lines
throughout the Lower Peninsula of Michigan. Consumers owns and operates
six compressor stations with a total of 133,060 installed horsepower.
Consumers' gas storage fields, listed below, have an aggregate storage
capacity of 242.2 bcf.
<TABLE>
<CAPTION>
Field Name Location Storage Capacity (bcf)
<S> <C> <C>
Overisel Allegan and Ottawa Counties 64.0
Salem Allegan and Ottawa Counties 35.0
Ira St Clair County 7.5
Lenox Macomb County 3.5
Ray Macomb County 66.0
Northville Oakland, Washtenaw and Wayne Counties 25.8
Puttygut St Clair County 16.6
Four Corners St Clair County 3.8
Swan Creek St Clair County .6
Hessen St Clair County 18.0
Lyon - 34 Oakland County 1.4
</TABLE>
Michigan Gas Storage owns and operates two compressor stations with a
total of 46,600 installed horsepower. Its transmission system consists of
530 miles of pipelines within the Lower Peninsula of Michigan.
Michigan Gas Storage's gas storage fields, listed below, have an aggregate
certified storage capacity of 109.5 bcf.
<TABLE>
<CAPTION>
Total Certified
Field Name Location Storage Capacity (bcf)
<S> <C> <C>
Winterfield Osceola and Clare Counties 72.3
Cranberry Lake Clare and Missaukee Counties 28.2
Riverside Missaukee County 9.0
</TABLE>
Consumers' gas properties also include the Marysville gas reforming plant,
located in Marysville, Michigan. Huron and PanCanadian Petroleum Company
are partners in a partnership to use the expanded capacity of the
underground caverns at the Marysville plant for commercial storage of
liquid hydrocarbons. In addition, Consumers and PanCanadian Petroleum
Company are partners in a partnership to use certain hydrocarbon
fractionation facilities at the plant.
CMS ENERGY OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES
Net oil and gas production by CMS NOMECO for the years 1994 through 1996
is shown in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Oil and condensate (Mbbls) (a) 4,597 4,267 2,025
Natural gas (MMcf) (a) 29,371 26,348 20,546
Plant products (Mbbls) (a) 240 226 193
Average daily production (b)
Oil (Mbbls) 16.7 16.1 7.1
Gas (MMcf) 97.9 84.9 69.3
Reserves to annual production ratio
Oil (MMbbls) 14.6 14.9 26.1
Gas (bcf) 11.0 10.8 11.3
<FN>
(a) Revenue interest to CMS NOMECO
(b) CMS NOMECO working interest (includes CMS NOMECO's share of royalties)
</TABLE>
<PAGE>
<PAGE> 32
The following table shows CMS NOMECO's estimated proved reserves of oil
and gas for the years 1994 through 1996.
<TABLE>
<CAPTION>
Total Worldwide United States International
Oil Gas Oil Gas Oil Gas
(MMbbls) (bcf) (MMbbls) (bcf) (MMbbls) (bcf)
Proved Developed and
Undeveloped Reserves
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 34.7 201.8 3.4 194.6 31.3 7.2
Revisions and other changes (1.3) (9.7) (0.3) (9.4) (1.0) (0.3)
Extensions and discoveries 0.4 50.2 0.4 50.2 - -
Acquisitions of reserves 20.2 9.4 - 9.4 20.2 -
Production (2.1) (20.5) (0.8) (20.3) (1.3) (0.2)
---- ----- ---- ----- ---- ----
December 31, 1994 51.9 231.2 2.7 224.5 49.2 6.7
Revisions and other changes (4.1) (23.8) (0.1) (22.9) (4.0) (0.9)
Extensions and discoveries - 13.3 - 2.6 - 10.7
Acquisitions of reserves 20.0 96.2 - 96.2 20.0 -
Sales of reserves (2.4) (6.7) - (1.0) (2.4) (5.7)
Production (4.3) (26.3) (0.7) (26.2) (3.6) (0.1)
---- ----- ---- ----- ---- ----
December 31, 1995 61.1 283.9 1.9 273.2 59.2 10.7
Revisions and other changes 4.7 6.8 1.2 - 3.5 6.8
Extensions and discoveries 4.9 64.6 - 32.6 4.9 32.0
Acquisitions of reserves 0.2 1.0 - 1.0 0.2 -
Sales of reserves (0.6) (3.7) (0.6) (3.7) - -
Production (4.7) (29.4) (0.7) (29.4) (4.0) -
---- ----- ---- ----- ---- ----
December 31, 1996 65.6 323.2 1.8 273.7 63.8 49.5
==== ===== ==== ===== ==== ====
Estimated Proved Developed Reserves
December 31, 1993 31.2 200.0 3.3 193.4 27.9 6.6
December 31, 1994 37.4 211.7 2.5 205.9 34.9 5.8
December 31, 1995 32.7 254.2 1.8 254.2 30.9 -
December 31, 1996 35.3 270.0 1.8 270.0 33.5 -
==== ===== ==== ===== ==== ====
Equity Interest in Estimated
Proved Reserves of Comeco
Petroleum, Inc. (Yemen)
December 31, 1993 1.5 - - - 1.5 -
December 31, 1994 2.9 - - - 2.9 -
December 31, 1995 2.8 - - - 2.8 -
December 31, 1996 3.2 - - - 3.2 -
==== ===== ==== ===== ==== ====
</TABLE>
<PAGE>
<PAGE> 33
The following table shows CMS NOMECO's undeveloped net acres of oil and
gas leasehold interests.
<TABLE>
<CAPTION>
December 31 1996 1995
<S> <C> <C>
Michigan 131,502 143,243
North Dakota 13,840 15,586
Indiana 10,986 7,014
Louisiana (a) 8,088 17,408
Texas (a) 7,005 11,458
Ohio 6,104 4,494
Other states 4,930 4,335
--------- ---------
Total domestic 182,455 203,538
--------- ---------
Colombia 294,330 42,571
Venezuela 230,175 230,175
Equatorial Guinea 113,947 113,947
Tunisia 67,193 67,891
Ecuador 66,430 66,430
Yemen 27,610 401,897
Congo 17,981 17,981
--------- ---------
Total international 817,666 940,892
--------- ---------
Total net acres 1,000,121 1,144,430
========= =========
<FN>
(a) Includes offshore acreage.
</TABLE>
CONSUMERS OTHER PROPERTIES
CMS Midland owns a 49 percent interest in the MCV Partnership which was
formed to construct and operate the MCV Facility. The MCV Facility has
been sold to five owner trusts and leased back to the MCV Partnership.
CMS Holdings is a limited partner in the FMLP, which is a beneficiary of
one of these trusts. CMS Holdings' indirect beneficial interest in the
MCV Facility is 35 percent.
Consumers owns fee title to 1,140 acres of land in the City and Township
of Midland, Midland County, Michigan, occupied by the MCV Facility. The
land is leased to the owners of the MCV Facility by five separate leases,
each leasing an undivided interest and in the aggregate totaling 100
percent, for an initial term ending December 31, 2035 with possible
renewal terms to June 15, 2090.
Consumers owns or leases three principal general office buildings in
Jackson, Michigan and 53 field offices at various locations in Michigan's
Lower Peninsula. Of these, two general office buildings and eleven field
offices are leased. Also owned are miscellaneous parcels of real estate
not now used in utility operations.
<PAGE>
<PAGE> 34
CMS ENERGY OTHER PROPERTIES
The following table shows interests in independent power plants at
December 31, 1996.
<TABLE>
Location Ownership Interest (%) Gross Capacity (MW)
CMS Generation
<S> <C> <C>
Wood Fueled
Chateaugay, New York 50.0 20
Grayling Township, Michigan 50.0 39
Genesee Township, Michigan 50.0 35
Imperial Valley, California 40.5 15
Lyonsdale, New York 50.0 19
New Bern, North Carolina 50.0 45
Stratton, Maine 35.0 40
Susanville, California 50.0 36
Fossil Fueled
Andhra Pradesh, India 25.3 235
Cebu Island, Philippines (Carmen) 47.5 46
Cebu Island, Philippines (Sangi) 47.5 89
Filer City, Michigan 50.0 60
Kingston, Jamaica (a) 43.9 56
Lakewood, New Jersey 45.0 236
Little Falls, New York 50.0 4
Mendoza Province, Argentina 80.6 242
Oklahoma City, Oklahoma 8.8 110
Scrap Tire Fueled
Sterling, Connecticut 50.0 31
Hydro Generation
Benton, Maine 50.0 4
Canton, New York 50.0 8
Copenhagen, New York 50.0 3
Corinth, New York 12.5 58
Limay River, Argentina (Arroyito) 17.2 120
Limay River, Argentina (El Chocon) 17.2 1,200
Little Falls, New York 1.0 13
Lyons Falls, New York 50.0 3
Petersburg, Virginia 55.5 3
Port Leyden, New York 12.5 6
Wind Generation
Altamont Pass, California 22.7 30
Montezuma, California 8.5 72
CMS Midland
Fossil Fueled
Midland, Michigan 49.0(b) 1,370
==== =====
<FN>
(a) Commenced commercial operations in January, 1997.
(b) See the previous section - Consumers Other Properties - for more information.
</TABLE>
In 1996, CMS Generation sold its 37.5 percent interest in a 80 MW fossil-
fueled plant in Solvay, New York. In February 1997, CMS Generation
acquired a 29.5 percent interest in a 48 MW fossil-fueled plant in Cavite,
Philippines. CMS Generation also negotiated the purchase of a further
interest which could take its ultimate interest to 44 percent, and has
plans to increase the plant's generating capacity to 63 MW in 1998.
CMS Gas Transmission owns a 75 percent interest in a general partnership
which owns and operates a 25-mile, 16-inch natural gas transmission
pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent
limited partnership interest in the Saginaw Bay Area Limited Partnership
which owns 125 miles of 10-inch and 16-inch natural gas transmission
pipeline in north-central Michigan; owns a 44 percent limited partnership
interest in a partnership that owns certain pipelines of 20 and 12 miles
interconnected to the Saginaw Bay Area Limited Partnership facilities;
owns natural gas treating plants in Otsego County, Michigan; owns 41 miles
of gas transmission pipeline in Otsego and Montmorency Counties, Michigan;
owns and operates the Bluewater Pipeline, a 3.1 mile pipeline from an
interconnection with Consumers natural gas transmission system to an
interconnection with an existing pipeline at the St. Clair River, south of
Port Huron, Michigan; and owns a 25 percent general partnership interest
in TGN, which owns and operates 2,600 miles of pipeline that provides
natural gas transmission service to the northern and central parts of
Argentina.
In 1996, CMS Gas Transmission commenced operations of the Little Bear
Pipeline, a 46 mile pipeline originating in Montmorency County, Michigan
at an interconnection with the Thunder Bay Pipeline to the carbon dioxide
processing facility at South Chester, Otsego County, Michigan.
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 ten day
storage service and has the capability of being refilled in 20 days.
In January 1996, CMS Gas Transmission acquired a 50 percent ownership
interest in Nitrotec Corporation, a proprietary gas technology company,
which recently received patents for its helium removal and nitrogen
rejection processes. Nitrotec has helium recovery plants in Colorado and
Kansas. A nitrogen rejection plant in Texas was placed in service in
1996, with another nitrogen rejection plant scheduled to be placed in
service during the first quarter of 1997.
Through the Cherokee Gas Processing partnership, formed in May 1996,
CMS Gas Transmission owns an 82 percent interest in the Lucien, Crescent
and Ames gas gathering systems and processing plants located in Oklahoma.
The Lucien facilities include 380 miles of low-pressure gas-gathering
lines and five compressor stations in Garfield, Logan, Noble and Payne
counties in Oklahoma. It also includes a 10 million cubic feet per day
processing plant in Noble county. The Crescent and Ames systems, acquired
by the partnership in October 1996, contained 1,634 miles of low-pressure
gathering lines, 23,500 HP of compression and a 45 million cubic feet per
day processing plant west of Guthrie, Oklahoma. A portion of the Ames
system consisting of 139 miles of low-pressure gathering lines and 2,395
HP of compression was sold in January 1997.
CMS Energy, through certain subsidiaries, owns a 50 percent interest in
Bay Harbor Limited Liability Company, a resort development in Emmet
County, Michigan, owns 6,000 acres of undeveloped land in Benzie and
Manistee Counties, Michigan, and owns 53 acres of undeveloped land in
Muskegon County, Michigan.
CONSUMERS CAPITAL EXPENDITURES
Capital expenditures during 1996 for Consumers and its subsidiaries
totaled $441 million for capital additions and $6 million for DSM
programs. Of the $441 million, $304 million was incurred for electric
utility additions and $137 million for gas utility additions. These
capital additions include $34 million for environmental protection
additions and $31 million for capital leases of nuclear fuel and other
assets. The electric and gas utility additions include an attributed
portion of capital expenditures common to both businesses.
In 1997, capital expenditures are estimated to be $387 million for capital
additions. Of the $387 million, $272 million will be incurred for
electric utility additions and $115 million for gas utility additions.
These capital addition estimates include $21 million related to
environmental protection additions and $28 million related to capital
leases of nuclear fuel and other assets. The estimated electric and gas
utility additions include an attributed portion of anticipated capital
expenditures common to both businesses.
CMS ENERGY CAPITAL EXPENDITURES
Capital expenditures during 1996 for CMS Energy and its subsidiaries
totaled $873 million for capital additions and $6 million for DSM
programs. Of the $873 million, $441 million was incurred by Consumers as
discussed above. The remaining $432 million in capital additions include
$88 million for oil and gas exploration and development, $142 million for
independent power production, $136 million for natural gas transmission,
storage and marketing, $64 million for international energy distribution
and $2 million for other capital expenditures. These capital additions
include $34 million for environmental protection additions and $31 million
for capital leases of nuclear fuel and other assets.
In 1997, capital expenditures are estimated to be $965 million for capital
additions. Of the $965 million, $387 million will be incurred by Consumers
as discussed above. The remaining $578 million in capital additions are
estimated to be incurred as follows: $135 million for oil and gas
exploration and development; $196 million for independent power
production; $110 million for natural gas transmission and storage; $120
million for international energy distribution; and $17 million for
marketing services and trading. These capital addition estimates include
$21 million related to environmental protection additions and $28 million
related to capital leases of nuclear fuel and other assets.
<PAGE>
<PAGE> 37
ITEM 3. LEGAL PROCEEDINGS.
CMS Energy, Consumers and some of their subsidiaries and affiliates are
parties to certain routine lawsuits and administrative proceedings
incidental to their businesses involving, for example, claims for personal
injury and property damage, contractual matters, income taxes, and rates
and licensing. Reference is made to Item 1. Business - CMS Energy and
Consumers Regulation, Item 7. Management's Discussion and Analysis and
Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements included herein for additional
information regarding various pending administrative and judicial
proceedings involving rate, operating and environmental matters.
CMS ENERGY EXEMPTION UNDER PUHCA
CMS Energy is exempt from registration under PUHCA. In December 1991, the
Attorney General and the Michigan Municipal Cooperative Group filed a
request with the SEC for the revocation of CMS Energy's exemption. In
January 1992, CMS Energy responded to the revocation request affirming its
position that it is entitled to the exemption. In April 1992, the MPSC
filed a statement with the SEC that recommended that the SEC impose
certain conditions on CMS Energy's exemption. CMS Energy is vigorously
contesting the revocation request and believes it will maintain the
exemption. There has been no action taken by the SEC on this matter.
In June 1995, the SEC released a staff report that recommended legislative
options to Congress: 1) repeal PUHCA and strengthen the ability of the
FERC and state regulators to obtain books and records, conduct audits and
review affiliate transactions; 2) repeal PUHCA, without condition; or 3)
amend PUHCA to give the SEC broader exemptive authority. The SEC staff
supported option 1 because it would achieve the benefits of unconditional
repeal, while preserving the ability of states to protect consumers. In
February 1997, a bill was introduced in the United States House of
Representatives to stimulate competitive electric rates and services,
including provisions that would essentially repeal PUHCA on a state-by-
state basis as each state certifies to the SEC that a competitive, non-
discriminatory market for both electric and natural gas energy exists in
such state. This bill would also strengthen the ability of the FERC to
obtain books and records of public utility holding company affiliates and
subsidiaries. CMS Energy management anticipates that additional bills will
be introduced in Congress in 1997 which will propose the repeal or
significant revision of PUHCA.
CONSUMERS STRAY VOLTAGE LAWSUITS
Consumers has a number of lawsuits relating to so-called stray voltage,
which results when small electrical currents present in grounded electric
systems are diverted from their intended path. Claimants contend that
stray voltage affects farm animal behavior, reducing the productivity of
their livestock operations. Investigation by Consumers of prior stray
voltage complaints disclosed that many factors, including improper wiring
and malfunctioning of on-farm equipment, can lead to the stray voltage
phenomenon. Consumers maintains a policy of investigating all customer
calls regarding stray voltage and working with customers to address their
concerns including, when necessary, modifying the configuration of the
customer's hook-up to Consumers' system. In October 1993, a complaint
seeking certification as a class action suit was filed against Consumers
in a local circuit court. The complaint alleged that in excess of a
billion dollars of damages, primarily related to lost production by
certain livestock owned by the purported class, were being incurred as a
result of stray voltage from electricity being supplied by Consumers.
Consumers believes the allegations to be without merit and vigorously
opposed the certification of the class and this suit. In March 1994, the
court decided to deny class certification for this complaint and to
dismiss, subject to refiling as separate suits, the October lawsuit with
respect to all but one of the named plaintiffs. In April 1994, the
plaintiffs appealed the court's denial of class certification in this
matter to the Court of Appeals. In November 1996, the Court of Appeals
issued a decision dismissing the case. In January 1997, the Court of
Appeals denied plaintiffs' motion for reconsideration. Subsequently the
plaintiffs filed an application for leave to appeal in the Michigan
Supreme Court, where the matter remains pending. A number of individuals
who would have been part of the class action have refiled their claims as
separate lawsuits. At January 31, 1997, Consumers had 22 separate stray
voltage cases pending for trial, down from 30 pending at year end 1995.
CONSUMERS HIGHLAND TOWNSHIP FRANCHISE PROCEEDING
MichCon obtained a revocable franchise in 1956 to provide natural gas
service to Highland Township, Michigan. In 1962, Consumers secured an
irrevocable 30 year franchise to provide natural gas service to Highland
Township. Neither franchise was exclusive. Although MichCon's franchise
for service in Highland Township expired in 1986 and was not renewed,
MichCon continued service to customers in Highland Township. Consumers
secured a revocable renewal franchise for Highland Township in 1992.
Thereafter in 1992, Consumers filed suit to enjoin MichCon from expanding
its gas service to new customers in Highland Township. The Circuit Court
of Oakland County, Michigan denied MichCon's motion for summary
disposition and granted Consumers' petition for an injunction. MichCon
subsequently transferred its remaining rights and interest in Highland
Township to Consumers, ceased doing business there and appealed the
Circuit Court decision with the Court of Appeals. In August 1995, the
Court of Appeals refused to decide the issue addressed by the Circuit
Court (namely whether MichCon, as a holdover utility without any
franchise, could continue to lawfully do business in a township) because
the Court of Appeals concluded that Consumers' 1992 revocable renewal
franchise was invalid since it was not confirmed by a vote of the Highland
Township electorate as the Court determined was required by the Public
Utility Franchise Act. Prior to this decision, the commonly held
interpretation of the Public Utility Franchise Act was that a vote of the
electorate was only required for irrevocable franchises, not revocable
franchises such as that held by Consumers in this case. The Court of
Appeals reversed the Circuit Court decision and remanded the case to the
Circuit Court for entry of summary disposition in MichCon's favor -- even
though the only franchise MichCon had ever possessed was revocable and
thus, under the Court of Appeals' decision, invalid. Although the Court
of Appeals specifically stated in its opinion that continuing to provide
utility service without a valid franchise was not necessarily unlawful,
Consumers currently has over 800 revocable franchises which could be
affected should the Court of Appeals order remain in place. Consumers'
motion for reconsideration and for a stay of the Court of Appeals'
decision was denied. In December 1995, Consumers filed an application,
which is still pending, with the Michigan Supreme Court for leave to
appeal the Court of Appeals' decision. In June 1996, the Michigan
Legislature amended the Public Utility Franchise Act to provide that
revocable franchises may be granted by a township without a vote of the
electorate.
CMS ENERGY INDEPENDENT POWER PRODUCTION PROJECT LITIGATION
In August 1995, William R. Williams and two of his corporations, Altresco
Philippines, Inc. and WRW Corporation (formerly Altresco International,
Inc.), filed a lawsuit against CMS Generation in the Denver County
District Court, State of Colorado, in connection with a project to be
developed in Bantangas, Philippines by Luzon Power Associates, Inc. in
which CMS Generation purchased a 50 percent ownership interest. Luzon
Power Associates, Inc. has an agreement to supply power to the Manila
Electric Company. The complaint alleges breach of a confidentiality
agreement, breach of fiduciary duty, intentional interference with a
contract, breach of implied covenant of good faith and fair dealing, and
unfair competition. The claims primarily relate to a confidentiality
agreement between the parties, and CMS Generation's alleged pursuit of
another project to sell power directly to the Manila Electric Company,
known as the Magellan project, in alleged violation of a restrictive
covenant in the confidentiality agreement. The plaintiffs claim direct
damages of approximately $85 million and indirect damages in a like amount
from loss of future business, plus punitive damages, interest, and
attorney's fees. CMS Generation removed the case to the United States
District Court for the District of Colorado in September 1995, and in
January 1996, that court denied CMS Generation's motion to dismiss the
suit or to transfer the case based on improper venue. A trial date of
July 1997 has been set by the court. CMS Generation believes the
plaintiff's position is without merit and intends to vigorously oppose any
claims they may raise but cannot predict the outcome of this matter.
CONSUMERS JOINT LAWSUIT AGAINST DOE
Under the Nuclear Waste Policy Act of 1982, the DOE is required to begin
accepting deliveries of spent nuclear fuel from commercial operators by
January 31, 1998 for disposal, even if a permanent repository is not then
operational. The unconditional nature of the DOE's obligation was
confirmed by the United States Court of Appeals for the District of
Columbia Circuit in 1996. Utilities and their customers have been
prepaying the costs of DOE transport and disposal through fees based on
electric generation by their nuclear plants. For fuel used after April 6,
1983, Consumers charges disposal costs to nuclear fuel expense, recovers
them through electric rates and remits to the DOE quarterly. Consumers
elected to defer payment for disposal of spent nuclear fuel burned before
April 7, 1983 until the first of its spent fuel is delivered to the DOE.
At December 31, 1996, Consumers had a recorded liability to the DOE of
$106 million, including interest, which is to be paid prior to the first
delivery of spent nuclear fuel to the DOE. Consumers recovered through
electric rates the amount of this liability, excluding a portion of
interest. In January 1997, in response to the DOE's declaration in
December 1996 that it would not begin to accept spent nuclear fuel
deliveries by the date required by law, Consumers and other utilities
filed suit in the United States Court of Appeals for the District of
Columbia Circuit. The utilities are seeking a declaration that they are
relieved of their obligation to remit their quarterly fee payments to the
DOE and are authorized to escrow any related fees collected from their
customers, unless and until the DOE begins to accept spent nuclear fuel.
The suit seeks an order requiring the DOE to develop a program to begin
acceptance of spent nuclear fuel by January 31, 1998. Also in 1997,
federal legislation was reintroduced to clarify the timing of the DOE's
obligation to accept spent nuclear fuel and to direct the DOE to establish
an integrated spent fuel management system that includes designing and
constructing an interim storage facility in Nevada.
CMS ENERGY AND CONSUMERS ENVIRONMENTAL MATTERS
CMS Energy, Consumers and their subsidiaries and affiliates are subject to
various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. However, based on their present
knowledge and subject to future legal and factual developments, CMS Energy
and Consumers believe that it is unlikely that these actions, individually
or in total, will have a material adverse effect on their financial
condition. See Item 1. Business - CMS Energy and Consumers Environmental
Compliance, Item 7. Management's Discussion and Analysis and Item 8.
Financial Statements and Supplementary Data - Note 12 of Consumers' Notes
to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
CMS ENERGY
None in the fourth quarter of 1996 for CMS Energy.
CONSUMERS
None in the fourth quarter of 1996 for Consumers.
<PAGE>
<PAGE> 41
PART II
ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
CMS Energy
Market prices for CMS Energy's common stock and related security holder
matters are contained in Item 8. Financial Statements and Supplementary
Data - CMS Energy's Quarterly Financial and Common Stock Information,
which is incorporated by reference herein. Number of common shareholders
at February 28, 1997 was 92,562.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In May, August, November and
December 1996, Consumers paid $75 million, $40 million, $48 million and
$37 million in cash dividends, respectively, on its common stock. During
1995, Consumers paid $70 million in cash dividends in May on its common
stock.
ITEM 6. SELECTED FINANCIAL DATA.
CMS Energy
Selected financial information is contained in Item 8. Financial
Statements and Supplementary Data - CMS Energy's Selected Financial
Information which is incorporated by reference herein.
Consumers
Selected financial information is contained in Item 8. Financial
Statements and Supplementary Data - Consumers' Selected Financial
Information which is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CMS Energy
Management's discussion and analysis of financial condition and results of
operations is contained in Item 8. Financial Statements and Supplementary
Data - CMS Energy's Management's Discussion and Analysis which is
incorporated by reference herein.
Consumers
Management's discussion and analysis of financial condition and results of
operations is contained in Item 8. Financial Statements and Supplementary
Data - Consumers' Management's Discussion and Analysis which is
incorporated by reference herein.
<PAGE>
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS Energy Page
Selected Financial Information. . . . . . . . . . . . . . . . . 44
Management's Discussion and Analysis. . . . . . . . . . . . . . 47
Consolidated Statements of Income . . . . . . . . . . . . . . . 62
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 63
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 64
Consolidated Statements of Preferred Stock. . . . . . . . . . . 66
Consolidated Statements of Common Stockholders' Equity. . . . . 67
Notes to Consolidated Financial Statements. . . . . . . . . . . 68
Report of Independent Public Accountants. . . . . . . . . . . . 94
Quarterly Financial and Common Stock Information. . . . . . . . 95
Consumers Page
Selected Financial Information. . . . . . . . . . . . . . . . . 98
Management's Discussion and Analysis. . . . . . . . . . . . . . 99
Consolidated Statements of Income . . . . . . . . . . . . . . . 110
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 111
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 112
Consolidated Statements of Long-Term Debt . . . . . . . . . . . 114
Consolidated Statements of Preferred Stock. . . . . . . . . . . 115
Consolidated Statements of Common Stockholder's Equity. . . . . 116
Notes to Consolidated Financial Statements. . . . . . . . . . . 117
Report of Independent Public Accountants. . . . . . . . . . . . 138
Quarterly Financial Information . . . . . . . . . . . . . . . . 139
<PAGE>
<PAGE> 43
CMS Energy
1996 Financial Statements
<PAGE>
<PAGE> 44
<TABLE>
Selected Financial Information CMS Energy Corporation
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Operating revenue (in millions) ($) 4,333 3,890 3,614 3,476 3,142
Consolidated net income (loss)
(in millions) ($) 240 204 179 155 (297)
Average common shares outstanding
(in thousands)
CMS Energy 92,462 88,810 85,888 81,251 79,877
Class G 7,727 7,511 - - -
Earnings (loss) per average common share
CMS Energy ($) 2.45 2.27 2.09 1.90 (3.72)
Class G ($) 1.82 .38 - - -
Cash from operations (in millions) ($) 661 682 612 484 456
Capital expenditures, excludes capital
lease additions and DSM (in millions) ($) 659 535 575 550 487
Total assets (in millions) ($) 8,615 8,143 7,378 6,958 6,842
Long-term debt, excluding current
maturities (in millions) ($) 2,842 2,906 2,709 2,405 2,725
Non-current portion of capital
leases (in millions) ($) 103 106 108 115 98
Total preferred stock (in millions) ($) 356 356 356 163 163
Total preferred securities (in millions) ($) 100 - - - -
Cash dividends declared per common share
CMS Energy ($) 1.02 .90 .78 .60 .48
Class G ($) 1.15 .56 - - -
Market price of common stock at year-end
CMS Energy ($) 33-5/8 29-7/8 22-7/8 25-1/8 18-3/8
Class G ($) 18-3/8 18-7/8 - - -
Book value per common share at year-end
CMS Energy ($) 17.02 15.16 12.78 11.33 9.09
Class G ($) 11.19 10.56 - - -
Return on average common equity (%) 15.2 15.9 17.3 18.3 (33.2)
Return on assets (%) 5.3 5.1 4.7 4.5 (2.3)
Number of common shareholders at year-end 55,708 59,983 63,628 66,795 70,801
Number of employees at year-end
(full-time equivalents) 9,712 10,105 9,972 10,013 9,971
</TABLE>
<PAGE>
<PAGE> 45
<TABLE>
Selected Financial Information (Continued) CMS Energy Corporation
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Electric Utility Statistics
Sales (billions of kWh) 37.1 35.5 34.5 32.8 31.6
Customers (in thousands) 1,594 1,570 1,547 1,526 1,506
Average sales rate per kWh (cents) 6.55 6.36 6.29 6.28 5.82
Gas Utility Statistics
Sales and transportation deliveries (bcf) 448 404 409 411 384
Customers (in thousands) (a) 1,504 1,476 1,448 1,423 1,402
Average sales rate per mcf ($) 4.45 4.42 4.48 4.46 4.55
Electric and Gas Non-Utility Statistics
CMS Energy's share of unconsolidated
independent power production
revenue (in millions) ($) 493 497 385 334 284
Independent power production
sales (millions of kWh) 7,823 7,422 6,216 5,019 4,057
CMS Energy's share of unconsolidated
natural gas transmission, storage and
marketing revenue (in millions) ($) 42 26 7 3 4
Gas marketed for end-users (bcf) 108 101 66 60 45
Exploration and Production Statistics
Sales (net equiv. MMbbls) 9.7 8.9 5.6 5.0 4.6
Proved reserves (net equiv. MMbbls) 122.6 111.2 93.3 69.8 70.9
Proved reserves added (net equiv. MMbbls) 21.1 26.8 29.0 3.9 15.0
Finding cost per net equiv. bbl ($) 2.94 5.06 5.92 4.97 4.88
<FN>
(a) Excludes off-system transportation customers.
</TABLE>
<PAGE>
<PAGE> 46
(This page intentionally left blank)
<PAGE>
<PAGE> 47
CMS Energy Corporation
Management's Discussion and Analysis
This Annual Report 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 Annual Report, except to the extent they
contain 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 Annual
Report, 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; acquisition, development and operation of
independent power production facilities; energy marketing to utilities,
commercial and industrial customers; storage, transmission and processing
of natural gas; and international energy distribution.
Consolidated Earnings
In Millions, Except Per Share Amounts
Years Ended December 31 1996 1995 Change
Consolidated Net Income $ 240 $ 204 $ 36
Net Income Attributable to Common Stocks:
CMS Energy 226 201 25
Class G 14 3 11
Earnings Per Average Common Share:
CMS Energy 2.45 2.27 .18
Class G 1.82 .38 1.44
Class G Shares were issued on July 21, 1995. Pro forma net income
attributable to CMS Energy Common Stock and to Class G Common Stock, which
reflects the performance of the gas distribution, storage and
transportation business currently conducted by Consumers and Michigan Gas
Storage, assuming Class G shares were outstanding during the entire period
for the year ended December 31, 1995, would be $189 million and $15
million respectively. Pro forma earnings per share for the year ended
December 31, 1995 would be $2.14 and $1.93 for CMS Energy Common Stock and
Class G Common Stock, respectively.
The increase in consolidated net income for 1996 primarily reflects the
favorable impact of an electric rate increase and operating income
resulting from a refund received by the MCV Partnership which provided a
$6 million earnings benefit for CMS Energy. Earnings in 1996 also reflect
increased electric sales, gas deliveries and revenues from gas loaning
activities. Consolidated net income was also affected by increased
earnings from CMS Gas Transmission's 25 percent ownership interest in TGN
and increased 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. CMS Gas Transmission and CMS Generation
are subsidiaries of Enterprises. The improved consolidated net income for
1995 over the 1994 level reflects increased utility electric sales and
utility gas deliveries, increased electric utility revenue as a result of
the May 1994 rate increase, reversal of losses previously recorded for gas
utility contingencies (see Note 4), improved operating results from
Consumers' interest in the MCV Facility, and the continuing growth of the
international businesses. 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. In 1996, Consumers paid $200 million in common
dividends to CMS Energy. Consumers temporarily suspended its common
dividends from mid-1995 until early 1996 to improve its capital structure.
In 1996, Enterprises paid common dividends and other distributions of $119
million to CMS Energy.
Operating Activities 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. CMS NOMECO's is a subsidiary of Enterprises. Consolidated
cash from operations totaled $661 million and $682 million for 1996 and
1995, respectively. The $21 million decrease includes increased
electricity sales and gas deliveries; lower cash losses associated with
the PPA; CMS NOMECO's increased sales of oil and natural gas; and the
timing of cash payments, receipts and recognition of revenues related to
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 $841
million and $1,016 million for 1996 and 1995, respectively. The decrease
of $175 million primarily reflects the 1995 acquisition of Hydra-Co and an
increase in 1996 of proceeds from the sale of property. An increase in
capital expenditures was partially offset by a decrease in investments in
partnerships and unconsolidated subsidiaries during 1996. CMS Energy's
1996 expenditures for its utility and international businesses were $447
million and $432 million, respectively.
Financing Activities Net cash provided by financing activities totaled
$180 million and $311 million for 1996 and 1995, respectively. The net
decrease of $131 million primarily reflects an increase in the repayment
of bank loans, an increase in common stock dividends and a reduction in
proceeds from the issuance of common stock. These changes were partially
offset by increased proceeds from bank loans and notes as well as proceeds
from the sale of preferred securities in 1996.
In 1996, CMS Energy filed shelf-registration statements with the SEC for
the issuance and sale of up to $125 million of Series B GTNs and $150
million Series C GTNs, with net proceeds to be used for general corporate
purposes. On December 31, 1996, CMS Energy had issued and outstanding
$250 million of Series A GTNs and $103 million of Series B GTNs with
weighted-average interest rates of 7.7 percent and 8.0 percent,
respectively.
Also in 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. On December 31, 1996, $107 million was
outstanding with a weighted-average interest rate of 7.2 percent.
CMS NOMECO replaced its $140 million revolving credit agreement with a
$225 million revolving credit agreement. On December 31, 1996, $122
million was outstanding under the new agreement with a weighted-average
interest rate of 6.2 percent.
In 1996, CMS Energy declared and paid $94 million in cash dividends to
holders of CMS Energy Common Stock and $9 million in cash dividends to
holders of Class G Common Stock. 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 $.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
January 1997, 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, which were paid in February 1997.
In 1996, CMS Energy received net proceeds of $95 million from the issuance
of common stock. The issuance of 2.1 million of those shares completed
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. Proceeds from the sale were used for general corporate
purposes of CMS Energy.
In 1996, CMS Energy filed a shelf-registration statement with the SEC for
the issuance and the sale of up to $500 million of senior and subordinated
debt securities. If securities are issued from this shelf-registration
statement, the net proceeds will be used to invest in the business of
CMS Energy and for its general corporate purposes. Initially, the net
proceeds may be used to refund or refinance a portion of Series A GTNs,
Series A Deferred Coupon Notes and Series B Deferred Coupon Notes.
Other Investing and Financing Matters CMS Energy has available unsecured,
committed lines of credit totaling $155 million and a $450 million
Unsecured Revolving Credit Facility. At December 31, 1996, CMS Energy had
utilized a total of $178 million under these facilities. CMS Energy will
continue to evaluate the capital markets in 1997 as a source of financing
its subsidiaries' investing activities and required debt retirements.
Consumers has several unsecured, committed lines of credit totaling $120
million and a $425 million working capital facility available to meet
short-term borrowing requirements to finance working capital and gas in
storage, and to pay for capital expenditures between long-term financings.
At December 31, 1996, a total of $333 million was outstanding under these
facilities. In October 1996, the FERC authorized the issuance of up to
$900 million of short-term securities through 1998. An agreement is in
place permitting the sales of certain accounts receivable for up to $500
million. At December 31, 1996 and 1995, receivables sold totaled $318
million and $295 million, respectively. In November 1996, the FERC
authorized the issuance of $500 million of long-term securities through
November 1998 for refinancing or refunding purposes. Also in October
1996, Michigan Gas Storage entered into a $23 million secured, variable
rate, seven-year term loan.
CMS Energy is required to redeem or retire $1.9 billion of long-term debt
over the three-year period ending December 1999. In addition, at December
31, 1996, Consumers had a recorded a liability to the DOE of $106 million,
which is to be paid prior to the first delivery of spent nuclear fuel to
the DOE. Delivery of the fuel had originally been scheduled to occur in
1998 (see Note 2). Cash provided by operating activities is expected to
satisfy a substantial portion of these debt retirements. Additionally,
capital markets will continue to be evaluated as a source of financing
required debt retirements.
At December 31, 1996 the book value per share of CMS Energy Common Stock
and Class G Common Stock was $17.02 and $11.19, respectively.
Electric Utility Results of Operations
Pretax Operating Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales (net of special contract discounts) $ 1 $ 59
Rate increases and other regulatory issues 50 9
Operation and maintenance 2 (13)
General tax and depreciation (13) (26)
Other - 1
---- ----
Total change $ 40 $ 30
==== ====
Electric Sales: Total electric sales in 1996 were 37.1 billion kWh, a 4.4
percent increase from the 1995 level as a result of economic growth. This
increase in total electric sales included a 1.7 percent increase in sales
to ultimate customers. Total electric sales in 1995 were 35.5 billion
kWh, a 3.0 percent increase from the 1994 level as a result of economic
growth and warmer summer temperatures. This increase in total electric
sales included a 4.2 percent increase in sales to ultimate customers. The
table below reflects electric kWh sales by class of customer for both
periods:
In Billions of kWh
Years Ended December 31 1996 1995 Change 1995 1994 Change
Residential 10.9 10.7 .2 10.7 10.2 .5
Commercial 10.0 9.7 .3 9.7 9.2 .5
Industrial 12.9 12.7 .2 12.7 12.3 .4
Other 3.3 2.4 .9 2.4 2.8 (.4)
---- ---- --- ---- ---- ---
Total sales 37.1 35.5 1.6 35.5 34.5 1.0
==== ==== === ==== ==== ===
Power Costs:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$1,087 $970 $117 $970 $950 $20
The increases in both periods reflect 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 under the PPA is
1,240 MW through the termination of the PPA in 2025. The MPSC allows
Consumers to recover substantially all payments for 915 megawatts (MW) of
contract capacity purchased from the MCV Partnership. The MPSC order
allowing recovery was affirmed by the Court of Appeals in March 1996. At
the end of 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power purchases from the MCV
Partnership.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the PPA
contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below. These after-tax cash
underrecoveries totaled $41 million, $90 million and $61 million in 1996,
1995 and 1994, respectively. For further information, see Note 3.
In Millions
1997 1998 1999 2000 2001
Estimated cash
underrecoveries, net of tax $28 $23 $22 $21 $20
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Electric Rate Proceedings: In February 1996, the MPSC issued a partial
final order in the retail electric rate case filed in 1994, granting a $46
million annual increase in electric retail rates and authorizing a 12.25
percent return on common equity. Separate requests were before the MPSC
to offer competitive special rates to certain large qualifying customers
and to modify certain depreciation rates and practices. In November 1996,
the MPSC issued a final order in the Settlement Agreement which combined
the separate requests. The rate increase and rate of return were not
changed from the partial final order and Consumers was authorized to
accelerate recovery of its nuclear plant investment by charging $18
million of annual steam production plant depreciation expense to the
nuclear production depreciation reserve. Recovery of the additional 325
MW of MCV Partnership contract capacity charges was also approved (see
Note 3).
The Settlement Agreement also requires the establishment of a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Nuclear Matters: In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report rated
all areas as good, unchanged from the previous assessment.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003,
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that, with a change in fuel management designed to
minimize embrittlement, Palisades might be operated to the end of its
license life in the year 2007 without annealing of the reactor vessel, but
will continue to monitor the matter.
Palisades' on-site storage pool for spent nuclear fuel is at capacity.
Consequently, NRC-approved dry casks, which are steel and concrete vaults,
are being used for temporary on-site storage. For further information,
see Note 15.
Electric Environmental Matters: 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 that certain capital
expenditures be made in order to comply with the amendments for nitrogen
oxide reductions, generating units are currently operating at or near the
sulfur dioxide emission limits that will be effective in the year 2000.
Management believes that annual operating costs will not be materially
affected as a result of expenditures to comply.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, and believes that these costs are
properly recoverable in rates.
Consumers is a so-called potentially responsible party at several sites
being administered under Superfund. In addition, 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 the liability at any
of the known Superfund sites, individually or in total, will have a
material adverse effect on CMS Energy's financial position, liquidity or
results of operations. For further information regarding electric
environmental matters, see Note 14.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock.
As of January 1997, 22 separate stray voltage lawsuits were awaiting
trial court action, down from 30 lawsuits at December 31, 1995, and 83
lawsuits at December 31, 1994. CMS Energy believes that the resolution of
the remaining lawsuits will not have a material impact on its financial
position, liquidity or results of operations.
Gas Utility Results of Operations
Pretax Operating Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales $ 19 $ 12
Reversal in 1995 of gas contingency (23) 23
Recovery of gas costs and other issues 7 (4)
Gas loaning activities 7 -
Operations and maintenance (4) (9)
General taxes and depreciation (5) (7)
Other 1 1
---- ----
Total change $ 2 $ 16
==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility and other miscellaneous transportation, increased 5.1 percent for
1996 compared to 1995 and 6.5 percent for 1995 compared to 1994. The
increased deliveries for each period reflect growth resulting from
customer additions, conversions to natural gas from alternative fuels and
continued strength in the Michigan economy. The table below indicates
total system deliveries and the impact of weather.
In Billions of Cubic Feet
Years Ended December 31 1996 1995 Change 1995 1994 Change
Weather-adjusted deliveries
(variance reflects growth) 337 326 11 326 313 13
Impact of weather 15 9 6 9 1 8
--- --- --- --- --- ---
System deliveries excluding
transport to MCV Partnership 352 335 17 335 314 21
Transport to MCV Partnership 65 54 11 54 77 (23)
Off-system transportation 31 15 16 15 18 (3)
--- --- --- --- --- ---
Total system deliveries 448 404 44 404 409 (5)
=== === === === === ===
Cost of Gas Sold:
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
$750 $674 $76 $674 $662 $12
The cost increase for 1996 was the result of increased sales and the
reversal of a $23 million gas contract contingency during 1995.
Gas Utility Issues
Gas Rate Proceedings: In March 1996, the MPSC issued a final order
decreasing gas rates by $12 million annually and authorizing 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 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 1995, Consumers filed an appeal with the
Court of Appeals, which is still pending, claiming that the MPSC decision
denies Consumers the opportunity to earn its authorized rate of return and
is therefore unconstitutional.
Gas Cost Recovery Matters: In 1995, the MPSC issued an order regarding a
$44 million (excluding 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 correctly concludes
that the producers' theories are without merit and will vigorously oppose
any claims they may raise, but cannot predict the outcome of this issue.
In the gas cost recovery reconciliation proceeding for the period April
1995 through March 1996, an issue has arisen questioning whether revenue
from gas loaning (which was a new business activity for Consumers) should,
in whole or in part, be immediately passed through to customers. The
Administrative Law Judge issued a proposal for decision in January 1997
that agreed with the MPSC staff's position that the gas loaning program
uses storage assets of Consumers and therefore recommended that 90 percent
of the revenue should be refunded to customers. For the year ended
December 31, 1996, $6 million would be subject to refund. Consumers will
continue to oppose this view before the MPSC.
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, and 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 December 31,
1996, Consumers has accrued a liability for $48 million and has
established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could affect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, environmental clean-up costs, above
the amount currently being recovered in rates, will be deferred and
amortized over ten 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 14.
Oil and Gas Exploration and Production
Pretax Operating Income: 1996 pretax operating income increased $9
million from 1995, primarily due to higher oil and gas prices and volumes,
partially offset by the recognition of a $10 million gain from assignment
and novation of a gas supply contract recorded in the first quarter of
1995. Pretax operating income for 1995 increased $22 million from 1994,
primarily due to higher sales volumes and oil sales prices, income
attributable to the acquisitions of Walter International, Inc., and Terra
Energy Ltd., oil and gas exploration and production companies, and
increased gains from the assignments of gas supply contracts, partially
offset by lower average market prices for gas.
Capital Expenditures: Capital expenditures during 1996 relate primarily
to the development of existing oil and gas reserves.
Independent Power Production
Pretax Operating Income: 1996 pretax operating income increased $22
million from 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. Pretax operating income for 1995 increased $25 million,
primarily reflecting higher capacity sales by the MCV Partnership, as well
as additional equity earnings by CMS Generation subsidiaries primarily due
to the Hydra-Co acquisition.
Capital Expenditures and Other: In 1996, CMS Generation, through a
subsidiary, 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. Also in 1996, CMS Generation increased its ownership interest in
the project from 39 percent to 100 percent by purchasing the remaining 61
percent from a consortium of Argentine investors. The Overseas Private
Investment Corporation is expected to provide $75 million in non-recourse
project financing for the facility.
In 1996, CMS Generation, through a subsidiary, and an affiliate of ABB
signed an agreement with Morocco's national utility, Office National de
l'Electricite, for the privatization, expansion and operation of the 1,320
MW Jorf Lasfar coal-fueled power plant located southwest of Casablanca.
The agreement covers the 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 closing under the agreement, which is targeted for the first
half of 1997 and includes over $1 billion in debt financing. Construction
of the second two units will begin shortly thereafter.
In 1996, CMS Generation, through a subsidiary, increased its ownership
interest in CTM to 81 percent. In 1996, CTM began a project to repower
its electric generating plant in Western Argentina's Mendoza Province.
CMS Generation currently plans to invest $185 million to refurbish and
repower the facility resulting in an increase in the plant's available net
output from 243 MW to 506 MW. Capital markets financing of $85 million is
targeted for the first half of 1997.
As of the first quarter of 1997, GVK, began generating electricity from
all three of its combustion turbines. CMS Generation holds a 25.25
percent interest in GVK and operates the 235 MW plant. Construction is
continuing on the combined-cycle facility with an estimated total cost of
$260 million. GVK has received a Government of India counter-guarantee of
performance of certain obligations under the power purchase agreement by
the Andhra Pradesh State Electricity Board and expects to complete
financing early in 1997.
As of January 1, 1997, Jamaica Private Power Company achieved commercial
operation of the two diesel generators at its 60 MW diesel-fired
independent power project in Kingston, Jamaica. CMS Generation, through a
subsidiary, holds a 44 percent interest in Jamaica Private Power Company
and a 60 percent interest in Private Power Operators Limited, which will
operate the plant. Construction on the balance of the plant, including
the 4 MW waste heat steam turbine, will be complete in the first half of
1997.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: 1996 pretax operating income increased $14
million from 1995, reflecting new pipeline and storage investments,
primarily TGN, the continued growth of existing projects, gas marketed to
end-users and the exchange of ownership interests in the Moss Bluff and
Grands Lacs partnerships, as detailed below. In 1995, pretax operating
income increased $5 million over 1994, reflecting growth from new pipeline
investments and the continued growth of existing projects and gas marketed
to end-users.
Capital Expenditures and Other: In 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 billion cubic feet per day of 10-day storage service and has the
capability of being refilled in 20 days.
In 1996, CMS Gas Transmission acquired 32 percent of the common shares of
Nitrotec. Nitrotec specializes in the development and commercialization
of advanced carbon-based adsorption gas separation technologies. Nitrotec
recently received patents covering its helium removal process and nitrogen
rejection process.
In 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 $26 million.
In 1996, Cherokee acquired the Crescent and Ames gas gathering systems and
processing plant in Oklahoma for $34 million. A portion of the Ames gas
gathering system was subsequently sold in January 1997 for $8 million.
CMS Gas Transmission and Heritage Gas Services have partnership interests
in Cherokee of 82 percent and 18 percent, respectively. Cherokee had
acquired the adjacent Lucien gas gathering system and processing plant
earlier in 1996, and has now integrated the two operations. The Crescent
system is providing operating synergies with the Lucien system, and has
increased CMS Gas Transmission's presence in this important domestic gas-
producing region.
In 1996, CMS Gas Transmission, together with Empresa Nacional de
Electricidad S.A., Chile's largest electricity generation and transmission
company, became partners in the Atacama Pipeline, an integrated $700
million project to construct 930 kilometer pipeline that will transport
natural gas across the Andes Mountains from Northern Argentina to markets
in Northern Chile. A 600 MW gas-fueled, combined-cycle generating plant
is planned to be built in two stages at the end of the pipeline in Chile
by a consortium including CMS Generation. Construction is scheduled to
begin in 1997, with gas transportation and plant operations expected in
1999.
International Energy Distribution
Capital Expenditures: In 1996, a seven-company consortium in which
CMS Electric and Gas Company, a subsidiary of Enterprises, holds a 40
percent interest acquired 90 percent of the outstanding shares of EDEER
S.A. for $160 million. EDEER S.A. serves over 200,000 customers,
primarily residential and commercial, in a 55,000 square kilometer area.
In 1996, the Entre Rios Province transferred ownership and operating
management of EDEER S.A. to the consortium.
Forward-Looking Information
Forward-looking information is included throughout this Annual Report.
Material contingencies are also described in the 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 $2.7 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 1997 as a potential source of financing its
subsidiaries' investing activities. CMS Energy estimates capital
expenditures by business segment over the next three years as follows:
In Millions
Years Ended December 31 1997 1998 1999
Electric utility (a) $272 $275 $257
Gas utility (a) 115 103 103
Oil and gas exploration and production 135 150 165
Independent power production 196 162 157
Natural gas transmission and storage 110 100 75
International energy distribution 120 100 100
Marketing, services and trading 17 13 -
---- ---- ----
$965 $903 $857
==== ==== ====
(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 $450 million from 1997 to 1999 in its
oil and gas exploration and production operations, primarily in North and
South America, offshore West Africa and North Africa. CMS Energy also
plans to invest $515 million in its independent power production
operations from 1997 to 1999 to pursue acquisitions and development of
electric generating plants in the United States, Latin America, Southern
Asia, the Pacific Rim region and North Africa. Investments totaling $285
million from 1997 to 1999, relating to non-utility gas operations, are
planned to continue development of natural gas storage, gathering and
pipeline operations both domestically and internationally. CMS Energy
plans to invest $320 million from 1997 to 1999 in its international energy
distribution operations related to international expansion. CMS MST plans
to invest $30 million from 1997 to 1999. CMS MST was formed during 1996
as part of CMS Energy's expansion and reorganization of its energy
marketing business. This restructuring is expected to significantly
improve CMS Energy's competitive position in the energy marketplace
throughout the U.S. and abroad. CMS MST will provide gas, electric, oil
and coal marketing, risk management and energy management services
throughout the United States and eventually worldwide.
These estimates are prepared for planning purposes and are subject to
revision.
Electric Outlook: Consumers expects average annual growth of two to three
percent per year in electric system sales over the next five years, based
on the current industry configuration in Michigan. Actual electric sales
in future periods may be affected by abnormal weather, changing economic
conditions, or the developing competitive market for electricity.
Consumers continues to work toward retaining its current retail service
customers by offering electric rates that are competitive with those of
other energy providers, and by improving reliability and customer
communications. Consumers is also taking steps to prepare for a future
environment in which open access is the predominant means by which retail
service customers obtain their power requirements.
Consumers' retail service is affected by competition in several areas,
including the potential installation of cogeneration or other self-
generation facilities by larger industrial customers; the formation of
municipal utilities that would displace retail service to an entire
community; competition from other utilities that offer flexible rate
arrangements designed to encourage movement of facilities or production to
their service areas; economic development competition between utilities;
MPSC direct access programs and potential electric industry restructuring
including regulatory decisions and new state or federal legislation.
In 1996, the MPSC significantly reduced the rate subsidization of
residential customers by large industrial and 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. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and serve other facilities at least ten years. 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 also 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 Michigan Attorney
General.
The MPSC-approved Settlement Agreement, among other things, opened up 240
MW of load to competition. Consumers believes it can compete for 140 MW
of load, while 100 MW is reserved for 18 months for direct access on a
lottery basis. Consumers has negotiated special contracts sufficient to
fill the 140 MW of load available under the Settlement Agreement. These
contracts were filed with the MPSC for approval.
In January 1996, the Governor of the State of Michigan requested that the
MPSC review the existing regulatory framework governing Michigan business
in order to improve Michigan's business climate. After the filing of
utility plans as requested by the MPSC earlier in 1996, and after
discussions with many parties, in December 1996, the MPSC staff issued a
report recommending a phased-in program of direct access by electric
customers (also known as customer choice) based on two fundamental
principles: 1) all customers should be eligible to participate in the
emerging competitive market for electric supply; and 2) rates should not
be increased for any customers and should be decreased where possible.
The report also recommends that, beginning in 1997, customers would have
the opportunity to select the power supplier of their choice. All
customers would be eligible to participate, but in the initial years the
total amount would be limited to 150 MW for 1997, increasing an additional
150 MW each year through 2000. In 2001, all commercial and industrial
customers served at primary voltage would be eligible, and in 2004 all
remaining customers would be eligible. This report also recommends
recovery of electric utility transition costs (often referred to as
stranded costs) from those customers exercising a right to purchase power
from generators other than traditional utility suppliers.. Transition
costs consist of two elements: 1) energy supply costs that were incurred
during the regulated era that would not be competitive at market prices if
the electric industry is restructured; and 2) costs that are incurred to
facilitate the transition from regulated monopoly status to competitive
market status. The MPSC staff report states that transition costs should
include the following: 1) regulatory assets (see Note 19); 2) nuclear
capital costs; 3) contract capacity costs in power purchase agreements; 4)
employee-related restructuring costs; and 5) other costs related to
implementing restructuring.
The report also recommends that where possible, the recovery of the
transition costs would be funded through rate reduction bonds, a potential
financing which has the dual advantages of funding transition costs while
simultaneously reducing customer rates. Transition costs not recovered
through rate reduction bonds would be recovered through a transition
charge billed to direct access customers. The transition charge would
begin when the customer takes direct access service and would continue
through 2007. Customers not participating in the direct access program
would be charged bundled rates that include: 1) a base rate freeze; 2)
suspension of the power supply cost recovery process during the
transition period and establishment of a fixed level of fuel and purchase
power recovery based on approved cost levels; and 3) limited performance-
based regulation of the transmission and distribution functions in a
manner which incorporates service standards and allows for the Consumer
Price Index less one percent adjustments on transmission and distribution
rates through the end of 2001.
On March 7, 1997, Consumers filed supplementary data with the MPSC at its
request. This data showed that Consumers has approximately $1.8 billion
of existing transition costs which would be recovered by a transition
charge to be paid by direct access customers through 2007. Restructuring
and implementation costs of $200 million would be recovered by an
implementation charge to direct access customers. Alternatively, if the
securitization approach is pursued and appropriate legislation is passed,
the data indicate that significant customer benefits would result. The
resulting securitization charge would be paid by all customers to service
$4 billion of rate reduction bonds with a proposed 15 year term. Because
of the phase-in schedule for retail direct access service, a substantial
portion of $4 billion in costs that would be subject to the securitization
alternative would be paid by customers on bundled rates prior to getting
choice, thus allowing the transition cost to be charged only to direct
access customers to be limited to $1.8 billion if securitization does not
occur. Securitization results in over $200 million benefit per year to
customers because the 15 year repayment period of the bonds allows the
cost reimbursement by the customer to be spread out over a longer period
than without securitization and because securitization allows the costs
being securitized to be financed at a lower rate.
Several of the elements of electric utility restructuring will need to be
addressed in legislation, including assurance of full transition cost recovery,
securitization of rate reduction bonds and generation deregulation.
Consumers currently expects that electric utility restructuring will occur
in a manner consistent with the MPSC Staff Report, but cannot predict
with certainty the timing of actual implementation, the extent of customer
choice, or resultant financial impacts.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid for wholesale
transactions. 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 allows
the full recovery of transition costs. Order 888 also requires that power
pools restructure their ongoing operations and open membership to industry
participants. Order 889 requires that utilities establish electronic
systems to share information about available transmission capacity and to
separate their wholesale power marketing and transmission operations
functions.
Several FERC Order 888 and 889 requirements have been implemented,
including the filing with FERC of Consumers' individual open access tariff
and the Joint Transmission Tariff with Detroit Edison for transmission
service across the Consumers and Detroit Edison transmission systems,
separation of the wholesale merchant function from the transmission
function, implementation of the required Code of Conduct, unbundling of
wholesale interconnection agreements and related issues. Consumers
participated in organizational discussions of a Midwest Independent System
Operator, of which Consumers is a member.
One issue related to FERC Orders 888 and 889 that is not resolved is the
operation of the Michigan Electric Power Coordination Center. Currently,
Consumers and Detroit Edison have an agreement to jointly operate the
Michigan Electric Power Coordination Center pool, which provides
considerable savings to Michigan electric customers. Consumers would
propose to maintain the benefits of the pool for its customers and open up
the pool to other participants on a non-discriminatory basis. Detroit
Edison seeks to terminate the power pool agreement with Consumers
effective April 30, 1997. The current Michigan Electric Power
Coordination Center agreement requires a four-year advance notice for
termination. The FERC is expected to rule on this issue in 1997. The
impact of the FERC decision on Consumers and its customers cannot be
predicted.
Consumers currently applies the utility accounting standard, SFAS 71, that
recognizes the economic effects of rate regulation and, accordingly, has
recorded regulatory assets and liabilities related to its generation,
transmission and distribution operations (see note 19). If rate recovery
of generation-related costs becomes unlikely or uncertain, whether due to
competition or regulatory action, this accounting standard may no longer
apply to Consumers' generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of
related regulatory liabilities) or a loss, depending on whether Consumers'
regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets. Based on a current evaluation of
the various factors and conditions that are expected to impact future cost
recovery, Consumers believes that its regulatory assets, including those
related to generation, are probable of future recovery.
At the SEC staff's request, the FASB is reviewing the accounting for
closure and removal costs for long-lived assets, including
decommissioning. The current electric utility industry accounting
practices of recording the cost of removal as a component of depreciation
could be changed. The FASB's tentative decision includes recognition of
the cost of closure and removal obligation as a liability based on
discounted future cash flows with the offset recorded as part of the cost
of the plant asset.
Gas Outlook: Consumers currently anticipates gas deliveries to grow two
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 addition, Consumers has proposed to
the MPSC a fixed gas price for recovery over a three-year period.
Consumers is also offering a variety of energy related services to its
customers including appliance maintenance, home safety, and home security.
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 mid-1997 and last for
two years, are intended to help the MPSC determine whether it is
appropriate to allow all customers access to the competitive gas
transportation market.
Based on a regulated utility accounting standard, 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 (see Note 19).
Other
New Accounting Standards: In 1996, the FASB issued SFAS 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which is effective for 1997 financial statements. In October
1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, Environmental Remediation Liabilities,
effective for 1997 financial statements. CMS Energy does not expect the
application of these statements to have a material impact on its financial
position, liquidity or results of operations.
<PAGE>
<PAGE> 62
<TABLE>
Consolidated Statements of Income CMS Energy Corporation
<CAPTION>
In Millions, Except Per Share Amounts
Years Ended December 31 1996 1995 1994
<C> <C> <C> <C>
Operating Revenue Electric utility $2,446 $2,277 $2,189
Gas utility 1,282 1,195 1,151
Oil and gas exploration and production 130 108 78
Independent power production 140 96 46
Natural gas transmission, storage and marketing 320 196 145
Other 15 18 5
------ ------ ------
Total operating revenue 4,333 3,890 3,614
------ ------ ------
Operating Expenses Operation
Fuel for electric generation 296 283 306
Purchased power - related parties 589 491 482
Purchased and interchange power 202 196 162
Cost of gas sold 997 824 785
Other 751 695 621
------ ------ ------
Total operation 2,835 2,489 2,356
Maintenance 178 186 192
Depreciation, depletion and amortization 441 416 379
General taxes 202 196 184
------ ------ ------
Total operating expenses 3,656 3,287 3,111
------ ------ ------
Pretax Operating Electric utility 402 362 332
Income (Loss) Gas utility 153 151 135
Oil and gas exploration and production 39 30 8
Independent power production 68 46 21
Natural gas transmission, storage and marketing 28 14 9
Other (13) - (2)
------ ------ ------
Total pretax operating income 677 603 503
------ ------ ------
Other Income Accretion income (Note 2) 10 11 13
(Deductions) Accretion expense (Note 2) (22) (31) (35)
Other, net 1 10 19
------ ------ ------
Total other deductions (11) (10) (3)
------ ------ ------
Fixed Charges Interest on long-term debt 230 224 193
Other interest 29 27 18
Capitalized interest (8) (8) (6)
Preferred dividends 28 28 24
Preferred securities distributions (Note 8) 8 - -
------ ------ ------
Net fixed charges 287 271 229
------ ------ ------
Income Before Income Taxes 379 322 271
Income Taxes 139 118 92
------ ------ ------
Consolidated Net Income $ 240 $ 204 $ 179
====== ====== ======
Net Income Attributable to Common Stocks CMS Energy $ 226 $ 201 $ 179
Class G $ 14 $ 3 -
====== ====== ======
Average Common Shares Outstanding CMS Energy 92 89 86
Class G 8 8 -
====== ====== ======
Earnings Per Average Common Share CMS Energy $ 2.45 $ 2.27 $ 2.09
Class G $ 1.82 $ .38 -
====== ====== ======
Dividends Declared Per Common Share CMS Energy $ 1.02 $ .90 $ .78
Class G $ 1.15 $ .56 -
====== ====== ======
<FN>
The accompanying notes are an integral part of these statements.
/TABLE
<PAGE>
<PAGE> 63
<TABLE>
Consolidated Statements of Cash Flows CMS Energy Corporation
<CAPTION>
In Millions
Years Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Consolidated net income $ 240 $ 204 $ 179
Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $49, $51 and $49,
respectively) 441 416 379
Deferred income taxes and investment tax credit 46 75 56
Capital lease and debt discount amortization 41 61 73
Accretion expense (Note 2) 22 31 35
Accretion income - abandoned Midland
project (Note 2) (10) (11) (13)
Undistributed earnings of related parties (64) (53) (25)
Power purchases (Note 3) (63) (137) (87)
Other 20 7 3
Changes in other assets and liabilities (Note 17) (12) 89 12
------- ------- -------
Net cash provided by operating activities 661 682 612
------- ------- -------
Cash Flows From Capital expenditures (excludes capital lease additions
Investing of $31, $31 and $36, respectively and DSM) (Note 17) (659) (535) (575)
Activities Investments in partnerships and unconsolidated
subsidiaries (163) (242) (52)
Investments in nuclear decommissioning trust funds (49) (51) (49)
Cost to retire property, net (31) (41) (38)
Acquisition of companies, net of cash acquired (20) (146) -
Deferred demand-side management costs (6) (9) (9)
Proceeds from sale of property 79 22 20
Other 8 (14) (6)
------- ------- -------
Net cash used in investing activities (841) (1,016) (709)
------- ------- -------
Cash Flows From Proceeds from bank loans, notes and bonds 433 333 701
Financing Proceeds from preferred securities 97 - -
Activities Issuance of common stock 95 160 30
Repayment of bank loans (256) (18) (473)
Payment of common stock dividends (103) (84) (67)
Payment of capital lease obligations (40) (37) (35)
Retirement of bonds and other long-term debt (37) (44) (279)
Increase (decrease) in notes payable, net (8) 2 80
Retirement of common stock (1) (1) (2)
Issuance of preferred stock - - 193
------- ------- -------
Net cash provided by financing activities 180 311 148
------- ------- -------
Net Increase (Decrease) in Cash and Temporary Cash Investments - (23) 51
Cash and temporary cash investments
Beginning of year 56 79 28
------- ------- -------
End of year $ 56 $ 56 $ 79
======= ======= =======
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 64
<TABLE>
Consolidated Balance Sheets CMS Energy Corporation
<CAPTION>
ASSETS In Millions
December 31 1996 1995
<S> <C> <C>
Plant and Property Electric $6,333 $6,103
(At Cost) Gas 2,337 2,218
Oil and gas properties (full-cost method) 1,140 1,074
Other 94 105
------ ------
9,904 9,500
Less accumulated depreciation, depletion
and amortization (Note 2) 4,867 4,627
------ ------
5,037 4,873
Construction work-in-progress 243 201
------ ------
5,280 5,074
------ ------
Investments Independent power production 318 275
Natural gas transmission, storage and marketing 233 193
First Midland Limited Partnership (Notes 3 and 20) 232 225
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 20) 134 103
Other 86 22
------ ------
1,003 818
------ ------
Current Assets Cash and temporary cash investments at cost, which
approximates market 56 56
Accounts receivable and accrued revenue, less allowances
of $10 in 1996 and $4 in 1995 (Note 6) 373 296
Inventories at average cost
Gas in underground storage 186 184
Materials and supplies 86 83
Generating plant fuel stock 30 37
Deferred income taxes (Note 5) 48 24
Prepayments and other 235 230
------ ------
1,014 910
------ ------
Non-current Assets Postretirement benefits (Note 12) 435 462
Nuclear decommissioning trust funds (Note 2) 386 304
Abandoned Midland project 113 131
Other 384 444
------ ------
1,318 1,341
------ ------
Total Assets $8,615 $8,143
====== ======
</TABLE>
<PAGE>
<PAGE> 65
<TABLE>
CMS Energy Corporation
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1996 1995
<S> <C> <C>
Capitalization Common stockholders' equity $1,702 $1,469
Preferred stock of subsidiary 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 -
Long-term debt (Note 7) 2,842 2,906
Non-current portion of capital leases (Note 13) 103 106
------ ------
5,103 4,837
------ ------
Current Liabilities Current portion of long-term debt and capital leases 409 207
Notes payable 333 341
Accounts payable 348 306
Accrued taxes 262 254
Accounts payable - related parties 63 53
Power purchases (Note 3) 47 90
Accrued interest 47 45
Accrued refunds 8 22
Other 206 192
------ ------
1,723 1,510
------ ------
Non-current Deferred income taxes (Note 5) 698 640
Liabilities Postretirement benefits (Note 12) 521 533
Power purchases (Note 3) 178 221
Deferred investment tax credits 161 171
Regulatory liabilities for income taxes,
net (Notes 5 and 19) 66 44
Other 165 187
------ ------
1,789 1,796
------ ------
Commitments and Contingencies (Notes 2, 3, 4, 13, 14 and 15)
Total Stockholders' Investment and Liabilities $8,615 $8,143
====== ======
<FN>
(a) As described in Note 8, 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 notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 66
<TABLE>
Consolidated Statements of Preferred Stock CMS Energy Corporation
<CAPTION>
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Consumers' Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 379,549 379,549 38 38
7.68 101.00 207,565 207,565 21 21
7.72 101.00 289,642 289,642 29 29
7.76 102.21 308,072 308,072 31 31
Consumers' Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption (a) 2.08 25.00 8,000,000 8,000,000 193 193
----- -----
Total Preferred Stock $ 356 $ 356
===== =====
<FN>
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 67
<TABLE>
Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
<CAPTION>
In Millions, Except Number of Shares
Other Retained
Number Common Paid-in Revaluation Earnings
of Shares Stock Capital Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 85,196,795 $ 1 $1,672 $ - $(707) $ 966
Consolidated net income 179 179
Common Stock:
Dividends declared (67) (67)
Reacquired (85,174) (2) (2)
Issued 1,389,578 30 30
Reissued 33,350 1 1
---------- --- ------ ---- ----- ------
Balance at December 31, 1994 86,534,549 1 1,701 - (595) 1,107
Consolidated net income 204 204
Common stock:
Dividends declared:
CMS Energy (80) (80)
Class G (4) (4)
Reacquired (21,514) (1) (1)
Issued:
CMS Energy 5,039,019 126 126
Class G (a) 124 124
Reissued 41,447 1 1
Change in unrealized
investment-loss (8) (8)
---------- --- ------ ---- ----- ------
Balance at December 31, 1995 91,593,501 1 1,951 (8) (475) 1,469
Consolidated net income 240 240
Common stock:
Dividends declared:
CMS Energy (94) (94)
Class G (9) (9)
Reacquired (31,700) (1) (1)
Issued:
CMS Energy 3,248,225 90 90
Class G (a) 5 5
Reissued 3,085 - -
Change in unrealized
investment-gain 2 2
---------- --- ------ ---- ----- ------
Balance at December 31, 1996 94,813,111 $ 1 $2,045 $ (6) $(338) $1,702
========== === ====== ==== ===== ======
<FN>
(a) Number of Class G common shares outstanding:
Balance at December 31, 1995 7,618,602
Issued during 1996 257,872
---------
Balance at December 31, 1996 7,876,474
=========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 68
CMS Energy Corporation
Notes to Consolidated 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.
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; acquisition, development and operation of
independent power production facilities; energy marketing to utility,
commercial and industrial customers; storage, transmission and processing
of natural gas; and international energy distribution.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
CMS Energy, Consumers and Enterprises and their wholly owned subsidiaries.
The financial statements are prepared in conformity with generally
accepted accounting principles and include the use of management's
estimates. 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 years ended December 31, 1996, 1995
and 1994, undistributed equity earnings were $64 million, $53 million and
$25 million, respectively.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers
could recover a portion of its abandoned Midland investment over a 10-year
period, but did not allow Consumers to earn a return on that amount.
Consumers reduced the recoverable investment to the present value of the
future recoveries. During the recovery period, the unrecovered asset is
adjusted to its present value. This adjustment is reflected as accretion
income. Conversely, Consumers recorded a loss in 1992 for the present
value of its estimated future underrecoveries of power costs resulting
from purchases from the MCV Partnership (see Note 3), and now recognizes
accretion expense annually to reflect the time value of money on the
recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Consumers' property repairs and
minor property replacements are charged to maintenance expense.
Depreciable property retired or sold plus cost of removal (net of salvage
credits) is charged to accumulated depreciation. Consumers bases
depreciation provisions for utility plant on straight-line and
units-of-production rates approved by the MPSC. The composite
depreciation rate for electric utility property was 3.5 percent for 1996,
1995 and 1994. The composite rate for gas utility plant was 4.2 percent
for 1996, 4.3 percent for 1995 and 4.2 percent for 1994.
The composite rate for other plant and property was 5.5 percent for 1996,
4.9 percent for 1995 and 4.7 percent for 1994.
CMS NOMECO follows the full-cost method of accounting and, accordingly,
capitalizes its exploration and development costs, including the cost of
non-productive drilling and surrendered acreage, on a country-by-country
basis. The capitalized costs in each cost center are being amortized on
an overall units-of-production method based on total estimated proved oil
and gas reserves. Other non-utility depreciable property is amortized
over its estimated useful life; gains and losses are recognized at the
time of sale.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under current federal
law, as confirmed by court decision, the DOE is required to begin
accepting deliveries of spent nuclear fuel by January 31, 1998 for
disposal, even if a permanent repository is not then operational.
Utilities and their customers have been prepaying the costs of DOE
transport and disposal through fees based on electric generation by their
nuclear plants. For fuel used after April 6, 1983, Consumers charges
disposal costs to nuclear fuel expense, recovers them through electric
rates and remits to the DOE quarterly. Consumers elected to defer payment
for disposal of spent nuclear fuel burned before April 7, 1983 until the
first of its spent fuel is delivered to the DOE. At December 31, 1996,
Consumers has a recorded liability to the DOE of $106 million, including
interest, which is to be paid prior to the first delivery of spent nuclear
fuel to the DOE. Consumers recovered through electric rates the amount of
this liability, excluding a portion of interest. In January 1997, in
response to the DOE's declaration in December 1996 that it would not begin
to accept spent nuclear fuel deliveries by the date required by law,
Consumers and other utilities filed suit in federal court. The utilities
are seeking a declaration that they are relieved of their obligation to
remit their quarterly fee payments to the DOE and are authorized to escrow
any related fees collected from their customers, unless and until the DOE
begins to accept spent nuclear fuel. The suit seeks an order requiring
the DOE to develop a program to begin acceptance of spent nuclear fuel by
January 31, 1998. Also in 1997, federal legislation was reintroduced to
clarify the timing of the DOE's obligation to accept spent nuclear fuel
and to direct the DOE to establish an integrated spent fuel management
system that includes designing and constructing an interim storage
facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $49 million in 1996
from its electric customers toward the future decommissioning of its two
nuclear plants. In April 1996, Consumers received a decommissioning order
from the MPSC which estimated decommissioning costs for Big Rock and
Palisades to be $317 million and $548 million (in 1996 dollars),
respectively. The estimated decommissioning costs increased from previous
estimates principally due to the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. After the plants are retired, Consumers plans
to maintain the facilities in protective storage until radioactive waste
disposal facilities are available. As a result, the majority of
decommissioning costs will be incurred after each plant's NRC operating
license expires. When Big Rock's and Palisades' NRC licenses expire in
2000 and 2007, respectively, the trust funds are estimated to have
accumulated $257 million and $686 million, respectively. It is estimated
that at the time the plants are fully decommissioned (in the years 2030
for Big Rock and 2046 for Palisades), the trust funds will have provided
$1 billion for Big Rock and $2.1 billion for Palisades, including trust
earnings over this decommissioning period. Based on this plan, Consumers
believes that the current decommissioning surcharge will be sufficient to
provide for decommissioning of its nuclear plants. At December 31, 1996,
Consumers had an investment in nuclear decommissioning trust funds of $386
million.
Reclassifications: CMS Energy has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect
consolidated net income for the years presented.
Related-Party Transactions: In 1996, 1995 and 1994, Consumers purchased
$50 million, $53 million and $48 million, respectively, of electric
generating capacity and energy from affiliates of Enterprises. Affiliates
of CMS Energy sold, stored and transported natural gas and provided other
services to the MCV Partnership totaling $17 million, $26 million and $22
million for 1996, 1995 and 1994, respectively. For additional discussion
of related-party transactions with the MCV Partnership and the FMLP, see
Notes 3 and 20. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
based on a regulated utility accounting standard, SFAS 71. As a result,
the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized. If all or a separable portion of Consumers'
operations becomes no longer subject to the provisions of utility
regulation, a write-off of related regulatory assets and liabilities would
be required, unless some form of transition cost recovery continues
through rates established and collected for Consumers' remaining
operations. In addition, Consumers would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets. For further discussion, see MD&A Forward-Looking Information and
Note 19.
Other: For significant accounting policies regarding income taxes, see
Note 5; for executive incentive compensation, see Note 11; for pensions
and other postretirement benefits, see Note 12; and for cash equivalents,
see Note 17.
3: 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.
Summarized Statements of Income for CMS Midland and CMS Holdings:
In Millions
Years Ended December 31 1996 1995 1994
Pretax operating income $40 $35 $12
Income taxes and other 11 10 (1)
--- --- ---
Net income $29 $25 $13
=== === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership under the PPA is 1,240
MW through the termination of the PPA in 2025. 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 MPSC allows Consumers to recover substantially all of the
payments for its ongoing purchase of 915 MW of contract capacity. The
MPSC order allowing recovery was affirmed in March 1996 by the Court of
Appeals. Consumers is recovering 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.
Consumers previously recognized a loss in 1992 for the present value of
the estimated future underrecoveries of power costs under the PPA based 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. At December 31, 1996 and 1995, the after-tax present
value of the PPA liability totaled $147 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $41 million along with $28
million related to the termination of power purchase agreements, partially
offset by after-tax accretion expense of $14 million. The undiscounted
after-tax amount associated with the liability totaled $549 million at
December 31, 1996.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below.
In Millions
1997 1998 1999 2000 2001
Estimated cash
underrecoveries,
net of tax $28 $23 $22 $21 $20
=== === === === ===
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Power Supply Cost Recovery 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 power supply cost recovery
reconciliation case issued in 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 a 1993 MPSC order and appealed this issue.
The MCV Partnership and ABATE also filed separate appeals of this order.
In November 1996, the Court of Appeals affirmed the MPSC's order.
Consumers and the MCV Partnership filed petitions for rehearing of the
Court of Appeals opinion, which were denied in January 1997.
4: Rate Matters
Electric Proceedings: In February 1996, the MPSC issued a partial final
order in the retail electric rate case filed in 1994, granting Consumers a
$46 million annual increase in its electric retail rates and authorizing a
12.25 percent return on common equity. Consumers also had separate
requests before the MPSC to offer competitive special rates to certain
large qualifying customers and to modify certain depreciation rates and
practices. In November 1996, the MPSC issued a final order in the
Settlement Agreement which combined the separate requests. The rate
increase and rate of return were not changed from the partial final order
and Consumers was authorized to accelerate recovery of its nuclear plant
investment by charging $18 million of annual steam production plant
depreciation expense to the nuclear production depreciation reserve.
Recovery of the additional 325 MW of MCV Partnership contract capacity
charges was also approved (see Note 3).
The Settlement Agreement also requires Consumers to establish a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Gas Proceedings: In March 1996, the MPSC issued a final order in a 1994
rate case, authorizing recovery of costs related to postretirement
benefits and former manufactured gas plant sites (see Note 12). Overall,
however, the order decreased Consumers' gas rates by $12 million annually
and authorized an 11.6 percent return on common equity.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The
Administrative Law Judge issued a proposal for decision in January 1997
that agreed with the MPSC staff's position that the gas loaning program
uses storage assets of Consumers and therefore recommended that 90 percent
of the revenue should be refunded to customers. For the year ended
December 31, 1996, $6 million would be subject to refund. Consumers will
continue to oppose this view before the MPSC.
In December 1996, the MPSC authorized Consumers to implement a pilot gas
transportation program for 40,000 customers in Bay County, Michigan. The
pilot program will provide residential and small commercial customers the
opportunity to purchase gas from suppliers other than Consumers for a two
year period beginning April 1997. Consumers will retain its role as sole
transporter and distributor of this gas.
In 1993, the MPSC issued an order favorable to Consumers regarding a gas
pricing disagreement between Consumers and certain intrastate producers,
which was affirmed on judicial review by state courts. In December 1996,
the U.S. Supreme Court denied the producers' request to review that
decision. 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.
In 1995, the MPSC issued an order regarding a $44 million (excluding
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 correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In December 1996, Consumers filed a request with the MPSC to totally
suspend the GCR clause and employ a fixed price for recovery of gas costs
for a period of three years ending in March 2000. There would be no
reconciliations and no reopenings for that period of time. In April 2000,
a new GCR factor would be implemented.
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.
5: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on
each company's separate taxable income. CMS Energy and Consumers practice
full deferred tax accounting for temporary differences, but federal income
taxes have not been recorded on the undistributed earnings of foreign
subsidiaries where CMS Energy intends to permanently reinvest those
earnings.
CMS Energy uses ITC to reduce current income taxes payable and defers and
amortizes ITC over the life of the related property. Any AMT paid
generally becomes a tax credit that can be carried forward indefinitely to
reduce regular tax liabilities in future periods when regular taxes paid
exceed the tax calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Current income taxes $ 93 $ 43 $ 36
Deferred income taxes 56 85 66
Deferred ITC, net (10) (10) (10)
---- ---- ----
$139 $118 $ 92
==== ==== ====
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1996 1995
Property $ (621) $ (603)
Unconsolidated investments (259) (266)
Postretirement benefits (Note 12) (165) (173)
Abandoned Midland project (40) (46)
Employee benefit obligations
(includes postretirement benefits
of $167 and $175) (Note 12) 201 204
AMT carryforward 172 161
Power purchases (Note 3) 82 112
ITC carryforward - 23
Other (20) (28)
--- ---
$ (650) $ (616)
======= =======
Gross deferred tax liabilities $(1,715) $(1,698)
Gross deferred tax assets 1,065 1,082
------- -------
$ (650) $ (616)
======= =======
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1996 1995 1994
Consolidated net income before
preferred dividends $268 $232 $203
Income tax expense 139 118 92
---- --- - ----
407 350 295
Statutory federal income tax rate x 35% x 35% x 35%
---- --- - ----
Expected income tax expense 142 123 103
Increase (decrease) in taxes from:
Foreign income taxes 6 3 -
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax depreciation
not previously deferred 6 6 7
ITC amortization (10) (10) (10)
Section 29 Fuel Tax Credits (13) (13) (8)
Other, net 3 4 (5)
---- --- - ----
$139 $118 $ 92
==== === = ====
6: Short-Term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through 1998. Consumers has an unsecured $425 million
facility and unsecured, committed lines of credit aggregating $120
million that are used to finance seasonal working capital requirements.
At December 31, 1996, a total of $333 million was outstanding at a
weighted average interest rate of 6.3 percent, compared with $341 million
outstanding at December 31, 1995, at a weighted average interest rate of
6.5 percent.
Consumers has in place a $500 million trade receivables purchase and sale
program. At December 31, 1996 and 1995, receivables sold under the
agreement totaled $318 million and $295 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold. In 1996, Consumers entered into
a $100 million swap agreement to hedge the variable rate exposure under
the trade receivables purchase and sale program. The swap agreement
terminates in November 1998.
7: Long-Term Debt
At December 31, 1996 and 1995, long-term debt consists of the following:
In Millions
December 31
Maturing/Expiring Interest Rate 1996 1995
First Mortgage Bonds 1996 to 2023 5.875% to 7.375% $1,305 $1,341
Long-Term Bank Debt July 1999 6.0%(a) 400 400
Senior Deferred Coupon
Notes 1997 and 1998 9.5% and 9.875%(a) 347 347
General Term Notes
(Registered Trademark):
Series A 1997 to 2003 7.7%(a) 250 221
Series B 1999 to 2003 8.0%(a) 103 -
Pollution Control
Revenue Bonds 2000 to 2018 5.1%(a) 131 131
Term Loan Agreement:
CMS Energy 2002 7.3%(a) 125 125
CMS Generation 2001 7.2%(a) 107 -
Revolving Line of Credit 1999 6.2%(a) 122 112
Unsecured Revolving
Credit Facility 1998 6.8%(a) 120 118
Nuclear Fuel Disposal (b) 5.1%(a) 106 100
Bank Loans 1997 to 2006 7.4%(a) 102 177
Other - - 3 4
--- ---
Principal Amount
Outstanding 3,221 3,076
Current Amounts (370) (161))
Net Unamortized
Discount (9) (9))
------ ------
Total Long-Term Debt $2,842 $2,906
====== ======
(a) Represents the weighted average interest rate at December 31, 1996.
(b) Due date uncertain (see Note 2).
The scheduled maturities of long-term debt and improvement fund
obligations are as follows: $370 million in 1997, $714 million in 1998,
$845 million in 1999, $20 million in 2000 and $195 million in 2001.
CMS Energy
In 1995, CMS Energy amended the terms of its $400 million Unsecured
Revolving Credit Facility, originally dated July 29, 1994 and increased
the amount to $450 million and extended the termination date to June 30,
1998. CMS Energy also entered into a $125 million, seven-year Term Loan
Agreement dated November 21, 1995.
In 1996, CMS Energy filed a shelf registration with the SEC for the
issuance and sale of up to $125 million CMS Energy Series B General Term
Notes(Registered Trademark), with net proceeds to be used for general
corporate purposes.
Consumers
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers'
ability to issue and sell securities is restricted by certain provisions
in its First Mortgage Bond Indenture, its Articles and the need for
regulatory approvals in compliance with appropriate federal law.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable
rate, long-term loan.
Other: Consumers has FERC authorization through November 1998 to issue up
to $500 million of long-term securities for the purposes of refinancing or
refunding existing long-term securities.
Consumers long-term pollution control revenue bonds are secured by
irrevocable letters of credit or first mortgage bonds.
In October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan. At December 31, 1996, the loan had a
weighted average interest rate of 6.0 percent.
CMS NOMECO
In 1996, CMS NOMECO replaced its $140 million revolving credit agreement
with a $225 million revolving credit agreement which converts to term
loans maturing from March 1999 through March 2003.
Senior serial notes amounting to $28 million, with a weighted average
interest rate of 9.4 percent, were repaid in full on August 10, 1995. In
connection with this early extinguishment of debt, CMS NOMECO incurred a
$1.5 million prepayment premium. The notes were retired with available
proceeds from the bank credit line.
CMS Generation
In 1995, CMS Generation entered into a one-year $118 million bridge credit
facility for the acquisition of Hydra-Co of which $109 million remained
outstanding as of December 31, 1995. In 1996, CMS Generation refinanced
this bridge facility with a $110 million, five-year term loan.
8: Capitalization
CMS Energy
Capital Stock: In 1995, CMS Energy amended its Articles and authorized a
new class of common stock of CMS Energy, designated Class G Common Stock,
which reflects the separate performance of the gas distribution, storage
and transportation businesses of Consumers Gas Group. The pre-existing
CMS Energy Common Stock continues to be outstanding and reflects the
performance of all of the businesses of CMS Energy and its subsidiaries,
including the business of the Consumers Gas Group, except for the interest
in the Consumers Gas Group attributable to the Outstanding Shares. The
filing of the restated Articles with the Michigan Department of Commerce
increased the number of authorized shares of capital stock from 255
million shares to 320 million shares, consisting of 250 million shares of
CMS Energy Common Stock, par value $.01 per share, 60 million shares of
Class G Common Stock, no par value, and 10 million shares of Preferred
Stock, par value $.01 per share.
CMS Energy filed a shelf-registration statement with the SEC on February
15, 1995 covering the issuance of up to $200 million of securities
encompassing Common Stock, Preferred Stock of CMS Energy or of a special
purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. In
the third quarter 1995, CMS Energy received net proceeds of $123 million
from the issuance of 7.52 million shares of Class G Common Stock at a
price to the public of $17.75 per share, initially representing 23.50
percent of the common stockholder's equity value attributed to the
Consumers Gas Group. All of the proceeds funded the capital programs and
were used for general corporate purposes of CMS Energy. Initially, such
proceeds were used to repay a portion of CMS Energy's indebtedness, none
of which is attributable to the Consumers Gas Group. The issuance of
additional shares during 1996 and 1995 increased the common stockholders'
equity value attributable to the Consumers Gas Group, represented by the
Outstanding Shares, to 24.24 percent and 23.73 percent as of December 31,
1996 and 1995.
In 1996, CMS Energy received net proceeds of $95 million from the issuance
of common stock. The issuance of 2.1 million of those 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. Proceeds from the sale were used for general corporate
purposes of CMS Energy.
Other: Under its most restrictive borrowing arrangement at December 31,
1996, none of CMS Energy's consolidated net income was restricted for
payment of common dividends.
Consumers
Capital Stock: In 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. Consumers Power Company
Financing I was formed for the sole purpose of issuing the Trust
Originated Preferred Securities. Its primary asset is $103 million
principal amount of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers which mature in 2015. Consumers'
obligations with respect to the Trust Originated Preferred Securities
under the notes, under the indenture under which the notes have been
issued, under Consumers' guarantee of the Trust Originated Preferred
Securities, and under the declaration by the trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
Other: Under the provisions of its Articles at December 31, 1996,
Consumers had $255 million of unrestricted retained earnings available to
pay common dividends.
CMS NOMECO
In 1995, CMS Energy acquired Walter for $49 million, consisting of $27
million of CMS Energy Common Stock and $22 million in cash and assumed
debt. Walter was merged with a wholly owned subsidiary of CMS NOMECO.
In 1995, CMS Energy acquired 100 percent of the common stock of Terra for
$63 million. Terra has become a wholly owned subsidiary of CMS NOMECO.
9: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the year ended
December 31, 1996 reflect the performance of the Consumers Gas Group.
Earnings per share attributable to Common Stock, for the year ended
December 31, 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 has participated in earnings and dividends from
its issue date. The allocation of earnings (loss) attributable to each
class of common stock and the related amounts per share are computed by
considering the weighted average number of shares outstanding.
Earnings (loss) attributable to Outstanding Shares are equal to 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, shares not held by the holders of the
Outstanding Shares, during the period. The earnings attributable to Class
G Common Stock on a per share basis, for the year ended December 31, 1996
and 1995, are based on 23.79 percent of the income of the Consumers Gas
Group and 23.45 percent of the income of the Consumers Gas Group since the
initial issuance, respectively.
Earnings per share for Class G Common Stock is omitted from the statement
of income for the year ended December 31, 1994, since Class G Common Stock
was not part of the equity structure of CMS Energy. For purpose of
analysis, following are pro forma data for the years ended December 31,
1995 and 1994 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.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Years Ended December 31 1996 1995 1994
Consolidated Net Income $ 240 $ 204 $ 179
Net Income Attributable to Common Stocks
CMS Energy 226 189 167
Class G 14 15 12
Average Common Shares Outstanding
CMS Energy 92.462 88.810 85.888
Class G 7.727 7.536 7.520
Earnings Per Average Common Share
CMS Energy $2.45 $2.14 $1.94
Class G $1.82 $1.93 $1.66
====== ====== ======
Holders of Class G Common Stock have no direct rights in the equity or
assets of Consumers Gas Group, but rather have rights in the equity and
assets of CMS Energy as a whole. In the sole discretion of the Board of
Directors, dividends may be paid exclusively to the holders of Class G
Common Stock, exclusively to the holders of CMS Energy Common Stock, or to
the holders of both classes in equal or unequal amounts. The Board of
Directors has stated its intention to declare and pay dividends on the
CMS Energy Common Stock based primarily on the earnings and financial
condition of CMS Energy. Dividends on Class G Common Stock are paid at
the discretion of the Board of Directors based primarily upon the earnings
and financial condition of Consumers Gas Group, and to a lesser extent,
CMS Energy as a whole.
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 and November 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
January 1997, 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, which were paid in February 1997.
10: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments in financial instruments
approximate fair value.
The carrying amount of long-term debt was $2.8 billion and $2.9 billion at
December 31, 1996 and 1995, respectively, and the fair value was $2.9
billion and $3.0 billion on those dates. Although the current fair value
of the long-term debt may differ from the current carrying amount,
settlement of the reported debt is generally not expected until maturity.
The carrying amount of preferred stock and securities was $456 million and
$356 million at December 31, 1996 and 1995, respectively, and the fair
value was $439 million and $344 million on those dates.
The fair values of CMS Energy's off-balance-sheet financial instruments
are based on the amounts estimated to terminate or settle the instruments.
At December 31, 1996, the fair value of CMS Energy's interest rate swap
agreements, with a notional amount of $617 million, was $10 million,
representing the amount that CMS Energy would have to pay to terminate the
agreements. The settlement of the interest rate swap agreements in 1996
did not materially effect interest expense. At December 31, 1995,
CMS Energy would have paid $16 million to terminate the agreements. Also
refer to Note 14 for a discussion of CMS NOMECO's price hedging
arrangements and their fair values. Guarantees were $102 million and $148
million at December 31, 1996 and 1995, respectively.
The amortized cost of CMS Energy's nuclear decommissioning investments,
which are considered available for sale securities in accordance with SFAS
115, Accounting For Certain Investments in Debt and Equity Securities, was
$351 million and $286 million as of December 31, 1996 and 1995. The
unrealized gain, which is classified in accumulated depreciation by
Consumers, was $35 million and $18 million as of December 31, 1996 and
1995.
11: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
Common Stock of CMS Energy, stock options and stock appreciation rights
may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. Awards under
the plan may consist of any class of Common Stock of CMS Energy and are
subject to performance-based business criteria for certain plan awards.
The plan reserves for award not more than three percent of CMS Energy's
Common Stock outstanding on January 1 each year, less the number of shares
of restricted Common Stock awarded and of Common Stock subject to options
granted under the plan during the immediately preceding four calendar
years. Any forfeitures are subject to award under the plan. At December
31, 1996, awards of up to 986,240 shares of CMS Energy Common Stock and
198,947 shares of Class G Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25
percent per year after two years and are subject to achievement of
specified levels of total shareholder return. Further, the restricted
stock is subject to forfeiture if employment terminates before vesting.
If performance objectives are exceeded, the plan provides additional
awards. Restricted shares vest fully if control of CMS Energy changes, as
defined by the plan. At December 31, 1996, 541,088 shares of the 600,838
restricted shares of CMS Energy Common Stock outstanding are subject to
performance objectives. At December 31, 1996 all of the 16,347 restricted
shares of Class G Stock outstanding are subject to performance objectives.
CMS Energy's Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, expired in 1995. However, options
and stock appreciation rights granted under this plan remain outstanding.
Under both plans, for stock options and stock appreciation rights, the
exercise price on each grant date equaled the closing market price on the
grant date. Options are exercisable upon grant and expire up to ten years
and one month from date of grant. The status of the restricted stock
granted to CMS Energy's key employees under the Performance Incentive
Stock Plan and options granted under both plans follows.
Restricted
Stock Options
Number Number Weighted-Average
of Shares of Shares Exercise Price
CMS Energy Common Stock:
Outstanding at
January 1, 1994 316,187 1,498,966 $ 23.61
Granted 133,500 273,000 $ 22.00
Exercised or Issued (39,361) (158,300) $ 15.64
Forfeited (79,970) - -
Expired - (123,000) $ 31.68
------- -------- --------
Outstanding at
December 31, 1994 330,356 1,490,666 $ 23.50
Granted 253,337 304,000 $ 25.08
Exercised or Issued (43,939) (147,666) $ 14.52
Forfeited (22,307) - -
Expired - (55,000) $ 27.46
------- --------- --------
Outstanding at
December 31, 1995 517,447 1,592,000 $ 24.50
Granted 222,000 368,176 $ 30.55
Exercised or Issued (92,533) (231,550) $ 20.79
Forfeited (46,076) - -
Expired - (12,000) $ 32.88
------- --------- -------
Outstanding at
December 31, 1996 600,838 1,716,626 $ 26.24
======= ========= =======
Restricted shares of Class G Common Stock granted during 1996 and 1995
totaled 9,423 and 6,924, respectively. Options of Class G Common Stock
granted at a price of $17.88 during 1996 and 1995 totaled 11,000 and
10,000, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
Number Weighted- Weighted-
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
$13.00 - $19.50 154,500 4.2 years $ 15.82
$19.51 - $29.00 851,450 6.5 years $ 23.59
$29.01 - $34.25 710,676 6.4 years $ 31.67
- --------------- --------- --------- -------
$13.00 - $34.25 1,716,626 6.2 years $ 26.24
=============== ========= ========= =======
The weighted average remaining life of Class G Common Stock options is 9.2
years.
The weighted average fair value of options granted for CMS Energy Common
Stock was $6.94 in 1996, $5.37 in 1995, and $5.32 in 1994. The weighted
average fair value of options granted for Class G Common Stock was $1.59
in 1996 and $1.57 in 1995. Fair value is estimated using the Black-
Scholes model, a mathematical formula used to value options traded on
securities exchanges, with the following assumptions:
Years Ended December 31 1996 1995 1994
CMS Energy Common Stock Options
Risk-free interest rate 6.63% 6.17% 6.94%
Expected stock-price volatility 24.08% 27.12% 28.83%
Expected dividend rate $ .27 $ .24 $ .24
Expected option life 5 years 5 years 5 years
Class G Common Stock Options
Risk-free interest rate 6.63% 6.17%
Expected stock-price volatility 16.19% 16.19%
Expected dividend rate $ .295 $ .295
Expected option life 5 years 5 years
======= =======
CMS Energy applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan.
Since stock options are granted at market price, no compensation cost has
been recognized for stock options granted under the plan. The
compensation cost charged against income for restricted stock was $2
million in 1996, $3 million in 1995, and was less than $1 million in 1994.
If compensation cost for stock options had been determined in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, CMS Energy's
consolidated net income and earnings per share would have been as follows:
In Millions, Except Per Share Amounts
Pro Forma As Reported
Years Ended December 31 1996 1995 1996 1995
Consolidated Net Income $239 $203 $ 240 $ 204
Net Income Attributable to Common Stocks
CMS Energy 225 200 226 201
Class G 14 3 14 3
Earnings Per Average Common Share
CMS Energy 2.43 2.26 2.45 2.27
Class G 1.76 .34 1.82 .38
==== ==== ==== ====
12: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its
subsidiaries provide certain health care and life insurance benefits for
retired employees and their eligible dependents. Substantially all
employees may become eligible for such benefits if they attain retirement
status while working for CMS Energy or its subsidiaries. CMS Energy and
its subsidiaries adopted SFAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, effective as of the beginning
of 1992 and Consumers recorded a liability of $466 million for the
accumulated transition obligation and a corresponding regulatory asset for
anticipated recovery in utility rates (see Note 19). CMS Energy's
international subsidiaries expensed their accumulated transition
obligation liability. The amount of such transition obligation is not
material to the presentation of the consolidated financial statements or
significant to CMS Energy's total transition obligation. The MPSC
authorized recovery of the electric utility portion of these costs in 1994
over 18 years and the gas utility portion in 1996 over 16 years. During
1995, the FERC granted Consumers a waiver of a three-year filing
requirement for cost recovery with respect to its wholesale electric
business. At December 31, 1996, Consumers had recorded a regulatory asset
and liability of $7 million. By early 1997, the FERC had authorized
recovery of these costs. CMS Energy funds the benefits using external
Voluntary Employee Beneficiary Associations, a legal entity, established
under guidelines of the Internal Revenue Code, through which the company
can provide certain benefits for its employees or retirees. Funding of
the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1996 are based on the assumption
that costs would increase 8.5 percent in 1997, then decrease gradually to
6.0 percent in 2004 and thereafter. The health care cost trend rate
assumption significantly affects the amounts reported. For example, a one
percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $97 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1996 by $11 million.
Years Ended December 31 1996 1995 1994
Weighted average discount rate 7.75% 7.50% 8.00%
Expected long-term rate of
return on plan assets 7.00% 7.00% 7.00%
===== ===== =====
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 13 $11 $13
Interest cost 42 40 41
Actual return on assets (14) (4) -
Net amortization and deferral 8 1 -
--- --- ---
Net postretirement benefit costs $ 49 $48 $54
=== === ===
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
In Millions
1996 1995
Actuarial present value of
estimated benefits
Retirees $ 330 $ 331
Eligible for retirement 66 46
Active (upon retirement) 190 200
---- ----
Accumulated postretirement benefit
obligation 586 577
Plan assets (primarily stocks, bonds
and money market investments) at
fair value 138 78
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets (448) (499)
Unrecognized net (gain) loss from
experience different than assumed (36) 1
Unrecognized prior service cost 7 -
---- ----
Recorded liability $(477) $(498)
===== =====
The health care portion of the accumulated postretirement benefit
obligation is $570 million and $562 million at December 31, 1996 and 1995,
respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the SERP. SERP benefits, which are based on an
employee's years of service and earnings as defined in the SERP, are paid
from a trust established and funded in 1988. Because the SERP is not a
qualified plan under the Internal Revenue Code, earnings of the trust are
taxable and trust assets are included in consolidated assets. At
December 31, 1996 and 1995, trust assets were $30 million and $28 million,
respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: The Pension Plan covers substantially all
employees. The benefits are based on an employee's years of accredited
service and earnings, as defined in the plan, during an employee's five
highest years of earnings. Because the plan was fully funded, no
contributions were made in 1996 and 1994. A contribution of $9 million
was made in 1995.
Years Ended December 31 1996 1995 1994
Discount rate 7.75% 7.50% 8.00%
Rate of compensation increase 4.00% 4.50% 4.50%
Expected long-term rate of
return on assets 9.25% 9.25% 9.25%
===== ===== =====
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 26 $ 23 $ 24
Interest cost 58 56 51
Actual return on plan assets (63) (168) 21
Net amortization and deferral (6) 103 (85)
--- --- ---
Net periodic pension cost $ 15 $ 14 $ 11
=== === ===
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
In Millions
Pension Plan SERP
1996 1995 1996 1995
Actuarial present value of
estimated benefits
Vested $504 $496 $ 21 $ 20
Non-vested 72 74 1 1
--- --- --- ---
Accumulated benefit obligation 576 570 22 21
Provision for future pay increases 158 183 15 13
--- --- --- ---
Projected benefit obligation 734 753 37 34
Plan assets (primarily stocks and bonds,
including $117 in 1996 and $104 in 1995
in common stock of CMS Energy) at
fair value 779 779 - -
--- --- --- ---
Projected benefit obligation less than
(in excess of) plan assets 45 26 (37) (34)
Unrecognized net (gain) loss from
experience different than assumed (99) (69) 5 7
Unrecognized prior service cost 39 43 2 2
Unrecognized net transition (asset) (27) (32) - -
--- --- --- ---
Recorded liability $ (42) $(32) $(30)$(25)
=== === === ===
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
Defined Contribution Plan: CMS Energy provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. CMS Energy will
match at least one-half of the amount contributed by employees up to 3
percent of their salary. These contributions to the plan are invested in
CMS Energy Common Stock. Amounts charged to expense for this plan were
approximately $18 million in 1996 and $17 million in 1995 and 1994.
13: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, aircraft, construction equipment, computer equipment,
nuclear fuel and buildings. Consumers' nuclear fuel capital leasing
arrangement is scheduled to expire in November 1998 and provides for
additional one-year extensions upon mutual agreement by the parties. Upon
termination of the lease, the lessor would be entitled to a cash payment
equal to its remaining investment, which was $69 million as of December
31, 1996. Consumers is responsible for payment of taxes, maintenance,
operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 1996, were:
In Millions
Capital Operating
Leases Leases
1997 $ 48 $ 9
1998 66 8
1999 14 7
2000 13 5
2001 11 5
2002 and thereafter 14 29
--- ---
Total minimum lease payments 166 $ 63
Less imputed interest 24 ===
---
Present value of net minimum
lease payments 142
Less current portion 39
---
Non-current portion $103
===
Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
for the years ended December 31, 1996, 1995 and 1994, were $8 million, $11
million and $10 million, respectively.
Capital lease expenses for the years ended December 31, 1996, 1995 and
1994 were $46 million, $46 million and $43 million, respectively.
Included in these amounts for the years ended 1996, 1995 and 1994 are
nuclear fuel lease expenses of $25 million, $25 million and $21 million,
respectively.
14: Commitments, Contingencies and Other
Environmental Matters: Consumers is a so-called potentially responsible
party at several sites being administered under the 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 known sites will be between $2 million and $9 million. At
December 31, 1996, Consumers has accrued $2 million for its estimated
losses.
Under the Michigan Natural Resources and Environmental Protection Act,
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. Four of the five plans submitted by Consumers have been approved by
the appropriate environmental regulatory authority in the State of
Michigan. Findings for the two completed remedial investigations indicate
that the expenditures for those two sites are likely to be less than the
amounts projected before the studies were performed. However, these
findings may not be representative of all of the sites. Data available
and 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 December 31, 1996, Consumers has accrued a liability of
$48 million and has established a regulatory asset for approximately the
same amount. Any significant change in assumptions, such as remediation
technique, nature and extent of contamination, and legal and regulatory
requirements, could affect the estimate of remedial action costs for the
sites. In accordance with an MPSC rate order issued in March 1996,
environmental clean-up costs above the amount currently being recovered in
rates will be deferred and amortized 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 Clear Air Act, as amended on November 15, 1990, 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 $40 million to install equipment at certain generating units.
Consumers estimates capital expenditures for in-process and proposed
modifications at other coal-fired units to be an additional $35 million by
the year 2000. Management believes that Consumers' annual operating costs
will not be materially affected as a result of expenditures that will be
made to comply with the Clean Air Act.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $965 million for 1997, $903 million for 1998 and $857
million for 1999.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1997 to
2004. Consumers contracts for 60 - 70 percent of its annual coal
requirements which in 1996 totaled $243 million (62 percent was under
long-term contracts). Consumers supplements its long-term contracts with
spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1997 to 2003. Consumers' 1996 gas requirements totaled 266 bcf
at a cost of $747 million, 80 percent of which was under long-term
contracts for one year or more. As of the end of 1996, Consumers had 35
percent of its 1997 gas requirements under such long-term contracts, and
will supplement them with additional long-term contracts and spot-market
purchases.
Other: As of December 31, 1996, CMS Energy and Enterprises have
guaranteed up to $102 million in contingent obligations of unconsolidated
affiliates and unrelated parties.
CMS NOMECO periodically enters into oil and gas price hedging arrangements
to mitigate its exposure to price fluctuations on the sale of crude oil
and natural gas. As of December 31, 1996, CMS NOMECO had contracts on
13.8 bcf of gas for the delivery months of January though December 1997 at
prices ranging from $1.92 to $2.80 per MMBtu and on 2.0 million barrels of
oil at prices ranging from $19.50 to $22.90 per barrel. CMS NOMECO paid
$3 million for settlement of January 1997 contracts on 1.6 bcf of gas. As
of December 31, 1996, the fair value of the remaining 1997 gas and oil
contracts reflected payment due by CMS NOMECO of $5 million. These
arrangements are accounted for as hedges; accordingly, gains or losses are
deferred and recognized at such time as the hedged transaction is
completed. If there was a loss of correlation between the changes in (1)
the market value of the commodity price contracts and (2) the market price
ultimately received for the hedged item, and the impact was material, the
open commodity price contracts would be marked to market and gains and
losses would be recognized in the income statement currently.
CMS NOMECO also has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing
the economic equivalent of 10,000 MMBtu per day at a fixed, escalated
price starting at $2.82 per MMBtu in 2001. The settlement periods are
each a one-year period ending December 31, 2001 through 2006 on 3.65
MMBtu. If the floating price, essentially the then current Gulf Coast
spot price, for a period is higher than the fixed price, the seller pays
CMS NOMECO the difference, and vice versa. If a party's exposure at any
time exceeds $5 million, that party is required to obtain a letter of
credit in favor of the other party for the excess over $5 million and up
to $10 million. At December 31, 1996, the seller had arranged a letter of
credit in CMS NOMECO's favor for $2.5 million. As of December 31, 1996,
the fair value of this contract reflected $16 million due to the seller,
representing the amount CMS NOMECO would have to pay to terminate the
agreement.
A number of lawsuits have been filed against Consumers relating to the
effect of so-called stray voltage on certain livestock. 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 and has
an ongoing program to modify the grounding of all customer services. As
of January 1997, Consumers had 22 separate stray voltage lawsuits awaiting
trial court action, down from 30 lawsuits at December 31, 1995, and 83
lawsuits at December 31, 1994.
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.
15: 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 Consumers to 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 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 has
reviewed the petition and denied the request to suspend Consumers' general
license to store spent fuel.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, indications of minor flaws in welds in the steel liner of one of
the loaded casks were detected. Radiographic examination of the casks 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. Nevertheless, Consumers plans to remove the spent
fuel and insert it into a transportable cask. Bids are currently being
taken for the design and fabrication of the transportable cask. Consumers
is monitoring an investigation under way at another utility that also uses
a 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 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 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 $23 million in any one year to Nuclear Mutual Ltd.
and National Electric Insurance Ltd.; $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.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003,
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that, with fuel management designed to minimize
embrittlement, Palisades might be operated to the end of its license life
in the year 2007 without annealing of the reactor vessel, but will
continue to monitor the matter.
16: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1996 1995
Net investment
Ludington - 51% $116 $116
Campbell Unit 3 - 93.3% 329 332
Transmission lines - various 35 33
Accumulated depreciation
Ludington $ 84 $ 81
Campbell Unit 3 252 238
Transmission lines 14 14
===== ====
17: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the years ended December 31 were:
In Millions
1996 1995 1994
Cash transactions
Interest paid (net of amounts capitalized) $240 $207 $162
Income taxes paid (net of refunds) 82 34 36
Non-cash transactions
Nuclear fuel placed under capital lease $ 28 $ 26 $ 21
Other assets placed under capital leases 3 5 15
Common Stock issued to acquire companies - 90 -
Assumption of debt - 20 -
Capital leases refinanced - 21 -
==== ==== ====
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1996 1995 1994
Sale of receivables, net $23 $20 $(10)
Accounts receivable (28) (80) (15)
Accrued revenue (82) (24 20)
Inventories - 43 (4)
Accounts payable 55 112 26
Accrued refunds (13) (3) (3)
Other current assets and liabilities, net 23 30 4
Non-current deferred amounts, net 10 (9) (6)
--- --- ---
$(12) $ 89 $ 12
==== ==== ====
18: Reportable Segments
CMS Energy operates principally in the following five business segments:
electric utility; gas utility; oil and gas exploration and production;
independent power production; and natural gas transmission, storage and
marketing.
The Consolidated Statements of Income show operating revenue and pretax
operating income by business segment. Other segment information follows:
In Millions
Years Ended December 31 1996 1995 1994
Depreciation, depletion and amortization
Electric utility $ 282 $ 272 $ 257
Gas utility 87 83 76
Oil and gas exploration and production 55 52 41
Independent power production 8 4 2
Natural gas transmission, storage
and marketing 7 3 2
Other 2 2 1
---- ---- ----
$ 441 $ 416 $ 379
====== ====== ======
Identifiable assets
Electric utility (a) $4,505 $4,522 $4,364
Gas utility (a) 1,709 1,690 1,673
Oil and gas exploration and production 719 660 469
Independent power production 1,053 840 536
Natural gas transmission, storage
and marketing 449 303 109
Other 180 128 227
---- ---- ----
$8,615 $8,143 $7,378
====== ====== ======
Capital expenditures (b)
Electric utility $ 310 $ 328 $ 358
Gas utility 137 126 134
Oil and gas exploration and production (c) 88 168 115
Independent power production 142 239 29
Natural gas transmission, storage
and marketing 136 178 31
Other 66 14 5
---- ---- ----
$ 879 $1,053 $ 672
====== ====== ======
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
(c) Includes common stock issued for acquisitions in 1995.
19: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process. These costs are being recovered through rates over
periods of up to 16 years.
An accounting standard, effective January 1996, requires impairment losses
on long-lived assets to be recognized when an asset's book value exceeds
its expected future cash flows (undiscounted). The standard also imposes
stricter criteria for retention of regulatory-created assets by requiring
that such assets be probable of future recovery at each balance sheet
date. There was no impact on financial position or results of operations
upon adoption because management believes these assets will be recovered.
For further discussion, see MD&A Forward-Looking Information.
In Millions
December 31 1996 1995
Postretirement benefits (Note 10) $ 460 $ 487
Income taxes (Note 5) 158 176
Abandoned Midland project 113 131
DSM - deferred costs 60 68
Trunkline settlement 25 55
Manufactured gas plant sites (Note 12) 47 47
Power purchase contracts (Note 3) - 44
Uranium enrichment facility 23 25
Ludington Fish Settlement 14 -
Other 18 22
---- ----
Total regulatory assets $ 918 $1,055
====== ======
Income taxes (Note 5) $ (224) $ (220)
DSM - deferred revenue (24) (25)
Other (1) (1)
---- ----
Total regulatory liabilities $ (249) $ (246)
====== ======
20: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1996 obligation to purchase electric capacity from the MCV Partnership was
15 percent of Consumers' owned and contracted capacity. Summarized
financial information of the MCV Partnership follows:
Statements of Income
In Millions
Years Ended December 31 1996 1995 1994
Operating revenue (a) $ 645 $ 618 $ 579
Operating expenses 417 386 378
---- ---- ----
Operating income 228 232 201
Other expense, net 162 171 183
---- ---- ----
Net income $ 66 $ 61 $ 18
====== ====== ======
Balance Sheets
In Millions
December 31 1996 1995
Assets
Current assets (b) $ 316 $ 257
Property, plant and
equipment, net 1,889 1,948
Other assets 159 156
----- -----
$2,364 $2,361
======= ======
Liabilities and Partners' Equity
Current liabilities $ 235 $ 219
Long-term debt and other
non-current liabilities (c) 1,930 2,008
Partners' equity (d) 199 134
----- -----
$2,364 $2,361
====== ======
(a) Revenue from Consumers totaled $598 million, $571 million and $534
million for 1996, 1995, and 1994, respectively.
(b) Receivables from Consumers totaled $52 million and $48 million at
December 31, 1996 and 1995, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At
December 31, 1996 and 1995, lease obligations of $1.6 billion were owed to
the owner trust. CMS Holdings' share of the interest and principal
portion for the 1996 lease payments was $64 million and $25 million,
respectively, and for the 1995 lease payments was $66 million and $23
million, respectively. The lease payments service $1.1 billion in non-
recourse debt outstanding as of December 31, 1996 and 1995, of the
owner-trust. FMLP's debt is secured by the MCV Partnership's lease
obligations, assets, and operating revenues. For 1996 and 1995, the
owner-trust made debt payments (including interest) of $192 million.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
<PAGE>
<PAGE> 94
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS ENERGY CORPORATION (a
Michigan corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CMS Energy Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
<PAGE>
<PAGE> 95
<TABLE>
Quarterly Financial and Common Stock Information CMS Energy Corporation
<CAPTION>
In Millions, Except Per Share Amounts
1996 (Unaudited) 1995 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $1,283 $938 $929 $1,183 $1,117 $835 $869 $1,069
Pretax operating income $214 $156 $166 $141 $206 $124 $149 $124
Consolidated net income $88 $50 $58 $44 $86 $33 $47 $38
Earning (loss) per average
common share:
CMS Energy $.83 $.54 $.65 $.43 $.99 $.37 $.54 $.37
Class G $1.50 $.16 $(.28) $.44 - - $(.17) $.55
Dividends declared per
common share:
CMS Energy $.24 $.24 $.27 $.27 $.21 $.21 $.24 $.24
Class G $.28 $.28 $.295 $.295 - - $.28 $.28
Common stock prices (a)
CMS Energy:
High $31-7/8 $31-1/4 $31-5/8 $33-3/4 $24-3/4 $25-3/8 $26-3/8 $30
Low $27-13/16 $28 $29 $30-1/8 $22-5/8 $22-1/2 $23-3/8 $26
Class G:
High $20 $19-3/8 $18-7/8 $19-1/4 - - $18-3/4 $18-7/8
Low $17-7/8 $17-1/2 $16-5/8 $17-3/8 - - $16-1/8 $17-5/8
<FN>
(a) Based on New York Stock Exchange - Composite transactions.
</TABLE>
<PAGE>
<PAGE> 96
(This page intentionally left blank)
<PAGE> 97
Consumers Energy
1996 Financial Statements
<PAGE>
<PAGE> 98
<TABLE>
Selected Financial Information Consumers Energy Company
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Operating revenue (in millions) ($) 3,770 3,511 3,356 3,243 2,978
Net income (loss) (in millions) ($) 296 255 226 198 (244)
Net income (loss) available to common
stockholder (in millions) ($) 260 227 202 187 (255)
Cash from operations (in millions) ($) 672 642 598 403 470
Capital expenditures, excluding capital
lease additions and DSM (in millions) ($) 410 414 447 451 411
Total assets (in millions) ($) 7,025 6,954 6,809 6,551 6,596
Long-term debt, excluding current
maturities (in millions) ($) 1,900 1,922 1,953 1,839 2,079
Non-current portion of capital
leases (in millions) ($) 100 104 108 106 88
Total preferred stock (in millions) ($) 356 356 356 163 163
Total preferred securities (in millions) ($) 100 - - - -
Number of preferred shareholders at year-end 9,540 10,084 10,599 7,037 7,376
Book value per common share at year-end ($) 19.96 19.00 16.96 15.28 14.64
Return on average common equity (%) 15.9 15.0 14.9 14.8 (18.8)
Return on assets (%) 5.7 5.3 4.9 4.7 (0.2)
Number of full-time equivalent
employees at year-end
Consumers 8,938 9,262 9,409 9,495 9,459
Michigan Gas Storage 67 70 73 72 72
Electric statistics
Sales (millions of kWh) 37,051 35,506 34,462 32,764 31,601
Customers (in thousands) 1,594 1,570 1,547 1,526 1,506
Average sales rate per kWh cents 6.55 6.36 6.29 6.28 5.82
Gas statistics
Sales and transportation deliveries (bcf) 448 404 409 411 384
Customers (in thousands) (a) 1,504 1,476 1,448 1,423 1,402
Average sales rate per mcf ($) 4.45 4.42 4.48 4.46 4.55
<FN>
(a) Excludes off-system transportation customers.
/TABLE
<PAGE>
<PAGE> 99
Consumers Energy Company
Management's Discussion and Analysis
This Annual Report 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 Annual Report, except to the extent they
contain 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 Annual
Report, 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 Energy Company (formerly Consumers Power Company) is a
combination electric and gas utility company serving the Lower Peninsula
of Michigan, and is the principal subsidiary of CMS Energy, a holding
company. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of
which is the automotive industry.
<TABLE>
<CAPTION>
Consolidated Earnings
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Net income available to common stockholder $260 $227 $33 $227 $202 $25
</TABLE>
The improved net income for 1996 reflects the favorable impact of an
electric rate increase received in February 1996. The 1996 period also
reflects increased electric sales, gas deliveries, and revenues from gas
loaning activities. In addition, other operating income increased during
1996 due to a FERC-ordered refund received by the MCV Partnership from a
gas pipeline supplier. The improved net income for 1995 over the 1994
level reflects increased electric sales and gas deliveries, increased
electric revenue as a result of a mid-1994 rate increase, reversal of
losses previously recorded for gas contingencies and improved operating
results from Consumers' interest in the MCV Facility. For further
information, see the Electric and Gas Utility Results of Operations
sections and Note 4.
Cash Position, Investing and Financing
Operating Activities: 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 $672 million and $642
million for 1996 and 1995, respectively. The $30 million increase
resulted from increased electricity sales and gas deliveries, an electric
rate increase, and lower cash losses associated with the PPA. Operating
cash is used primarily to maintain and expand electric and gas systems,
retire portions of long-term debt, and pay dividends.
Investing Activities: Cash used in investing activities totaled $494
million and $519 million for 1996 and 1995, respectively. The cash was
used primarily for capital expenditures.
Financing Activities: Cash used in financing activities totaled $188
million for 1996, compared with $134 million used in financing activities
in 1995. The net increase of $54 million in cash used in 1996 reflects an
additional $130 million in common dividends paid and the redemption of $36
million of maturing first mortgage bonds. These changes were partially
offset by $97 million in proceeds from the sale of Trust Originated
Preferred Securities (see Note 7) in 1996. Common dividends were
temporarily suspended in mid-1995 to improve the capital structure, then
reinstated in May 1996 and continued through year-end.
Other Investing and Financing Matters: Several unsecured, committed lines
of credit totaling $120 million and a $425 million working capital
facility are available to meet short-term borrowing requirements to
finance working capital and gas in storage, and to pay for capital
expenditures between long-term financings. At December 31, 1996, a total
of $333 million was outstanding under these facilities. In October 1996,
the FERC authorized the issuance of up to $900 million of short-term
securities through 1998. An agreement is in place permitting the sales of
certain accounts receivable for up to $500 million. At December 31, 1996
and 1995, receivables sold totaled $318 million and $295 million,
respectively. In November 1996, the FERC authorized the issuance of $500
million of long-term securities through November 1998 for refinancing or
refunding purposes. Also in October 1996, Michigan Gas Storage entered
into a $23 million secured, variable rate, seven-year term loan.
Consumers is required to redeem or retire $1.1 billion of long-term debt
over the three-year period ending December 1999. In addition, at December
31, 1996, Consumers had a recorded liability to the DOE of $106 million,
which is to be paid prior to the first delivery of spent nuclear fuel to
the DOE. Delivery of the fuel had originally been scheduled to occur in
1998 (see Note 2). Cash provided by operating activities is expected to
satisfy a substantial portion of these debt retirements. Additionally,
capital markets will continue to be evaluated as a source of financing
required debt retirements.
At December 31, 1996, Consumers' capital structure consisted of 37 percent
common equity, 10 percent preferred equity (including preferred stock and
preferred securities), and 53 percent long- and short-term debt (including
capital leases and notes payable). The common equity portion of the
capital structure is expected to improve through accumulated earnings and
controlled expenditures.
Electric Utility Results of Operations
Electric Pretax Operating Income:
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
$402 $362 $40 $362 $332 $30
</TABLE>
The increase in electric pretax operating income in 1996 reflects the
favorable impact of an electric rate increase received in early 1996 and
the benefit of increased kWh sales and lower maintenance expenses. These
increases were partly offset by decreased revenues due to special contract
discounts negotiated with large industrial customers and increased
depreciation, general taxes and operation expenses. The 1995 electric
pretax operating income compared to 1994 reflects increased kWh sales and
the benefit of the mid-1994 rate increase which included the recovery of
higher postretirement benefit costs. The increase was partially offset by
higher depreciation, general taxes, and operation expenses during 1995,
which included $9 million of additional postretirement benefit costs,
along with the impact of $11 million of DSM incentive revenue during 1994.
The following table quantifies these impacts on Pretax Operating Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales (net of special contract discounts) $ 1 $ 59
Rate increases and other regulatory issues 50 9
Operation and maintenance 2 (13)
General tax and depreciation (13) (26)
Other - 1
---- ----
Total change $ 40 $ 30
==== ====
Electric Sales: Total electric sales in 1996 were 37.1 billion kWh, a 4.4
percent increase from the 1995 level as a result of economic growth. This
increase in total electric sales included a 1.7 percent increase in sales
to ultimate customers. Total electric sales in 1995 were 35.5 billion
kWh, a 3.0 percent increase from the 1994 level as a result of economic
growth and warmer summer temperatures. This increase in total electric
sales included a 4.2 percent increase in sales to ultimate customers. The
table below reflects electric kWh sales by class of customer for both
periods:
<TABLE>
<CAPTION>
In Billions of kWh
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Residential 10.9 10.7 .2 10.7 10.2 .5
Commercial 10.0 9.7 .3 9.7 9.2 .5
Industrial 12.9 12.7 .2 12.7 12.3 .4
Other 3.3 2.4 .9 2.4 2.8 (.4)
---- ---- ---- ---- ---- ----
Total sales 37.1 35.5 1.6 35.5 34.5 1.0
==== ==== ==== ==== ==== ====
</TABLE>
Power Costs:
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
$1,087 $970 $117 $970 $950 $20
</TABLE>
The cost increases in both periods reflect 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 through
the termination of the PPA in 2025. The MPSC allows Consumers to recover
substantially all payments for 915 MW of contract capacity purchased from
the MCV Partnership. The MPSC order allowing recovery was affirmed by the
Court of Appeals in March 1996. At the end of 1992, Consumers recognized
a loss for the present value of the estimated future underrecoveries of
power purchases from the MCV Partnership.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the PPA
contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below. These after-tax cash
underrecoveries totaled $41 million, $90 million and $61 million in 1996,
1995 and 1994, respectively. For further information, see Note 3.
<TABLE>
<CAPTION> In Millions
1997 1998 1999 2000 2001
<S> <C> <C> <C> <C> <C>
Estimated cash underrecoveries, net of tax $28 $23 $22 $21 $20
</TABLE>
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
Electric Rate Proceedings: In February 1996, the MPSC issued a partial
final order in the retail electric rate case filed in 1994, granting a $46
million annual increase in electric retail rates and authorizing a 12.25
percent return on common equity. Separate requests were before the MPSC
to offer competitive special rates to certain large qualifying customers
and to modify certain depreciation rates and practices. In November 1996,
the MPSC issued a final order in the Settlement Agreement which combined
the separate requests. The rate increase and rate of return were not
changed from the partial final order and Consumers was authorized to
accelerate recovery of its nuclear plant investment by charging $18
million of annual steam production plant depreciation expense to the
nuclear production depreciation reserve. Recovery of the additional 325
MW of MCV Partnership contract capacity charges was also approved (see
Note 3).
The Settlement Agreement also requires the establishment of a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Nuclear Matters: In January 1997, the NRC issued its Systematic
Assessment of Licensee Performance report for Palisades. The report rated
all areas as good, unchanged from the previous assessment.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003,
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that with a change in fuel management designed to
minimize embrittlement, Palisades might be operated to the end of its
license life in the year 2007 without annealing of the reactor vessel, but
will continue to monitor the matter.
Palisades' on-site storage pool for spent nuclear fuel is at capacity.
Consequently, NRC-approved dry casks, which are steel and concrete vaults,
are being used for temporary on-site storage. For further information,
see Note 13.
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
that certain capital expenditures be made in order to comply with the
amendments for nitrogen oxide reductions, generating units are currently
operating at or near the sulfur dioxide emission limits that will be
effective in the year 2000. Management believes that annual operating
costs will not be materially affected as a result of expenditures that
will be made to comply with the Clean Air Act.
Under the Michigan Natural Resources and Environmental Protection Act,
Consumers expects that it will ultimately incur investigation and remedial
action costs at a number of sites, and believes that these costs are
properly recoverable in rates.
Consumers is a so-called potentially responsible party at several sites
being administered under Superfund. In addition, 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 the 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 12.
Stray Voltage: A number of lawsuits have been filed against Consumers
relating to the effect of so-called stray voltage on certain livestock.
As of January 1997, 22 separate stray voltage lawsuits were awaiting
trial court action, down from 30 lawsuits at December 31, 1995, and 83
lawsuits at December 31, 1994. Consumers believes that the resolution of
the remaining 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:
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
$153 $151 $2 $151 $135 $16
</TABLE>
Gas pretax operating income increased in 1996 compared to 1995 as a result
of increased gas deliveries and revenues from value added services and gas
loaning activities. Partially offsetting these increases were the
reversal of a previously recorded gas contract contingency during 1995 and
higher operating expenses. Gas pretax operating income increased in 1995
compared to 1994, reflecting higher 1995 gas deliveries, and the reversal
of losses previously recorded for gas contingencies. Partially offsetting
these increases were higher depreciation and gas operation expenses (see
Note 4). The following table quantifies these impacts on Pretax Operating
Income:
In Millions
Change Compared to Prior Year 1996 vs 1995 1995 vs 1994
Sales $ 19 $ 12
Reversal in 1995 of gas contingency (23) 23
Recovery of gas costs and other issues 7 (4)
Gas loaning activities 7 -
Operations and maintenance (4) (9)
General taxes and depreciation (5) (7)
Other 1 1
---- ----
Total change $ 2 $ 16
==== ====
Gas Deliveries: Total system deliveries, excluding transport to the MCV
Facility and other miscellaneous transportation, increased 5.1 percent for
1996 compared to 1995 and 6.5 percent for 1995 compared to 1994. The
increased deliveries for each period reflect growth resulting from
customer additions, conversions to natural gas from alternative fuels and
continued strength in the Michigan economy. The table below indicates
total deliveries and the impact of weather.
<TABLE>
<CAPTION>
In bcf
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
Weather-adjusted deliveries
(variance reflects growth) 337 326 11 326 313 13
Impact of weather 15 9 6 9 1 8
--- --- --- --- --- ---
System deliveries excluding
transport to MCV Partnership 352 335 17 335 314 21
Transport to MCV Partnership 65 54 11 54 77 (23)
Other Transportation 31 15 16 15 18 (3)
--- --- --- --- --- ---
Total deliveries 448 404 44 404 409 (5)
=== === === === === ===
</TABLE>
Cost of Gas Sold:
<TABLE>
<CAPTION>
In Millions
Years Ended December 31 1996 1995 Change 1995 1994 Change
<S> <C> <C> <C> <C> <C> <C>
$750 $674 $76 $674 $662 $12
</TABLE>
The cost increase for 1996 was the result of increased sales and the
reversal of a $23 million gas contract contingency during 1995.
Gas Utility Issues
Gas Rate Proceedings: In March 1996, the MPSC issued a final order
decreasing gas rates by $12 million annually and authorizing 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 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 1995, Consumers filed an appeal with the
Court of Appeals, which is still pending, claiming that the MPSC decision
denies Consumers the opportunity to earn its authorized rate of return and
is therefore unconstitutional.
GCR Matters: In 1995, the MPSC issued an order regarding a $44 million
(excluding 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 correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The ALJ issued a
proposal for decision in January 1997 that agreed with the MPSC staff's
position that the gas loaning program uses storage assets of Consumers and
therefore recommended that 90 percent of the revenue should be refunded to
customers. For the year ended December 31, 1996, $6 million would be
subject to refund. Consumers will continue to oppose this view before the
MPSC.
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, and 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 December 31,
1996, Consumers has accrued a liability for $48 million and has
established a regulatory asset for approximately the same amount. Any
significant change in assumptions such as remediation technique, nature
and extent of contamination and regulatory requirements, could affect the
estimate of remedial action costs for the sites.
In accordance with an MPSC rate order, environmental clean-up costs, above
the amount currently being recovered in rates, will be deferred and
amortized over ten 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 12.
Forward-Looking Information
Forward-looking information is included throughout this Annual Report.
Material contingencies are also described in the 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. These estimates are prepared for
planning purposes and are subject to revision.
In Millions
Years Ended December 31 1997 1998 1999
Consumers
Construction $356 $334 $330
Nuclear fuel lease 14 27 13
Capital leases other than nuclear fuel 14 14 14
Michigan Gas Storage 3 3 3
---- ---- ----
$387 $378 $360
==== ==== ====
Electric utility operations (a) $272 $275 $257
Gas utility operations (a) 115 103 103
---- ---- ----
$387 $378 $360
==== ==== ====
(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.
Electric Outlook: Consumers expects average annual growth of two to three
percent per year in electric system sales over the next five years, based
on the current industry configuration in Michigan. Actual electric sales
in future periods may be affected by abnormal weather, changing economic
conditions, or the developing competitive market for electricity.
Consumers continues to work toward retaining its current retail service
customers by offering electric rates that are competitive with those of
other energy providers, and by improving reliability and customer
communications. Consumers is also taking steps to prepare for a future
environment in which open access is the predominant means by which retail
service customers obtain their power requirements.
Consumers' retail service is affected by competition in several areas,
including the potential installation of cogeneration or other self-
generation facilities by larger industrial customers; the formation of
municipal utilities that would displace retail service to an entire
community; competition from other utilities that offer flexible rate
arrangements designed to encourage movement of facilities or production to
their service areas; economic development competition between utilities;
MPSC direct access programs and potential electric industry restructuring
including regulatory decisions and new state or federal legislation.
In 1996, the MPSC significantly reduced the rate subsidization of
residential customers by large industrial and 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 serve other facilities at least ten years.
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 also 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.
The MPSC-approved Settlement Agreement, among other things, opened up 240
MW of load to competition. Consumers believes it can compete for 140 MW
of load while 100 MW is reserved for 18 months for direct access on a
lottery basis. Consumers has negotiated special contracts sufficient to
fill the 140 MW of load available under the Settlement Agreement. These
contracts were filed with the MPSC for approval.
In January 1996, the Governor of the State of Michigan requested that the
MPSC review the existing regulatory framework governing Michigan business
in order to improve Michigan's business climate. After the filing of
utility plans as requested by the MPSC earlier in 1996, and after
discussions with many parties, in December 1996, the MPSC staff issued a
report recommending a phased-in program of direct access by electric
customers (also known as customer choice) based on two fundamental
principles: 1) all customers should be eligible to participate in the
emerging competitive market for electric supply; and 2) rates should not
be increased for any customers and should be decreased where possible.
The report also recommends that, beginning in 1997, customers would have
the opportunity to select the power supplier of their choice. All
customers would be eligible to participate, but in the initial years the
total amount would be limited to 150 MW for 1997, increasing an additional
150 MW each year through 2000. In 2001, all commercial and industrial
customers served at primary voltage would be eligible, and in 2004 all
remaining customers would be eligible. This report also recommends
recovery of electric utility transition costs (often referred to as
stranded costs) from those customers exercising a right to purchase power
from generators other than their traditional utility supplier. Transition
costs consist of two elements: 1) energy supply costs that were incurred
during the regulated era that would not be competitive at market prices if
the electric industry is restructured; and 2) costs that are incurred to
facilitate the transition from regulated monopoly status to competitive
market status. The MPSC staff report states that transition costs should
include the following: 1) regulatory assets (see Note 18); 2) nuclear
capital costs; 3) contract capacity costs in power purchase agreements; 4)
employee-related restructuring costs; and 5) other costs related to
implementing restructuring.
The report also recommends that where possible, the recovery of the
transition costs would be funded through Rate Reduction Bonds. Transition
costs not recovered through Rate Reduction Bonds would be recovered
through a transition charge billed to direct access customers. The
transition charge would begin when the customer takes direct access
service and would continue through 2007. Customers not participating in
the direct access program would be charged bundled rates that include: 1)
a base rate freeze; 2) suspension of the PSCR process during the
transition period and establishment of a fixed level of fuel and purchase
power recovery; and 3) limited performance-based regulation of the
transmission and distribution functions in a manner which incorporates
service standards and allows for the Consumer Price Index less one percent
adjustments on transmission and distribution rates through the end of
2001.
On March 7, 1997, Consumers filed supplementary data with the MPSC at its
request. This data showed that Consumers has approximately $1.8 billion
of existing transition costs which would be recovered by a transition
charge to be paid by direct access customers through 2007. Restructuring
and implementation costs of $200 million would be recovered by an
implementation charge to direct access customers. Alternatively, if the
securitization approach is pursued and appropriate legislation is passed,
the data indicate that significant customer benefits would result. The
resulting securitization charge would be paid by all customers to service
$4 billion of Rate Reduction Bonds with a proposed 15-year term. Because
of the phase-in schedule for retail direct access service, a substantial
portion of $4 billion in costs that would be subject to the securitization
alternative would be paid by customers on bundled rates prior to getting
choice, thus allowing the transition cost to be charged only to direct
access customers to be limited to $1.8 billion if securitization does not
occur. Securitization results in over a $200 million benefit per year to
customers because the 15-year repayment period of the bonds allows the
cost reimbursement by the customer to be spread out over a longer period
than without securitization and because securitization allows the costs
being securitized to be financed at a lower rate.
Several of the elements of electric utility restructuring will need to be
addressed in legislation, including assurance of full transition cost recovery,
securitization of Rate Reduction Bonds and generation deregulation.
Consumers currently expects that electric utility restructuring will occur
in a manner consistent with the MPSC staff report, but cannot predict with
certainty the timing of actual implementation, the extent of customer
choice, or resultant financial impacts.
In April 1996, the FERC issued Orders 888 and 889, which require utilities
to provide open access to the interstate transmission grid for wholesale
transactions. 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 allows
the full recovery of transition costs. Order 888 also requires that power
pools restructure their ongoing operations and open membership to industry
participants. Order 889 requires that utilities establish electronic
systems to share information about available transmission capacity and to
separate their wholesale power marketing and transmission operations
functions.
Several FERC Order 888 and 889 requirements have been implemented,
including the filing with FERC of Consumers' individual open access tariff
and the Joint Transmission Tariff with Detroit Edison for transmission
service across the Consumers and Detroit Edison transmission systems,
separation of the wholesale merchant function from the transmission
function, implementation of the required Code of Conduct, unbundling of
wholesale interconnection agreements and related issues. Consumers
participated in organizational discussions of a Midwest Independent System
Operator, of which Consumers is a member.
One issue related to FERC Orders 888 and 889 that is not resolved is the
operation of the Michigan Electric Power Coordination Center. Currently,
Consumers and Detroit Edison have an agreement to jointly operate the
Michigan Electric Power Coordination Center pool, which provides
considerable savings to Michigan electric customers. Consumers would
propose to maintain the benefits of the pool for its customers and open up
the pool to other participants on a non-discriminatory basis. Detroit
Edison seeks to terminate the power pool agreement with Consumers
effective April 30, 1997. The current Michigan Electric Power
Coordination Center agreement requires a four-year advance notice for
termination. The FERC is expected to rule on this issue in 1997. The
impact of the FERC decision on Consumers and its customers cannot be
predicted.
Consumers currently applies the utility accounting standard , SFAS 71,
that recognizes the economic effects of rate regulation and, accordingly,
has recorded regulatory assets and liabilities related to its generation,
transmission and distribution operations (see Note 18). If rate recovery
of generation-related costs becomes unlikely or uncertain, whether due to
competition or regulatory action, this accounting standard may no longer
apply to Consumers' generation operations. This change could result in
either full recovery of generation-related regulatory assets (net of
related regulatory liabilities) or a loss, depending on whether Consumers'
regulators adopt a transition mechanism for the recovery of all or a
portion of these net regulatory assets. Based on a current evaluation of
the various factors and conditions that are expected to impact future cost
recovery, Consumers believes that its regulatory assets, including those
related to generation, are probable of future recovery.
At the SEC staff's request, the FASB is reviewing the accounting for
closure and removal costs for long-lived assets, including
decommissioning. The current electric utility industry accounting
practices of recording the cost of removal as a component of depreciation
could be changed. The FASB's tentative decision includes recognition of
the cost of closure and removal obligation as a liability based on
discounted future cash flows with the offset recorded as part of the cost
of the plant asset.
Gas Outlook: Consumers currently anticipates gas deliveries to grow two
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 addition, Consumers has proposed to
the MPSC a fixed gas price for recovery over a three-year period.
Consumers is also offering a variety of energy related services to its
customers including appliance maintenance, home safety, and home security.
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 mid-1997 and last for
two years, are intended to help the MPSC determine whether it is
appropriate to allow all customers access to the competitive gas
transportation market.
Based on a regulated utility accounting standard, 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 (see Note 18).
Other
New Accounting Standards: In 1996, the FASB issued SFAS 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which is effective for 1997 financial statements. In October
1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, Environmental Remediation Liabilities,
effective for 1997 financial statements. Consumers does not expect the
application of these statements to have a material impact on its financial
position, liquidity or results of operations.
<PAGE>
<PAGE> 110
<TABLE>
Consolidated Statements of Income Consumers Energy Company
In Millions
<CAPTION>
Years Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Operating Revenue Electric $2,446 $2,277 $2,189
Gas 1,282 1,195 1,151
Other 42 39 16
------------------------------
Total operating revenue 3,770 3,511 3,356
------------------------------
Operating Expenses Operation
Fuel for electric generation 296 283 306
Purchased power - related parties 589 491 482
Purchased and interchange power 202 196 162
Cost of gas sold 750 674 662
Other 600 589 562
------------------------------
Total operation 2,437 2,233 2,174
Maintenance 174 183 188
Depreciation, depletion and amortization 371 357 335
General taxes 191 189 178
------------------------------
Total operating expenses 3,173 2,962 2,875
------------------------------
Pretax Operating Electric 402 362 332
Income Gas 153 151 135
Other 42 36 14
------------------------------
Total pretax operating income 597 549 481
------------------------------
Other Income Dividends from affiliates (Note 17) 17 17 17
(Deductions) Accretion income (Note 2) 10 11 13
Accretion expense (Note 2) (22) (31) (35)
Other, net (4) 5 9
------------------------------
Total other income 1 2 4
------------------------------
Interest Charges Interest on long-term debt 139 141 135
Other interest 15 24 17
Capitalized interest (2) (2) (1)
------------------------------
Net interest charges 152 163 151
------------------------------
Net Income Before Income Taxes 446 388 334
Income Taxes 150 133 108
------------------------------
Net Income 296 255 226
Preferred Stock Dividends 28 28 24
Preferred Securities Distributions (Note 7) 8 - -
------------------------------
Net Income Available to Common Stockholder $ 260 $ 227 $ 202
==============================
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 111
<TABLE>
Consolidated Statements of Cash Flows Consumers Energy Company
<CAPTION>
In Millions
Years Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Net income $ 296 $ 255 $ 226
Operating Activities Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $49, $51 and
$49, respectively) 371 357 335
Capital lease and other amortization 40 38 35
Deferred income taxes and investment tax credit 48 57 57
Accretion expense (Note 2) 22 31 35
Accretion income - abandoned Midland project (Note 2) (10) (11) (13)
Undistributed earnings of related parties (40) (36) (16)
Power purchases (Note 3) (63) (137) (87)
Other 5 4 2
Changes in other assets and liabilities (Note 15) 3 84 24
--- --- ---
Net cash provided by operating activities 672 642 598
----- ----- -----
Cash Flows From Capital expenditures (excludes capital lease additions of
Investing Activities $31, $31 and $36, respectively and DSM) (Note 15) (410) (414) (447)
Investments in nuclear decommissioning trust funds (49) (51) (49)
Cost to retire property, net (31) (41) (38)
Deferred demand-side management costs (6) (9) (9)
Proceeds from sale of property - 1 14
Other 2 (5) 1
--- --- ---
Net cash used in investing activities (494) (519) (528)
----- ----- -----
Cash Flows From Payment of common stock dividends (200) (70) (176)
Financing Activities Payment of capital lease obligations (40) (37) (34)
Retirement of bonds and other long-term debt (37) (1) (133)
Payment of preferred stock dividends (28) (28) (19)
Increase (decrease) in notes payable, net (8) 2 80
Preferred securities distributions (8) - -
Proceeds from preferred securities 97 - -
Proceeds from bank loans 23 - 400
Contribution from stockholder 13 - 100
Repayment of bank loans - - (469)
Proceeds from preferred stock - - 193
--- --- ---
Net cash used in financing activities (188) (134) (58)
----- ----- -----
Net Increase (Decrease) in Cash and Temporary Cash Investments (10) (11) 12
Cash and temporary cash investments
Beginning of year 14 25 13
--- --- ---
End of year $ 4 $ 14 $ 25
==== ==== ====
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 112
<TABLE>
Consolidated Balance Sheets Consumers Energy Company
<CAPTION>
ASSETS In Millions
December 31 1996 1995
<S> <C> <C>
Plant Electric $6,333 $6,103
(At original cost) Gas 2,203 2,169
Other 26 30
-----------------------------
8,562 8,302
Less accumulated depreciation, depletion
and amortization (Note 2) 4,269 4,090
-----------------------------
4,293 4,212
Construction work-in-progress 158 190
-----------------------------
4,451 4,402
-----------------------------
Investments Stock of affiliates (Note 17) 298 337
First Midland Limited Partnership (Notes 3 and 19) 232 225
Midland Cogeneration Venture Limited
Partnership (Notes 3 and 19) 134 103
Other 8 7
-----------------------------
672 672
-----------------------------
Current Assets Cash and temporary cash investments at cost, which
approximates market 4 14
Accounts receivable and accrued revenue, less allowances
of $10 in 1996 and $3 in 1995 (Note 6) 148 137
Accounts receivable - related parties (Note 17) 63 10
Inventories at average cost
Gas in underground storage 186 184
Materials and supplies 68 72
Generating plant fuel stock 30 37
Deferred income taxes (Note 5) 27 26
Postretirement benefits (Note 10) 25 25
Prepayments and other 183 181
-----------------------------
734 686
-----------------------------
Non-current Assets Postretirement benefits (Note 10) 435 462
Nuclear decommissioning trust funds (Note 2) 386 304
Abandoned Midland project 113 131
Other 234 297
-----------------------------
1,168 1,194
-----------------------------
Total Assets $7,025 $6,954
=============================
</TABLE>
<PAGE>
<PAGE> 113
<TABLE>
<CAPTION>
Consumers Energy Company
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1996 1995
<S> <C> <C>
Capitalization Common stockholder's equity
(Note 7) Common stock $ 841 $ 841
Paid-in-capital 504 491
Revaluation capital 37 29
Retained earnings since December 31, 1992 297 237
-----------------------------
1,679 1,598
Preferred stock 356 356
Company-obligated mandatorily redeemable preferred
securities of Consumers Power Company Financing I (a) 100 -
Long-term debt 1,900 1,922
Non-current portion of capital leases 100 104
-----------------------------
4,135 3,980
-----------------------------
Current Liabilities Current portion of long-term debt and capital leases 98 90
Notes payable 333 341
Accounts payable 212 207
Accrued taxes 211 225
Accounts payable - related parties 68 56
Power purchases (Note 3) 47 90
Accrued interest 33 32
Accrued refunds 8 22
Other 176 178
-----------------------------
1,186 1,241
-----------------------------
Non-current Deferred income taxes (Note 5) 646 605
Liabilities Postretirement benefits (Note 10) 500 517
Power purchases (Note 3) 178 221
Deferred investment tax credit 159 169
Regulatory liabilities for income taxes,
net (Notes 5 and 18) 66 44
Other 155 177
-----------------------------
1,704 1,733
-----------------------------
Commitments and Contingencies
(Notes 2, 3, 4, 11, 12 and 13)
Total Stockholders' Investment and Liabilities $7,025 $6,954
=============================
<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 notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 114
<TABLE>
Consolidated Statements of Long-Term Debt Consumers Energy Company
<CAPTION>
In Millions
December 31 1996 1995
<S> <C> <C> <C> <C>
First Mortgage Bonds Series (%) Due
5-7/8 1996 $ - $ 36
6 1997 50 50
8-3/4 1998 248 248
6-5/8 1998 45 45
6-7/8 1998 43 43
8-7/8 1999 200 200
7-1/2 2001 57 57
7-1/2 2002 62 62
6-3/8 2003 300 300
7-3/8 2023 300 300
----- -----
1,305 1,341
Long-Term Bank Debt 400 400
Pollution Control Revenue Bonds 131 131
Nuclear Fuel Disposal (a) 106 100
Other 26 4
----- -----
Principal Amount Outstanding 1,968 1,976
Current Amounts (59) (45)
Net Unamortized Discount (9) (9)
----- -----
Total Long-Term Debt $1,900 $1,922
====== ======
</TABLE>
<TABLE>
LONG-TERM DEBT MATURITIES AND IMPROVEMENT FUND OBLIGATIONS In Millions
<CAPTION>
First Mortgage Improvement Long-Term
Bonds Fund Bank Debt Other Total
<S> <C> <C> <C> <C> <C>
1997 $ 50 $8 $ - $ 1 $ 59
1998 336 7 200 3 546
1999 200 3 200 105 508
2000 - 1 - 5 6
2001 57 1 - 5 63
(a) Due date uncertain (see Note 2)
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 115
<TABLE>
Consolidated Statements of Preferred Stock Consumers Energy Company
<CAPTION>
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 379,549 379,549 38 38
7.68 101.00 207,565 207,565 21 21
7.72 101.00 289,642 289,642 29 29
7.76 102.21 308,072 308,072 31 31
Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 25.00 (a) 8,000,000 8,000,000 193 193
---- ----
Total Preferred Stock $356 $356
==== ====
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 116
<TABLE>
Consolidated Statements of Common Stockholder's Equity Consumers Energy Company
<CAPTION>
In Millions
Other
Common Paid-in Revaluation Retained
Stock Capital Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 (a) $841 $391 $ - $ 54 $1,286
Net income 226 226
Cash dividends declared
Common stock (176) (176)
Preferred stock (24) (24)
Unrealized investment-gain 15 15
Stockholder's contribution 100 100
----------------------------------------------------------
Balance at December 31, 1994 (a) 841 491 15 80 1,427
Net income 255 255
Cash dividends declared
Common stock (70) (70)
Preferred stock (28) (28)
Change in unrealized investment-gain 14 14
----------------------------------------------------------
Balance at December 31, 1995 (a) 841 491 29 237 1,598
Net income 296 296
Cash dividends declared
Common stock (200) (200)
Preferred stock (28) (28)
Preferred securities distributions (8) (8)
Change in unrealized investment-gain 8 8
Stockholder's contribution 13 13
----------------------------------------------------------
Balance at December 31, 1996 (a) $841 $504 $37 $ 297 $1,679
==========================================================
<FN>
(a) Number of shares of common stock outstanding was 84,108,789.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 117
Consumers Energy Company
Notes to Consolidated Financial Statements
1: Corporate Structure
Consumers Energy Company (formerly Consumers Power Company) is a
combination electric and gas utility company serving the Lower Peninsula
of Michigan, and is the principal subsidiary of CMS Energy, a 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: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include
Consumers and its wholly owned subsidiaries. The financial statements are
prepared in conformity with generally accepted accounting principles and
include the use of management's estimates. Consumers uses the equity
method of accounting for investments in its companies and partnerships
where it has more than a 20 percent but less than a majority ownership
interest.
Accretion Income and Expense: In 1991, the MPSC ordered that Consumers
could recover a portion of its abandoned Midland investment over a 10-year
period, but did not allow Consumers to earn a return on that amount.
Consumers reduced the recoverable investment to the present value of the
future recoveries. During the recovery period, the unrecovered asset is
adjusted to its present value. This adjustment is reflected as accretion
income. Conversely, Consumers recorded a loss in 1992 for the present
value of its estimated future underrecoveries of power costs resulting
from purchases from the MCV Partnership (see Note 3), and now recognizes
accretion expense annually to reflect the time value of money on the
recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged to maintenance expense. Depreciable
property retired or sold plus cost of removal (net of salvage credits) is
charged to accumulated depreciation. Consumers bases depreciation
provisions for utility plant on straight-line and units-of-production
rates approved by the MPSC. The composite depreciation rate for electric
utility property was 3.5 percent for 1996, 1995 and 1994. The composite
rate for gas utility plant was 4.2 percent for 1996, 4.3 percent for 1995
and 4.2 percent for 1994. The composite rate for other plant and property
was 5.5 percent for 1996, 4.9 percent for 1995 and 4.7 percent for 1994.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under current federal
law, as confirmed by court decision, the DOE is required to begin
accepting deliveries of spent nuclear fuel by January 31, 1998 for
disposal, even if a permanent repository is not then operational.
Utilities and their customers have been prepaying the costs of DOE
transport and disposal through fees based on electric generation by their
nuclear plants. For fuel used after April 6, 1983, Consumers charges
disposal costs to nuclear fuel expense, recovers them through electric
rates and remits to the DOE quarterly. Consumers elected to defer payment
for disposal of spent nuclear fuel burned before April 7, 1983 until the
first of its spent fuel is delivered to the DOE. At December 31, 1996,
Consumers had a recorded liability to the DOE of $106 million, including
interest, which is to be paid prior to the first delivery of spent nuclear
fuel to the DOE. Consumers recovered through electric rates the amount of
this liability, excluding a portion of interest. In January 1997, in
response to the DOE's declaration in December 1996 that it would not begin
to accept spent nuclear fuel deliveries by the date required by law,
Consumers and other utilities filed suit in federal court. The utilities
are seeking a declaration that they are relieved of their obligation to
remit their quarterly fee payments to the DOE and are authorized to escrow
any related fees collected from their customers, unless and until the DOE
begins to accept spent nuclear fuel. The suit seeks an order requiring
the DOE to develop a program to begin acceptance of spent nuclear fuel by
January 31, 1998. Also in 1997, federal legislation was reintroduced to
clarify the timing of the DOE's obligation to accept spent nuclear fuel
and to direct the DOE to establish an integrated spent fuel management
system that includes designing and constructing an interim storage
facility in Nevada.
Nuclear Plant Decommissioning: Consumers collected $49 million in 1996
from its electric customers toward the future decommissioning of its two
nuclear plants. In April 1996, Consumers received a decommissioning order
from the MPSC which estimated decommissioning costs for Big Rock and
Palisades to be $317 million and $548 million (in 1996 dollars),
respectively. The estimated decommissioning costs increased from previous
estimates principally due to the unavailability of low- and high-level
radioactive waste disposal facilities. Amounts collected from electric
retail customers and deposited in trusts (including trust earnings) are
credited to accumulated depreciation. To meet NRC decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. After the plants are retired, Consumers plans
to maintain the facilities in protective storage until radioactive waste
disposal facilities are available. As a result, the majority of
decommissioning costs will be incurred after each plant's NRC operating
license expires. When Big Rock's and Palisades' NRC licenses expire in
2000 and 2007, respectively, the trust funds are estimated to have
accumulated $257 million and $686 million, respectively. It is estimated
that at the time the plants are fully decommissioned (in the years 2030
for Big Rock and 2046 for Palisades), the trust funds will have provided
$1 billion for Big Rock and $2.1 billion for Palisades, including trust
earnings over this decommissioning period. Based on this plan, Consumers
believes that the current decommissioning surcharge will be sufficient to
provide for decommissioning of its nuclear plants. At December 31, 1996,
Consumers had an investment in nuclear decommissioning trust funds of $386
million.
Reclassifications: Consumers has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect net
income for the years presented.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
based on a regulated utility accounting standard (SFAS 71). As a result,
the actions of regulators affect when revenues, expenses, assets and
liabilities are recognized. If all or a separable portion of Consumers'
operations becomes no longer subject to the provisions of utility
regulation, a write-off of related regulatory assets and liabilities would
be required, unless some form of transition cost recovery continues
through rates established and collected for Consumers' remaining
operations. In addition, Consumers would be required to determine any
impairment to the carrying costs of deregulated plant and inventory
assets. For further discussion, see MD&A Forward-Looking Information and
Note 18.
Other: For significant accounting policies regarding income taxes, see
Note 5; for executive incentive compensation, see Note 9; for pensions and
other postretirement benefits, see Note 10; and for cash equivalents, see
Note 15.
3: 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 Dow. 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.
Summarized Statements of Income for CMS Midland and CMS Holdings:
In Millions
Years Ended December 31 1996 1995 1994
Pretax operating income $40 $35 $12
Income taxes and other 11 10 (1)
--- --- ---
Net income $29 $25 $13
=== === ===
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership is 1,240 MW through
the termination of the PPA in 2025. 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 MPSC
allows Consumers to recover substantially all of the payments for its
ongoing purchase of 915 MW of contract capacity. The MPSC order allowing
recovery was affirmed in March 1996 by the Court of Appeals. Consumers is
recovering 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.
Consumers previously recognized a loss in 1992 for the present value of
the estimated future underrecoveries of power costs under the PPA based 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. At December 31, 1996 and 1995, the after-tax present
value of the PPA liability totaled $147 million and $202 million,
respectively. The reduction in the liability since December 31, 1995
reflects after-tax cash underrecoveries of $41 million along with $28
million related to the termination of power purchase agreements, partially
offset by after-tax accretion expense of $14 million. The undiscounted
after-tax amount associated with the liability totaled $549 million at
December 31, 1996.
In November 1996, the MPSC approved a Settlement Agreement proposed by
Consumers and the MPSC staff that addressed cost recovery for the
remaining 325 MW of MCV Facility capacity. Beginning January 1, 1996,
Consumers was permitted to recover an average capacity charge of 2.86
cents per kWh for this power. The approved average capacity charge
increased to 3.62 cents per kWh for 65 MW of the 325 MW on November 1,
1996, and for an additional 44 MW on January 1, 1997. Cost recovery for
the remaining 216 MW is based upon the escalation of the average capacity
charge by three percent annually until it reaches 3.62 cents per kWh in
2004, and remains at this ceiling rate through the end of the contract.
Consumers anticipates it will continue to experience cash underrecoveries
associated with the PPA as shown below.
In Millions
1997 1998 1999 2000 2001
Estimated cash underrecoveries,
net of tax $28 $23 $22 $21 $20
After considering the effects of the Settlement Agreement, Consumers
believes that the original loss recorded in 1992 remains adequate. The
amount of underrecoveries of power costs continues to be based, in part,
on management's best assessment of the future availability of the MCV
Facility. If the MCV Facility operates at levels above management's
estimate over the remainder of the PPA, future losses will need to be
recognized over and above amounts previously recorded. Further, Consumers
would experience greater amounts of cash underrecoveries than originally
anticipated. Management will continue to evaluate the adequacy of the
accrued liability considering actual facility operations.
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
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
a 1993 MPSC order and appealed this issue. The MCV Partnership and ABATE
also filed separate appeals of this order. In November 1996, the Court of
Appeals affirmed the MPSC's order. Consumers and the MCV Partnership
filed petitions for rehearing of the Court of Appeals opinion, which were
denied in January 1997.
4: Rate Matters
Electric Proceedings: In February 1996, the MPSC issued a partial final
order in the retail electric rate case filed in 1994, granting Consumers a
$46 million annual increase in its electric retail rates and authorizing a
12.25 percent return on common equity. Consumers also had separate
requests before the MPSC to offer competitive special rates to certain
large qualifying customers and to modify certain depreciation rates and
practices. In November 1996, the MPSC issued a final order in the
Settlement Agreement which combined the separate requests. The rate
increase and rate of return were not changed from the partial final order
and Consumers was authorized to accelerate recovery of its nuclear plant
investment by charging $18 million of annual steam production plant
depreciation expense to the nuclear production depreciation reserve.
Recovery of the additional 325 MW of MCV Partnership contract capacity
charges was also approved (see Note 3).
The Settlement Agreement also requires Consumers to establish a direct
access program. Customers having a maximum demand of at least 2 MW are
eligible to purchase generation services directly from any eligible third-
party power supplier. The program is limited to 650 MW of sales, of which
410 MW has already been filled by existing contracts; 140 MW may be filled
by either direct access customers or new special contracts which Consumers
has signed and submitted to the MPSC for approval; and the remaining 100
MW must be made available solely to direct access customers for at least
18 months. Rehearing petitions have been filed by Consumers and other
interested parties.
Gas Proceedings: In March 1996, the MPSC issued a final order in a 1994
rate case, authorizing recovery of costs related to postretirement
benefits and former manufactured gas plant sites (see Note 12). Overall,
however, the order decreased Consumers' gas rates by $12 million annually
and authorized an 11.6 percent return on common equity.
In the GCR reconciliation proceeding for the period April 1995 through
March 1996, an issue has arisen questioning whether revenue from gas
loaning (which was a new business activity for Consumers) should, in whole
or in part, be immediately passed through to customers. The ALJ issued a
proposal for decision in January 1997 that agreed with the MPSC staff's
position that the gas loaning program uses storage assets of Consumers and
therefore recommended that 90 percent of the revenue should be refunded to
customers. For the year ended December 31, 1996, $6 million would be
subject to refund. Consumers will continue to oppose this view before the
MPSC.
In December 1996, the MPSC authorized Consumers to implement a pilot gas
transportation program for 40,000 customers in Bay County, Michigan. The
pilot program will provide residential and small commercial customers the
opportunity to purchase gas from suppliers other than Consumers for a two-
year period beginning April 1997. Consumers will retain its role as
transporter and distributor of this gas.
In 1993, the MPSC issued an order favorable to Consumers regarding a gas
pricing disagreement between Consumers and certain intrastate producers,
which was affirmed on judicial review by state courts. In December 1996,
the U.S. Supreme Court denied the producers' request to review that
decision. 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.
In 1995, the MPSC issued an order regarding a $44 million (excluding
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 correctly concludes that the
producers' theories are without merit and will vigorously oppose any
claims they may raise, but cannot predict the outcome of this issue.
In December 1996, Consumers filed a request with the MPSC to totally
suspend the GCR clause and employ a fixed price for recovery of gas costs
for a period of three years ending in March 2000. There would be no
reconciliations and no reopenings for that period of time. In April 2000,
a new GCR factor would be implemented.
Resolution of the issues discussed in this note is not expected to have a
material impact on Consumers' financial position or results of operations.
5: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax
return with CMS Energy. Income taxes are generally allocated based on
each company's separate taxable income. Consumers practices full deferred
tax accounting for all temporary differences as authorized by the MPSC.
Consumers uses ITC to reduce current income taxes payable and defers and
amortizes ITC over the life of the related property. Any AMT paid becomes
a tax credit that can be carried forward indefinitely to reduce regular
tax liabilities in future periods when regular taxes paid exceed the tax
calculated for AMT. The significant components of income tax expense
(benefit) consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Current federal income taxes $102 $ 76 $ 51
Deferred income taxes 58 67 67
Deferred ITC, net (10) (10) (10)
---- ---- ----
$150 $133 $108
==== ==== ====
Operating $162 $145 $120
Other (12) (12) (12)
---- ---- ----
$150 $133 $108
==== ==== ====
The principal components of Consumers' deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1996 1995
Property $ (556) $ (539)
Unconsolidated investments (239) (245)
Postretirement benefits (Note 10) (165) (173)
Abandoned Midland project (40) (46)
Employee benefit obligations
(includes postretirement benefits
of $165 and $173) (Note 10) 195 200
Power purchases (Note 3) 82 112
AMT carryforward 93 94
ITC carryforward - 23
Other 11 (5)
------- -------
$ (619) $ (579)
======= =======
Gross deferred tax liabilities $(1,375) $(1,388)
Gross deferred tax assets 756 809
------- -------
$ (619) $ (579)
======= =======
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1996 1995 1994
Net income $ 296 $ 255 $ 226
Income tax expense 150 133 108
Preferred securities
distributions (8) - -
--- --- ---
Pretax income 438 388 334
Statutory federal income
tax rate x 35% x 35% x 35%
---- ---- ----
Expected income tax expense 153 136 117
Increase (decrease) in taxes
from Capitalized overheads
previously flowed through 5 5 5
Differences in book and tax
depreciation not previously
deferred 6 6 7
ITC amortization (10) (10) (10)
Affiliated companies'
dividends (6) (6) (6)
Other, net 2 2 (5)
---- ---- ----
Actual income tax expense $ 150 $ 133 $ 108
==== ==== ====
Effective tax rate 34.2% 34.3% 32.3%
6: Short-Term Financings
Consumers has FERC authorization to issue or guarantee up to $900 million
of short-term debt through 1998. Consumers has an unsecured $425 million
facility and unsecured, committed lines of credit aggregating $120 million
that are used to finance seasonal working capital requirements. At
December 31, 1996, a total of $333 million was outstanding at a weighted
average interest rate of 6.3 percent, compared with $341 million
outstanding at December 31, 1995, at a weighted average interest rate of
6.5 percent.
Consumers has in place a $500 million trade receivables purchase and sale
program. At December 31, 1996 and 1995, receivables sold under the
agreement totaled $318 million and $295 million, respectively. Accounts
receivable and accrued revenue in the Consolidated Balance Sheets have
been reduced to reflect receivables sold. In 1996, Consumers entered into
a $100 million swap agreement to hedge the variable rate exposure under
the trade receivables purchase and sale program. The swap agreement
terminates in November 1998.
7: Capitalization
Capital Stock: In 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. Consumers Power Company
Financing I was formed for the sole purpose of issuing the Trust
Originated Preferred Securities. Its primary asset is $103 million
principal amount of 8.36 percent unsecured subordinated deferrable
interest notes issued by Consumers which mature in 2015. Consumers'
obligations with respect to the Trust Originated Preferred Securities
under the notes, under the indenture under which the notes have been
issued, under Consumers' guarantee of the Trust Originated Preferred
Securities, and under the declaration by the trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities.
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers'
ability to issue and sell securities is restricted by certain provisions
in its First Mortgage Bond Indenture, its Articles and the need for
regulatory approvals in compliance with appropriate federal law.
Long-Term Bank Debt: Consumers has a $400 million unsecured, variable
rate, long-term loan. At December 31, 1996, the loan carried a weighted
average interest rate of 6.0 percent. In 1996, an existing interest rate
swap ended and Consumers entered into a new $125 million interest rate
swap agreement, again exchanging variable-rate interest for fixed-rate
interest to hedge a portion of its long-term debt. The swap agreement
terminates in November 1997. At December 31, 1996, the amount of the swap
totaled $125 million at 6.2 percent. After taking into account the effect
of the swaps, the weighted average interest rate on the long-term loan for
the year ended December 31, 1996 was 6.1 percent.
Other: Consumers has FERC authorization through November 1998 to issue up
to $500 million of long-term securities for the purposes of refinancing or
refunding existing long-term securities.
Consumers has a total of $131 million of long-term pollution control
revenue bonds outstanding, secured by irrevocable letters of credit or
first mortgage bonds, with a weighted average interest rate of 5.1 percent
at December 31, 1996.
In October 1996, Michigan Gas Storage entered into a $23 million secured,
variable rate, seven-year term loan. At December 31, 1996, the loan had a
weighted average interest rate of 6.0 percent.
Under the provisions of its Articles at December 31, 1996, Consumers had
$255 million of unrestricted retained earnings available to pay common
dividends.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments, except as shown below,
approximate fair value.
<TABLE>
<CAPTION> In Millions
December 31 1996 1995
Amortized Fair Unrealized Amortized Fair Unrealized
Available-for-sale securities Cost Value Gain Cost Value Gain
<S> <C> <C> <C> <C> <C> <C>
Common stock of CMS Energy $ 43 $ 99 $ 56 $ 43 $ 88 $ 45
Nuclear decommissioning
investments (a) 351 386 35 286 304 18
(a) Consumers classifies its unrealized gains and losses on nuclear decommissioning investments in accumulated
depreciation.
</TABLE>
The carrying amount of long-term debt was $1.9 billion at December 31,
1996 and 1995, and the fair value was $1.9 billion on those dates. For
held-to-maturity securities and related-party financial instruments, see
Note 17.
9: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, stock
options and stock appreciation rights may be granted to key employees
based on their contributions to the successful management of CMS Energy
and its subsidiaries. Awards under the plan may consist of any class of
Common Stock of CMS Energy and are subject to performance-based business
criteria for certain plan awards. The plan reserves for award not more
than three percent of CMS Energy's Common Stock outstanding on January 1
each year, less the number of shares of restricted Common Stock awarded
and of Common Stock subject to options granted under the plan during the
immediately preceding four calendar years. Any forfeitures are subject to
award under the plan. At December 31, 1996, awards of up to 986,240
shares of CMS Energy Common Stock and 198,947 shares of Class G Common
Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25
percent per year after two years and are subject to achievement of
specified levels of total shareholder return. Further, the restricted
stock is subject to forfeiture if employment terminates before vesting.
If performance objectives are exceeded, the plan provides additional
awards. Restricted shares vest fully if control of CMS Energy changes, as
defined by the plan. At December 31, 1996, 261,866 of the 277,366 shares
of restricted CMS Energy Common Stock outstanding are subject to
performance objectives. Of the 16,347 restricted shares of Class G Common
Stock, all are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, expired in 1995. However, options
and stock appreciation rights granted under this plan remain outstanding.
Under both plans, for stock options and stock appreciation rights, the
exercise price on each grant date equaled the closing market price on the
grant date. Options are exercisable upon grant and expire up to ten years
and one month from date of grant. The status of the restricted stock
granted to Consumers' key employees under the Performance Incentive Stock
Plan and options granted under both plans follows.
<TABLE>
<CAPTION>
Restricted
Stock Options
Number Number Weighted Average
CMS Energy Common Stock of Shares of Shares Exercise Price
<S> <C> <C> <C>
Outstanding at January 1, 1994 200,125 919,033 $ 24.18
Granted 72,250 145,500 $ 22.02
Exercised or Issued (22,510) (138,650) $ 16.85
Forfeited (60,087) -
Expired - (123,000) $ 31.68
------- ------- -------
Outstanding at December 31, 1994 189,778 802,883 $ 23.90
Granted 123,615 147,200 $ 25.53
Exercised or Issued (27,533) (93,333) $ 15.64
Forfeited (16,807) -
Expired - (51,000) $ 27.56
------- ------ -------
Outstanding at December 31, 1995 269,053 805,750 $ 24.93
Granted 84,760 138,520 $ 30.63
Exercised or Issued (50,925) (169,525) $ 21.72
Forfeited (25,522) -
Expired - (12,000) $ 32.88
------- ------- -------
Outstanding at December 31, 1996 277,366 762,745 $ 26.55
======= ======= =======
</TABLE>
Restricted shares of Class G Common Stock granted during 1996 and 1995
totaled 9,423 and 6,924, respectively. Options of Class G Common Stock
granted at a price of $17.88 during 1996 and 1995 totaled 11,000 and
10,000, respectively.
The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 1996:
<TABLE>
<C>
Number Weighted Weighted
Range of of Shares Average Average
Exercise Prices Outstanding Remaining Life Exercise Price
<S> <C> <C> <C> <C>
$13.00 - $19.50 70,400 4.1 years $ 15.75
$19.51 - $29.00 353,825 6.5 years $ 23.52
$29.01 - $34.25 338,520 5.6 years $ 31.96
--------------- ------- --------- -------
$13.00 - $34.25 762,745 5.9 years $ 26.55
=============== ======= ========= =======
The weighted average remaining life of Class G Common Stock options is 9.2 years.
</TABLE>
The weighted average fair value of options granted for the CMS Energy
Common Stock was $6.94 in 1996, $5.37 in 1995, and $5.32 in 1994. The
weighted average fair value of options granted for the Class G Common
Stock was $1.59 in 1996 and $1.57 in 1995. Fair value is estimated using
the Black-Scholes model, a mathematical formula used to value options
traded on securities exchanges, with the following assumptions:
Years Ended December 31 1996 1995 1994
CMS Energy Common Stock Options
Risk-free interest rate 6.63% 6.17% 6.94%
Expected stock price volatility 24.08% 27.12% 28.83%
Expected dividend rate $ .27 $ .24 $ .24
Expected option life 5 years 5 years 5 years
Class G Common Stock Options
Risk-free interest rate 6.63% 6.17%
Expected stock price volatility 16.19% 16.19%
Expected dividend rate $ .295 $ .295
Expected option life 5 years 5 years
Consumers applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for the Performance Incentive Stock Plan.
Since stock options are granted at market price, no compensation cost has
been recognized for stock options granted under the plan. If compensation
cost for stock options had been determined in accordance with SFAS 123,
Accounting for Stock-Based Compensation, Consumers' net income would have
decreased by less than $1 million for 1996 and 1995. The compensation
cost charged against income for restricted stock was $1 million in 1996,
$2 million in 1995, and was less than $1 million in 1994.
10: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers provides
certain health care and life insurance benefits for retired employees and
their eligible dependents. Substantially all employees may become
eligible for such benefits if they attain retirement status while working
for Consumers or its subsidiaries. Consumers adopted the required
accounting for these benefits effective in 1992 and recorded a liability
of $466 million for the accumulated transition obligation and a
corresponding regulatory asset for anticipated recovery in utility rates
(see Note 18). The MPSC authorized recovery of the electric utility
portion of these costs in 1994 over 18 years and the gas utility portion
in 1996 over 16 years. During 1995, the FERC granted Consumers a waiver
of a three-year filing requirement for cost recovery with respect to its
wholesale electric business. At December 31, 1996, Consumers had recorded
a regulatory asset and liability of $7 million. By early 1997, the FERC
had authorized recovery of these costs. Consumers funds the benefits
using external Voluntary Employee Beneficiary Associations. Funding of
the benefits coincides with Consumers' recovery in rates.
Retiree health care costs at December 31, 1996 are based on the assumption
that costs would increase 8.5 percent in 1997, then decrease gradually to
6.0 percent in 2004 and thereafter. The health care cost trend rate
assumption significantly affects the amounts reported. For example, a one
percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $96 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1996 by $11 million.
Years Ended December 31 1996 1995 1994
Weighted average discount rate 7.75% 7.50% 8.00%
Expected long-term rate of return
on plan assets 7.00% 7.00% 7.00%
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 12 $ 11 $ 13
Interest cost 41 39 40
Actual return on assets (14) (4) -
Net amortization and deferral 8 1 -
---- ---- ----
Net postretirement benefit costs $ 47 $ 47 $ 53
==== ==== ====
The funded status of the postretirement benefit plans for the health care
benefits and life insurance benefits is reconciled with the liability
recorded at December 31 as follows:
In Millions
1996 1995
Actuarial present value of estimated benefits
Retirees $ 327 $ 329
Eligible for retirement 65 45
Active (upon retirement) 183 195
---- ----
Accumulated postretirement benefit
obligation 575 569
Plan assets (primarily stocks, bonds
and money market investments) at
fair value 134 76
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets (441) (493)
Unrecognized prior service cost 6 -
Unrecognized net gain from experience
different than assumed (37) (1)
--- --
Recorded liability $(472) $(494)
===== =====
The health care portion of the accumulated postretirement benefit
obligation is $560 million and $554 million at December 31, 1996 and 1995,
respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the SERP. SERP benefits, which are based on an
employee's years of service and earnings as defined in the SERP, are paid
from a trust established in 1988. Because the SERP is not a qualified
plan under the Internal Revenue Code, earnings of the trust are taxable
and trust assets are included in consolidated assets. At December 31,
1996 and 1995, trust assets were $18 million and $19 million,
respectively, and were classified as other noncurrent assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit Pension Plan covers substantially all employees. The benefits are
based on an employee's years of accredited service and earnings, as
defined in the plan, during an employee's five highest years of earnings.
Because the plan was fully funded, no contributions were made in 1996 and
1994. A contribution of $9 million was made in 1995. Amounts presented
below for the Pension Plan include amounts for employees of CMS Energy and
non-utility affiliates which were not distinguishable from the plan's
total assets.
Years Ended December 31 1996 1995 1994
Discount rate 7.75% 7.50% 8.00%
Rate of compensation increase 4.00% 4.50% 4.50%
Expected long-term rate of
return on assets 9.25% 9.25% 9.25%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Service cost $ 25 $ 22 $ 23
Interest cost 57 54 50
Actual return on plan assets (63) (168) 21
Net amortization and deferral (6) 103 (85)
---- ---- ----
Net periodic pension cost $ 13 $ 11 $ 9
==== ==== ===
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
<TABLE>
<CAPTION>
In Millions
Pension Plan SERP
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Actuarial present value of estimated benefits
Vested $ 504 $ 496 $ 13 $ 12
Non-vested 72 74 - -
---- ---- --- ---
Accumulated benefit obligation 576 570 13 12
Provision for future pay increases 158 183 8 7
---- ---- --- ---
Projected benefit obligation 734 753 21 19
Plan assets (primarily stocks and bonds, including
$117 in 1996 and $104 in 1995 of CMS Energy
Common Stock) at fair value 779 779 - -
---- ---- --- ---
Projected benefit obligation less than
(in excess of) plan assets 45 26 (21) (19)
Unrecognized net (gain) loss from experience
different than assumed (99) (69) 1 2
Unrecognized prior service cost 39 43 1 1
Unrecognized net transition (asset) obligation (27) (32) - -
---- ---- --- ---
Recorded liability $ (42) $ (32) $ (19) $(16)
==== ==== === ===
</TABLE>
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
Defined Contribution Plan: Consumers provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. Consumers will
match at least one-half of the amount contributed by employees up to 3
percent of their salary. These contributions to the plan are invested in
CMS Energy Common Stock. Amounts charged to expense for this plan were
$17 million in 1996 and $16 million in 1995 and 1994.
11: Leases
Consumers leases various assets, including vehicles, rail cars, aircraft,
construction equipment, computer equipment, nuclear fuel and buildings.
Consumers' nuclear fuel capital leasing arrangement is scheduled to expire
in November 1998 and provides for additional one-year extensions upon
mutual agreement by the parties. Upon termination of the lease, the
lessor would be entitled to a cash payment equal to its remaining
investment, which was $69 million as of December 31, 1996. Consumers is
responsible for payment of taxes, maintenance, operating costs, and
insurance.
Minimum rental commitments under Consumers' non-cancelable leases at
December 31, 1996, were:
In Millions
Capital Operating
Leases Leases
1997 $ 47 $ 3
1998 65 3
1999 14 2
2000 12 2
2001 11 2
2002 and thereafter 14 22
--- ---
Total minimum lease payments 163 $ 34
===
Less imputed interest 24
---
Present value of net minimum
lease payments 139
Less current portion 39
---
Non-current portion $100
===
Consumers recovers these charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
for the years ended December 31, 1996, 1995 and 1994, were $3 million, $7
million and $8 million, respectively.
Capital lease expenses for the years ended December 31, 1996, 1995 and
1994 were $45 million, $45 million and $40 million, respectively.
Included in these amounts for the years ended 1996, 1995 and 1994, are
nuclear fuel lease expenses of $25 million, $25 million and $21 million,
respectively.
12: 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 known sites will be between $2 million and $9 million. At
December 31, 1996, Consumers has accrued $2 million for its estimated
losses.
Under the Michigan Natural Resources and Environmental Protection Act,
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. Four of the five plans submitted by Consumers have been approved
by the appropriate environmental regulatory authority in the State of
Michigan. Findings for the two completed remedial investigations indicate
that the expenditures for those two sites are likely to be less than the
amounts projected before the studies were performed. 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 December 31, 1996, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions,
such as remediation technique, nature and extent of contamination, and
legal and regulatory requirements, could affect the estimate of remedial
action costs for the sites. In accordance with an MPSC rate order issued
in March 1996, environmental clean-up costs above the amount currently
being recovered in rates will be deferred and amortized 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 $40 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and proposed modifications at other
coal-fired units to be an additional $35 million by the year 2000.
Management believes that Consumers' annual operating costs will not be
materially affected as a result of expenditures that will be made to
comply with the Clean Air Act.
Capital Expenditures: Consumers estimates capital expenditures, including
new lease commitments, of $387 million for 1997, $378 million for 1998 and
$360 million for 1999. For further information regarding capital
expenditures, see Forward-Looking Information in the MD&A.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1997 to
2004. Consumers contracts for 60 - 70 percent of its annual coal
requirements which in 1996 totaled $243 million (62 percent was under
long-term contracts). Consumers supplements its long-term contracts with
spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1997 to 2003. Consumers' 1996 gas requirements totaled 266 bcf
at a cost of $747 million, 80 percent of which was under long-term
contracts for one year or more. As of the end of 1996, Consumers had 35
percent of its 1997 gas requirements under such long-term contracts, and
will supplement them with additional long-term contracts and spot-market
purchases.
Other: A number of lawsuits have been filed against Consumers relating to
the effect of so-called stray voltage on certain livestock. 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 and has an ongoing program to modify the grounding of all
customer services. As of January 1997, Consumers had 22 separate stray
voltage lawsuits awaiting trial court action, down from 30 lawsuits at
December 31, 1995, and 83 lawsuits at December 31, 1994.
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.
13: 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 Consumers to 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 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 has
reviewed the petition and denied the request to suspend Consumers general
license to store spent fuel.
Consumers has loaded 13 dry storage casks with spent nuclear fuel at
Palisades. In a review of the cask manufacturer's quality assurance
program, indications of minor flaws in welds in the steel liner of one of
the loaded casks were detected. Radiographic examination of the casks 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. Nevertheless, Consumers plans to remove the spent
fuel and insert it into a transportable cask. Bids are currently being
taken for the design and fabrication of the transportable cask. Consumers
is monitoring an investigation under way at another utility that also uses
a 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 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 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 $23 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.
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. Based on continuing
analysis of data from testing of similar materials, in December 1996,
Consumers received an interim Safety Evaluation Report from the NRC
indicating that the reactor vessel can be safely operated through 2003
before reaching the NRC's screening criteria for reactor embrittlement.
Consumers believes that with fuel management designed to minimize
embrittlement, Palisades might be operated to the end of its license life
in the year 2007 without annealing of the reactor vessel, but will
continue to monitor the matter.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1996 1995
Net investment
Ludington - 51% $116 $116
Campbell Unit 3 - 93.3% 329 332
Transmission lines - various 35 33
Accumulated depreciation
Ludington $ 84 $ 81
Campbell Unit 3 252 238
Transmission lines 14 14
15: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the years ended December 31 were:
In Millions
1996 1995 1994
Cash transactions
Interest paid (net of
amounts capitalized) $143 $158 $147
Income taxes paid
(net of refunds) 119 43 34
Non-cash transactions
Nuclear fuel placed
under capital lease $ 28 $ 26 $ 21
Other assets placed
under capital leases 3 5 15
Capital leases refinanced - 21 -
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1996 1995 1994
Sale of receivables, net $ 23 $ 20 $(10)
Accounts receivable 12 (55) (4)
Accrued revenue (49) 1 24
Inventories 8 54 (5)
Accounts payable 17 48 19
Accrued refunds (14) (4) (3)
Other current assets
and liabilities, net (14) 28 12
Non-current deferred
amounts, net 20 (8) (9)
---- --- ---
$ 3 $ 84 $ 24
===== ==== ====
16: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax
operating income by segments. These amounts include earnings from
investments accounted for by the equity method of $42 million, $39 million
and $16 million for 1996, 1995 and 1994, respectively. Other segment
information follows:
In Millions
Years Ended December 31 1996 1995 1994
Depreciation, depletion
and amortization
Electric $ 282 $ 272 $ 257
Gas 87 83 76
Other 2 2 2
----- ----- -----
$ 371 $ 357 $ 335
======= ======= =======
Identifiable assets
Electric (a) $4,505 $4,522 $4,364
Gas (a) 1,709 1,690 1,673
Other 811 742 772
----- ----- -----
$7,025 $6,954 $6,809
====== ====== ======
Capital expenditures (b)
Electric $ 310 $ 328 $ 358
Gas 137 126 134
----- ----- -----
$ 447 $ 454 $ 492
======= ======= =======
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
17: Related-Party Transactions
Consumers has an investment of $250 million in ten shares of Enterprises'
preferred stock. Beginning in 1997, a five-year redemption program of $50
million per year will commence. In addition, Consumers has an investment
in three million shares of CMS Energy Common Stock with a fair value
totaling $99 million (see Note 8) at December 31, 1996. As a result of
these two investments, Consumers received dividends on affiliates' common
and preferred stock totaling $17 million in 1996, 1995 and 1994.
Consumers purchases a portion of its gas from CMS NOMECO. The amounts of
purchases for the years ended 1996, 1995 and 1994 were $24 million,
$19 million and $1 million, respectively. In 1996, 1995 and 1994,
Consumers purchased $50 million, $53 million and $48 million,
respectively, of electric generating capacity and energy from affiliates
of Enterprises. Consumers and its subsidiaries sold, stored and
transported natural gas and provided other services to the MCV Partnership
totaling $13 million for 1996, 1995 and 1994. For additional discussion
of related-party transactions with the MCV Partnership and the FMLP, see
Notes 3 and 19. Other related-party transactions are immaterial.
18: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process. These costs are being recovered through rates over
periods of up to 16 years.
A new accounting standard, effective January 1996, requires impairment
losses on long-lived assets to be recognized when an asset's book value
exceeds its expected future cash flows (undiscounted). The standard also
imposes stricter criteria for retention of regulatory-created assets by
requiring that such assets be probable of future recovery at each balance
sheet date. There was no impact on financial position or results of
operations upon adoption because management believes these assets will be
recovered. For further discussion, see MD&A Forward-Looking Information.
In Millions
December 31 1996 1995
Postretirement benefits (Note 10) $ 460 $ 487
Income taxes (Note 5) 158 176
Abandoned Midland project 113 131
DSM - deferred costs 60 68
Trunkline settlement 25 55
Manufactured gas plant sites (Note 12) 47 47
Power purchase contracts (Note 3) - 44
Uranium enrichment facility 23 25
Ludington Fish Settlement 14 -
Other 18 22
---- -----
Total regulatory assets $ 918 $1,055
==== =====
Income taxes (Note 5) $ (224) $ (220)
DSM - deferred revenue (24) (25)
Other (1) (1)
---- -----
Total regulatory liabilities $ (249) $ (246)
===== =====
19: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1996 obligation to purchase electric capacity from the MCV Partnership was
15 percent of Consumers' owned and contracted capacity. Summarized
financial information of the MCV Partnership follows:
Statements of Income
In Millions
Years Ended December 31 1996 1995 1994
Operating revenue (a) $ 645 $ 618 $ 579
Operating expenses 417 386 378
---- ---- ----
Operating income 228 232 201
Other expense, net 162 171 183
---- ---- ----
Net income $ 66 $ 61 $ 18
==== ==== ====
Balance Sheets
In Millions
December 31 1996 1995
Assets
Current assets (b) $ 316 $ 257
Property, plant and equipment,
net 1,889 1,948
Other assets 159 156
----- -----
$2,364 $2,361
====== ======
Liabilities and Partners' Equity
Current liabilities $ 235 $ 219
Long-term debt and other
non-current liabilities (c) 1,930 2,008
Partners' equity (d) 199 134
----- -----
$2,364 $2,361
====== ======
(a) Revenue from Consumers totaled $598 million, $571 million and $534
million for 1996, 1995, and 1994, respectively.
(b) Receivables from Consumers totaled $52 million and $48 million, at
December 31, 1996 and 1995, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At
December 31, 1996 and 1995, lease obligations of $1.6 billion, were owed
to the owner trust. CMS Holdings' share of the interest and principal
portion for the 1996 lease payments was $64 million and $25 million,
respectively, and for the 1995 lease payments was $66 million and $23
million, respectively. The lease payments service $1.1 billion in non-
recourse debt outstanding as of December 31, 1996 and 1995, of the
owner-trust. FMLP's debt is secured by the MCV Partnership's lease
obligations, assets, and operating revenues. For 1996 and 1995, the
owner-trust made debt payments (including interest) of $192 million.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
<PAGE>
<PAGE> 138
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To Consumers Energy Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CONSUMERS
ENERGY COMPANY (formerly Consumers Power Company) (a Michigan corporation
and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
income, common stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Energy
Company and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
<PAGE>
<PAGE> 139
<TABLE>
Quarterly Financial Information Consumers Energy Company
<CAPTION>
In Millions
1996 (Unaudited) 1995 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $1,141 $797 $798 $1,034 $1,032 $750 $772 $957
Pretax operating income $197 $126 $144 $130 $187 $109 $136 $117
Net income $102 $58 $69 $67 $94 $45 $63 $53
Preferred stock dividends $7 $7 $7 $7 $7 $7 $7 $7
Preferred securities
distributions $1 $2 $2 $3 - - - -
Net income available to
common stockholder $94 $49 $60 $57 $87 $38 $56 $46
</TABLE>
<PAGE>
<PAGE> 140
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CMS Energy
None for CMS Energy.
Consumers
None for Consumers.
PART III
(ITEMS 10., 11., 12. and 13.)
CMS Energy
CMS Energy's definitive proxy statement, except for the organization and
compensation committee report and cumulative total return performance
graph contained therein, is incorporated by reference herein. See also
Item 1. Business for information pursuant to Item 10.
Consumers
Consumers' definitive proxy statement, except for the organization and
compensation committee report contained therein, is incorporated by
reference herein. See also Item 1. Business for information pursuant to
Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants
for CMS Energy and Consumers are listed in Item 8. Financial
Statements and Supplementary Data and are incorporated by reference
herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants for CMS Energy and Consumers are listed after the
Exhibits in the Index to Financial Statement Schedules, and are
incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c)
below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Report dated November 14, 1996 covering matters reported
pursuant to Item 5. Other Events.
Consumers
Current Report dated November 14, 1996 covering matters reported
pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).
<PAGE>
<PAGE> 141
CMS ENERGY AND CONSUMERS EXHIBITS
Previously Filed
-------------------
With As
File Exhibit
Exhibits Number Number Description
- --------------------------------------------------------------------------
(3)(a) 33-60007 (3)(i) - Restated Articles of Incorporation
of CMS Energy.
(3)(b) 1-9513 (3)(b) - By-Laws of CMS Energy. (1994
Form 10-K)
(3)(c) - Certificate of Amendment to the
Articles of Incorporation dated
March 10, 1997 and Restated
Articles of Incorporation dated
March 25, 1994 of Consumers Energy.
(3)(d) - By-Laws of Consumers Energy.
(4)(a) 2-65973 (b)(1)-4 - Indenture dated as of September 1,
1945, between Consumers and
Chemical Bank (successor to
Manufacturers Hanover Trust
Company), as Trustee, including
therein indentures supplemental
thereto through the Forty-third
Supplemental Indenture dated as of
May 1, 1979.
- Indentures Supplemental thereto:
1-5611 (4) - 65th 02/15/88 (Form 8-K dated
Feb. 18, 1988)
33-31866 (4)(d) - 67th 11/15/89
33-41126 (4)(c) - 68th 06/15/93
1-5611 (4) - 69th 09/15/93 (Form 8-K dated
Sept. 21, 1993)
(4)(b) 1-9513 (4)(b) - Indenture dated as of January 1,
1996 between Consumers and The Bank
of New York, as Trustee. First
Supplemental Indenture dated as of
January 18, 1996 between Consumers
and The Bank of New York, as
Trustee. (1995 Form 10-K)
(4)(c) 33-47629 (4)(a) - Indenture between CMS Energy and
NBD Bank, as Trustee.
1-9513 (4) - First Supplemental Indenture dated
as of October 1, 1992 between
CMS Energy and NBD Bank, as
Trustee. (Form 8-K dated Oct. 1,
1992)
1-9513 (4) - Second Supplemental Indenture dated
as of October 1, 1992 between
CMS Energy and NBD Bank, as
Trustee. (Form 8-K dated Oct. 1,
1992)
(4)(d) 1-9513 (4a) - Indenture between CMS Energy and
Chase Manhattan Bank, as Trustee,
dated as of January 15, 1994.
(Form 8-K dated Mar. 29, 1994)
1-9513 (4b) - First Supplemental Indenture dated
as of January 20, 1994 between
CMS Energy and Chase Manhattan
Bank, as Trustee. (Form 8-K dated
Mar. 29, 1994)
1-9513 (4) - Second Supplemental Indenture dated
as of March 19, 1996 between
CMS Energy and Chase Manhattan
Bank, as Trustee. (1st qtr 1996
Form 10-Q)
(10)(a) 33-60007 (4)(ii) - Credit Agreement dated as of
November 21, 1995, among
CMS Energy, the Banks, the Co-
Agents, the Documentation Agent,
the Operational Agent and the Co-
Managers, all as defined therein,
and the Exhibits thereto.
(10)(b) 33-60007 (4)(ii)(A) - Term Loan Agreement dated as of
November 21, 1995, among
CMS Energy, the Banks, the Co-
Agents, the Documentation Agent,
the Operational Agent and the Co-
Managers, all as defined therein,
and the Exhibits thereto.
(10)(c) 1-5611 (10) - Credit Agreement dated as of
July 14, 1995 among Consumers, the
Banks named therein and the First
National Bank of Chicago, as
Administrative Agent.
(10)(d) 1-9513 (10)(c) - Employment Agreement dated as of
August 1, 1990 among CMS Energy,
Consumers and William T.
McCormick, Jr. (1990 Form 10-K)
(10)(e) 1-5611 (10)(i) - Employment Agreement effective as
of June 15, 1988 among CMS Energy,
Consumers and Victor J. Fryling.
(1988 Form 10-K)
(10)(f) 1-5611 (10)(f) - Employment Agreement dated May 26,
1989 between Consumers and
Michael G. Morris. (1990
Form 10-K)
(10)(g) 1-5611 (10)(h) - Employment Agreement dated May 26,
1989 between Consumers and David A.
Mikelonis. (1991 Form 10-K)
(10)(h) 1-9513 (10)(f) - Employment Agreement dated May 26,
1989 among CMS Energy, Consumers
and John W. Clark. (1990
Form 10-K)
(10)(i) 1-5611 (10)(j) - Employment Agreement dated
March 25, 1992 between CMS Energy,
Consumers and Alan M. Wright.
(1992 Form 10-K)
(10)(j) 1-5611 (10)(k) - Employment Agreement dated
March 25, 1992 between Consumers
and Paul A. Elbert. (1992
Form 10-K)
(10)(k) 1-9513 (10)(j) - Employment Agreement dated
January 12, 1996 between CMS Energy
and Rodger A. Kershner. (1995
Form 10-K)
(10)(l) 1-9513 (10) - Employment Agreement dated
March 20, 1996 between CMS Energy
and Preston D. Hopper. (1st qtr
1996 Form 10-Q)
(10)(m) - Employment Agreement dated April 2,
1996 between CMS Energy and
William J. Haener.
(10)(n) - Employment Agreement dated April 4,
1996 between CMS Energy,
CMS Enterprises and James W. Cook.
(10)(o) - Employment Agreement dated
March 19, 1996 between Consumers
and David W. Joos.
(10)(p) 1-5611 (10)(g) - Consumers' Executive Stock Option
and Stock Appreciation Rights Plan
effective December 1, 1989. (1990
Form 10-K)
(10)(q) 33-61595 (4)(d) - CMS Energy's Performance Incentive
Stock Plan effective as of
December 1, 1989.
(10)(r) 1-9513 (10)(m) - CMS Energy Deferred Salary Savings
Plan effective January 1, 1994.
(1993 Form 10-K)
(10)(s) 1-5611 (10)(n) - CMS Energy and Consumers Annual
Executive Incentive Compensation
Plan effective January 1, 1986, as
amended January 1995. (1995
Form 10-K)
(10)(t) 1-5611 (10)(o) - Consumers' Supplemental Executive
Retirement Plan effective
November 1, 1990. (1993 Form 10-K)
(10)(u) 33-37977 (4.1) - Senior Trust Indenture, Leasehold
Mortgage and Security Agreement
dated as of June 1, 1990 between
The Connecticut National Bank and
United States Trust Company of New
York. (MCV Partnership)
- Indenture Supplemental thereto:
33-37977 (4.2) - Supplement No. 1 dated as of
June 1, 1990. (MCV Partnership)
(10)(v) 1-9513 (28)(b) - Collateral Trust Indenture dated as
of June 1, 1990 among Midland
Funding Corporation I, MCV
Partnership and United States Trust
Company of New York, Trustee. (3rd
qtr 1990 Form 10-Q)
- Indenture Supplemental thereto:
33-37977 (4.4) - Supplement No. 1 dated as of
June 1, 1990. (MCV Partnership)
(10)(w) 1-9513 (10)(v) - Amended and Restated Investor
Partner Tax Indemnification
Agreement dated as of June 1, 1990
among Investor Partners,
CMS Midland as Indemnitor and
CMS Energy as Guarantor. (1990
Form 10-K)
(10)(x) 1-9513 (19)(d)* - Environmental Agreement dated as of
June 1, 1990 made by CMS Energy to
The Connecticut National Bank and
Others. (1990 Form 10-K)
(10)(y) 1-9513 (10)(z)* - Indemnity Agreement dated as of
June 1, 1990 made by CMS Energy to
Midland Cogeneration Venture
Limited Partnership. (1990
Form 10-K)
(10)(z) 1-9513 (10)(aa)* - Environmental Agreement dated as of
June 1, 1990 made by CMS Energy to
United States Trust Company of New
York, Meridian Trust Company, each
Subordinated Collateral Trust
Trustee and Holders from time to
time of Senior Bonds and
Subordinated Bonds and Participants
from time to time in Senior Bonds
and Subordinated Bonds. (1990
Form 10-K)
(10)(aa) 33-37977 (10.4) - Amended and Restated Participation
Agreement dated as of June 1, 1990
among MCV Partnership, Owner
Participant, The Connecticut
National Bank, United States Trust
Company, Meridian Trust Company,
Midland Funding Corporation I,
Midland Funding Corporation II, MEC
Development Corporation and
Institutional Senior Bond
Purchasers. (MCV Partnership)
1-5611 (10)(w) - Amendment No. 1 dated as of July 1,
1991. (1991 Form 10-K)
(10)(bb) 33-37977 (10.4) - Power Purchase Agreement dated as
of July 17, 1986 between MCV
Partnership and Consumers. (MCV
Partnership)
- Amendments thereto:
33-37977 (10.5) - Amendment No. 1 dated September 10,
1987. (MCV Partnership)
33-37977 (10.6) - Amendment No. 2 dated March 18,
1988. (MCV Partnership)
33-37977 (10.7) - Amendment No. 3 dated August 28,
1989. (MCV Partnership)
33-37977 (10.8) - Amendment No. 4A dated May 25,
1989. (MCV Partnership)
(10)(cc) 1-5611 (28) - Request for Approval of Settlement
Proposal to Resolve MCV
1-9513 Cost Recovery Issues and Court
Remand, filed with the MPSC on
July 7, 1992, MPSC Case
No. U-10127. (1992 Form 8)
(10)(dd) 1-5611 (28) - Settlement Proposal Filed on
July 7, 1992 as Revised on
1-9513 September 8, 1992 by Filing with
the MPSC. (Form 8-K dated
September 8, 1992)
(10)(ee) 1-5611 (10)(cc) - MPSC Order Dated March 31, 1993,
Approving with 1-9513 Modifications
the Settlement Proposal Filed on
July 7, 1992, as Revised on
September 8, 1992. (1992
Form 10-K)
(10)(ff) 1-5611 (10)(y) - Unwind Agreement dated as of
December 10, 1991 by and among
CMS Energy, Midland Group, Ltd.,
Consumers, CMS Midland, Inc., MEC
Development Corp. and CMS Midland
Holdings Company. (1991 Form 10-K)
(10)(gg) 1-5611 (10)(z) - Stipulated AGE Release Amount
Payment Agreement dated as of
June 1, 1990, among CMS Energy,
Consumers and The Dow Chemical
Company. (1991 Form 10-K)
(10)(hh) 1-5611 (10)(aa)* - Parent Guaranty dated as of
June 14, 1990 from CMS Energy to
MCV, each of the Owner Trustees,
the Indenture Trustees, the Owner
Participants and the Initial
Purchasers of Senior Bonds in the
MCV Sale Leaseback transaction, and
MEC Development. (1991 Form 10-K)
(12) - Statements regarding computation of
CMS Energy's Ratio of Earnings to
Fixed Charges.
(21)(a) - Subsidiaries of CMS Energy.
(21)(b) - Subsidiaries of Consumers.
(23) - Consent of experts for CMS Energy.
(24) - Power of Attorney for CMS Energy
and Consumers Energy.
(27)(a) - Financial Data Schedule UT for
CMS Energy.
(27)(b) - Financial Data Schedule UT for
Consumers.
(99)(a) - CMS Energy: Consumers Gas Group
Financials
(99)(b) - Consumers' March 7, 1997 Response
to MPSC's Request for Information
in MPSC Case No. U-11290
* Obligations of only CMS Holdings and CMS Midland, second tier
subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the
Commission, and which were designated as noted above, are hereby
incorporated herein by reference and made a part hereof with the same
effect as if filed herewith.
<PAGE>
<PAGE> 146
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts
and Reserves 1996, 1995 and 1994:
CMS Energy Corporation. . . . . . . . . . . 147
Consumers Power Company . . . . . . . . . . 147
Report of Independent Public Accountants
CMS Energy Corporation. . . . . . . . . . . 148
Consumers Power Company . . . . . . . . . . 148
Schedules other than those listed above are omitted because they are
either not required, not applicable or the required information is shown
in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the
information is not applicable.
<PAGE>
<PAGE> 147
<TABLE>
CMS ENERGY CORPORATION
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1996, 1995 and 1994
(In Millions)
<CAPTION>
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for uncollectible
accounts (substantially all
Consumers Energy Company):
<S> <C> <C> <C> <C> <C>
1996 $4 $21 - $15(a) $10
1995 $5 $10 - $11(a) $4
1994 $4 $12 - $11(a) $5
(a) Accounts receivable written off including net uncollectible amounts of $13 in 1996, $10 in 1995 and $10 in
1994 charged directly to operating expense and credited to accounts receivable.
</TABLE>
<TABLE>
CONSUMERS ENERGY COMPANY
Schedule II - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1996, 1995 and 1994
(In Millions)
<CAPTION>
Balance at Charged Charged to Balance
Beginning to other at End
Description of Period Expense Accounts Deductions of Period
Accumulated provision for
uncollectible accounts:
<S> <C> <C> <C> <C> <C>
1996 $3 $21 - $14(a) $10
1995 $4 $10 - $11(a) $3
1994 $4 $11 - $11(a) $4
(a) Accounts receivable written off including net uncollectible amounts of $13 in 1996, $10 in 1995 and $10 in
1994 charged directly to operating expense and credited to accounts receivable.
</TABLE>
<PAGE>
<PAGE> 148
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in CMS Energy Corporation's
1996 Annual Report to shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated January 24, 1997. Our
audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
Report of Independent Public Accountants
----------------------------------------
To Consumers Energy Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Consumers Energy
Company's 1996 Annual Report to shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 24, 1997.
Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
<PAGE>
<PAGE> 149
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 14th day of March 1997.
CMS ENERGY CORPORATION
By William T. McCormick, Jr.
---------------------------
William T. McCormick, Jr.
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
CMS Energy Corporation and in the capacities and on the 14th day of March
1997.
Signature Title
(i) Principal executive officer:
Chairman of the Board,
Chief Executive Officer
William T. McCormick, Jr. and Director
-----------------------------
William T. McCormick, Jr.
(ii) Principal financial officer:
Senior Vice President,
Chief Financial Officer
A. M. Wright and Treasurer
-----------------------------
Alan M. Wright
(iii) Controller or principal
accounting officer:
Senior Vice President, Controller
P. D. Hopper and Chief Accounting Officer
-----------------------------
Preston D. Hopper
(iv) A majority of the Directors
including those named above:
John M Deutch* Director
-----------------------------
John M. Deutch
James J. Duderstadt* Director
-----------------------------
James J. Duderstadt
K R Flaherty* Director
-----------------------------
Kathleen R. Flaherty
Victor J. Fryling* Director
-----------------------------
Victor J. Fryling
Earl D. Holton* Director
-----------------------------
Earl D. Holton
Lois A. Lund* Director
-----------------------------
Lois A. Lund
Michael G. Morris* Director
-----------------------------
Michael G. Morris
W. U. Parfet* Director
-----------------------------
William U. Parfet
Percy A. Pierre* Director
-----------------------------
Percy A. Pierre
K. Whipple* Director
-----------------------------
Kenneth Whipple
John B. Yasinsky* Director
-----------------------------
John B. Yasinsky
* By Thomas A. McNish
-----------------------------
Thomas A. McNish, Attorney-in-Fact<PAGE>
<PAGE> 151
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Energy Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 14th day of March 1997.
CONSUMERS ENERGY COMPANY
By William T. McCormick, Jr.
---------------------------
William T. McCormick, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
Consumers Energy Company and in the capacities and on the 14th day of
March 1997.
Signature Title
(i) Principal executive officer:
President,
Chief Executive Officer
Michael G. Morris and Director
-----------------------------
Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and
A. M. Wright Chief Financial Officer
-----------------------------
Alan M. Wright
(iii) Controller or principal
accounting officer:
Vice President and
Dennis DaPra Controller
-----------------------------
Dennis DaPra
(iv) A majority of the Directors
including those named above:
John M Deutch* Director
-----------------------------
John M. Deutch
James J. Duderstadt* Director
-----------------------------
James J. Duderstadt
K R Flaherty* Director
-----------------------------
Kathleen R. Flaherty
Victor J. Fryling* Director
-----------------------------
Victor J. Fryling
Earl D. Holton* Director
-----------------------------
Earl D. Holton
Lois A. Lund* Director
-----------------------------
Lois A. Lund
William T. McCormick, Jr.* Director
-----------------------------
William T. McCormick, Jr.
W. U. Parfet* Director
-----------------------------
William U. Parfet
Percy A. Pierre* Director
-----------------------------
Percy A. Pierre
K. Whipple* Director
-----------------------------
Kenneth Whipple
John B. Yasinsky* Director
-----------------------------
John B. Yasinsky
*By Thomas A. McNish
-----------------------------
Thomas A. McNish, Attorney-in-Fact
<PAGE>
<PAGE>
Exhibit 3(c)
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
Date Received (FOR BUREAU USE ONLY)
Name
Mr. Thomas A. McNish, Vice President and Secretary
Consumers Energy Company
Address
212 West Michigan Avenue
City State Zip EFFECTIVE DATE:
Jackson MI 49201
DOCUMENT WILL BE RETURNED TO NAME AND ADDRESS INDICATED ABOVE
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations),
the undersigned corporation executes the following Certificate:
1. The present name of the corporation is: Consumers Power Company
2. The identification number assigned by the Bureau is: 021-395
3. The location of its registered office is:
212 West Michigan Avenue Jackson MICHIGAN 49201
(Street Address) (City) (ZIP Code)
4. Article I of the Articles of Incorporation is hereby amended to read
as follows:
The name of the corporation is Consumers Energy Company.
5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS
CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD
OF DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (b). DO NOT
COMPLETE BOTH.
a. * The foregoing amendment to the Articles of Incorporation were
duly adopted on the * day of * * , 19* , in
accordance with the provisions of the Act by the unanimous
consent of the incorporator(s) before the first meeting of the
Board of Directors or Trustees.
Signed this * day of * , 19 *
------------------------------ ---------------------------------
(Signature) (Signature)
* *
------------------------------ ---------------------------------
(Type or Print Name) (Type or Print Name)
------------------------------ ---------------------------------
(Signature) (Signature)
* *
------------------------------ ---------------------------------
(Type or Print Name) (Type or Print Name)
b. X The foregoing amendment to the Articles of Incorporation was
duly adopted on 10th day of March, 1997. The amendment: (check
one of the following)
X was duly adopted in accordance with Section 611(2) of the
Act by the vote of the shareholders if a profit
corporation, or by the vote of the shareholders or members
if a nonprofit corporation, or by the vote of the directors
if a nonprofit corporation organized on a non-stock
directorship basis. The necessary votes were cast in favor
of the amendment.
* was duly adopted by the written consent of all the
directors pursuant to Section 525 of the Act and the
corporation is a nonprofit corporation organized on a non-
stock directorship basis.
* was duly adopted by the written consent of the shareholders
or members having not less than the minimum number of votes
required by statute in accordance with Section 407(1) and
(2) of the Act if a nonprofit corporation, and Section
407(1) of the Act if a profit corporation. Written notice
to shareholders who have not consented in writing has been
given. (Note: Written consent by less than all of the
shareholders or members is permitted only if such provision
appears in the Articles of Incorporation.)
* was duly adopted by the written consent of all the
shareholders or members entitled to vote in accordance with
Section 407(3) of the Act if a non-profit corporation, and
Section 407(2) of the Act if a profit corporation.
Signed this 10th day of March, 1997
By: /s/ Thomas A. McNish
----------------------------------------------
(Signature)
Thomas A. McNish, Vice President and Secretary
-------------------------------------------------
(Type or Print Name and Title)<PAGE>
<PAGE>
Name of Person or Organization Preparer's Name and Business
Remitting Fees: Telephone Number:
Consumers Power Company Joyce H. Norkey
------------------------------ ----------------------------
* (517) 788-1031
------------------------------ ----------------------------
INFORMATION AND INSTRUCTIONS
1. The amendment cannot be filed until this form, or a comparable
document, is submitted.
2. Submit one original copy of this document. Upon filing, the document
will be added to the records of the Corporation and Securities
Bureau. The original copy will be returned to the address appearing
in the box on front as evidence of filing.
Since this document will be maintained on optical disk media, it is
important that the filing be legible. Documents with poor black and
white contrast, or otherwise illegible, will be rejected.
3. This document is to be used pursuant to the provisions of section 631
of the Act for the purpose of amending the articles of incorporation
of a domestic profit or nonprofit corporation. Do not use this form
for restated articles.
4. Item 2 - Enter the identification number previously assigned by the
Bureau. If this number is unknown, leave it blank.
5. Item 4 - The article(s) being amended must be set forth in its
entirety. However, if the article(s) being amended is divided into
separately identifiable sections, only the sections being amended
need be included.
6. This document is effective on the date endorsed "filed" by the
Bureau. A later effective date, no more than 90 days after the date
of delivery, may be stated as an additional article.
7. Amendments adopted before the first meeting of the board of directors
must be adopted by all incorporators with Item 5(a) being completed
and signed in ink by at least a majority of the incorporators of
profit corporations and by all incorporators of nonprofit
corporations. One signature is not sufficient if Article V of the
Articles of Incorporation names more than one incorporator. Item
5(b) must be completed for amendments adopted after the first meeting
of the board of directors and must be signed in ink by the president,
vice-president, chairperson or vice-chairperson of the corporation.
8. FEES: Make remittance payable to the State of Michigan. Include
corporation name and identification number on check or money order.
NON-REFUNDABLE FEE ...................................... $10.00
TOTAL MINIMUM FEE ....................................... $10.00
ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES OF PROFIT
CORPORATIONS ARE:
each additional 20,000 authorized shares or portion
thereof .................................... $30.00
maximum fee for first 10,000,000 authorized
shares ..................................... $5,000.00
each additional 20,000 authorized shares or
portion thereof in excess of 10,000,000
shares ..................................... $30.00
maximum fee per filing for authorized shares
in excess of 10,000,000 shares ............. $200,000.00
9. Mail form and fee to: The office is located at:
Michigan Department of Commerce 6546 Mercantile Way
Corporation and Securities Bureau Lansing, MI 48910
Corporation Division
P.O. Box 30054 Telephone: (517) 334-6302
Lansing, Michigan 48909-7554
<PAGE>
<PAGE> 4
STATE OF MICHIGAN
MICHIGAN DEPARTMENT OF COMMERCE
CORPORATION DIVISION
LANSING, MICHIGAN
RESTATED ARTICLES OF INCORPORATION
(Profit Corporation)
021-395
These Restated Articles of Incorporation are executed pursuant
to the provisions of Sections 641 through 651, Act 284, Public Acts of
1972, as amended, (the "Act"). These Restated Articles of Incorporation
were duly adopted on March 25, 1994 by the Board of Directors of Consumers
Power Company, without a vote of the shareholders, in accordance with
provisions of Section 642 of the Act. These Restated Articles of
Incorporation only restate and integrate and do not further amend the
provisions of the Articles of Incorporation as heretofore amended and
there is no material discrepancy between those provisions and the
provisions of these Restated Articles.
The present name of the corporation is Consumers Power Company.
The former name of the corporation was Consumers Power Company of
Michigan.
Consumers Power Company is the successor to a corporation of the
same name which was organized in Maine in 1910 and did business in
Michigan from 1915 to 1968.
The date of filing the original Articles of Incorporation in
Michigan was January 22, 1968.
RESTATED ARTICLES OF INCORPORATION
The following restated Articles of Incorporation supersede the
original Articles as amended and shall be the Articles of Incorporation of
the corporation.
ARTICLE I
The name of the corporation is CONSUMERS POWER COMPANY
(hereinafter called the "Company").
ARTICLE II
The purposes for which the Company is formed are as follows:
(a) To generate, manufacture, produce, gather, purchase, store,
transmit, distribute, transform, use, sell and supply electric energy or
gas, either artificial or natural, or both electric energy and gas, to the
public generally, and to public utilities, natural gas companies and to
any and all other entities (whether governmental, public or private); and
generally to carry on the electric business or the gas business, or both
businesses, as a public utility.
(b) To generate, manufacture, produce, purchase, transmit,
distribute, transform, use, sell and supply hot water, steam, heat, power
and energy, or any or all thereof, to the public generally, and to any and
all other entities (whether governmental, public or private); and
generally to carry on any or all of such businesses as a public utility.
(c) To acquire by lease, purchase, grant, donation, devise,
bequest or otherwise, all such lands, easements, royalties, leaseholds,
flowage rights, water power and other property, real, personal or mixed,
tangible or intangible, and any interest therein, wherever the same may be
located and whether within or without the State of Michigan, as may be
necessary, incidental or appropriate to the carrying out of any of its
purposes, and to hold, convey, mortgage or lease, with or without any of
its franchises, corporate or otherwise, any of the foregoing.
(d) To dam any stream or streams, lake or other body of water,
and excavate, construct, maintain, repair and improve any existing stream,
lake, reservoir, body of water, or canal, or which it may excavate and
construct, with water power appurtenant thereto; to flood, flow and
submerge land and property by any means whatsoever, including but not
limited to, the construction of the necessary dams or other facilities in
any canal, or in creeks, streams, reservoirs, lakes or other bodies of
water or watercourses, natural or artificial; to excavate, construct,
improve, maintain, repair, remove and replace reservoirs, dams, dikes and
other facilities; and to condemn all lands, easements, rights of way,
waterpowers, flowage rights, gas royalties, natural gas leaseholds,
royalty interests, and other property, and any and all interests therein,
to the extent authorized, and subject to the limitations imposed by the
laws of the State of Michigan or of any other State applicable thereto.
(e) To explore for, mine, produce, gather, purchase, store,
transmit, distribute, refine, sell and supply natural gas, oil and other
hydrocarbons.
(f) To sell appliances and carry on an appliance business.
(g) To carry on any and all other businesses and perform any
and all other acts incident to or appropriate in connection with any of
the foregoing.
(h) To guarantee, subscribe for, purchase, invest in, own, hold
or otherwise acquire, sell, assign, transfer, mortgage, pledge or
otherwise dispose of, the shares of the capital stock of, or any bonds,
securities or evidences of indebtedness created by, or any other evidences
of interest in, any other corporation or corporations or other entity of
the District of Columbia or of the State of Michigan or any other State,
country, nation or government so far as permitted by the laws applicable
thereto, and while the owner thereof to exercise all the rights, powers
and privileges of ownership, including the right to vote thereon or with
respect thereto and to receive all dividends or payments thereon, so far
as permitted by the laws applicable thereto; to lend money to or aid in
any lawful manner whatsoever any corporation or other entity now existing
or hereafter formed whose shares of capital stock, bonds, securities or
evidences of indebtedness, or other evidences of interest therein, are
held or are in any manner guaranteed by the Company; and to do any and all
lawful acts and things to protect, preserve, improve or enhance the value
of any such shares of capital stock, bonds, securities, evidences of
indebtedness or other interests.
(i) To acquire, purchase, hold, sell and transfer shares of its
own capital stock, bonds and other evidences of indebtedness to the extent
and in the manner authorized by, and subject to any requirements of, the
laws applicable thereto.
(j) To borrow money and issue, sell or pledge bonds, promissory
notes, bills of exchange, debentures and other obligations and evidences
of indebtedness, whether secured by mortgage, pledge or otherwise, or
unsecured.
(k) To make contributions of money, property, services or
otherwise for public welfare, including, among other things, charitable,
scientific, educational and religious purposes.
(l) To conduct its business in the State of Michigan, other
States, the District of Columbia, the territories and colonies of the
United States and in foreign countries and the territories and colonies
thereof and to have one or more offices within or without the State of
Michigan.
(m) To have and to exercise all such powers as may be conferred
by the laws of the State of Michigan applicable to the Company or to
corporations engaged in the State of Michigan in any business which may be
carried on by the Company.
The foregoing clauses shall be construed both as purposes and
powers, but no recitation, expression or declaration of specific or
special purposes or powers hereinabove enumerated shall be deemed to be
exclusive, it being hereby expressly declared that all purposes and powers
not inconsistent therewith or with the laws of the State of Michigan
applicable to the Company are hereby included, and the Company shall
possess all such incidental and other powers as are reasonably necessary,
appropriate or convenient to the accomplishment of any of the foregoing
purposes or powers, either alone or in association with other
corporations, associations, firms, individuals or entities (whether
governmental, public or private), to the same extent and as fully as
individuals might or could do, as principals, agents, contractors or
otherwise.
ARTICLE III
The street and mailing address of the registered office is 212
West Michigan Avenue, Jackson, Michigan 49201.
The name of the resident agent at the registered office is T. A.
McNish.
ARTICLE IV
The total number of shares of all classes of stock which the
Company shall have authority to issue is 188,500,000: 23,500,000 shares
of preferred stock, 7,500,000 of which are of the par value of $100 per
share and are of a class designated Preferred Stock, and 16,000,000 shares
of which are of no par value and are of a class designated Class A
Preferred Stock; 40,000,000 shares are of the par value of $1 per share
and are of a class designated Preference Stock; and 125,000,000 shares are
of the par value of $10 per share and are of a class designated Common
Stock.
ARTICLE V
A director shall not be personally liable to the Company or its
shareholders for monetary damages for breach of duty as a director except
(i) for a breach of the director's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for a
violation of Section 551(1) of the Michigan Business Corporation Act, and
(iv) any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article V, and no modification
to its provisions by law, shall apply to, or have any effect upon, the
liability or alleged liability of any director of the Company for or with
respect to any acts or omissions of such director occurring prior to such
amendment, repeal or modification.
ARTICLE VI
Each director and each officer of the Company shall be
indemnified by the Company to the fullest extent permitted by law against
expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him or her
in connection with the defense of any proceeding in which he or she was or
is a party or is threatened to be made a party by reason of being or
having been a director or an officer of the Company. Such right of
indemnification is not exclusive of any other rights to which such
director or officer may be entitled under any now or hereafter existing
statute, any other provision of these Articles, bylaw, agreement, vote of
shareholders or otherwise. If the Business Corporation Act of the State
of Michigan is amended after approval by the shareholders of this Article
VI to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Company shall be eliminated or limited to the fullest extent permitted by
the Business Corporation Act of the State of Michigan, as so amended. Any
repeal or modification of this Article VI by the shareholders of the
Company shall not adversely affect any right or protection of a director
of the Company existing at the time of such repeal or modification.
ARTICLE VII
The statement of the designations and the voting and other
powers, preferences and rights, and the qualifications, limitations or
restrictions thereof, of the Common Stock, of the Preference Stock, of the
Preferred Stock and of the Class A Preferred Stock is as follows:
PREFERRED STOCK
Preferred Stock Issuable in Series
----------------------------------
The shares of Preferred Stock may be divided into and issued in
series. Each such series shall be so designated as to distinguish the
shares thereof from the shares of all other series and classes, and all
shares of the Preferred Stock shall be identical, except as to the
following relative rights and preferences, as to which there may be
variations between different series:
(a) The rate of dividend;
(b) The price at which shares may be redeemed, such price to be
not less than $100 or more than $115 per share, plus
accrued dividends to the date of redemption;
(c) The amount payable upon shares in event of involuntary
liquidation, which amount shall not be less than $100 per
share or more than $115 per share, plus accrued dividends;
(d) The amount payable upon shares in event of voluntary
liquidation, which amount shall not be less than $100 per
share or more than $115 per share, plus accrued dividends;
(e) The terms and conditions, if any, on which shares shall be
by their terms convertible into or exchangeable for shares
of any other class of stock of the Company over which the
Preferred Stock has preference as to payment of dividends
and as to assets;
(f) Subject to the rights and preferences of shares of
Preferred Stock set forth under the heading "General
Provisions", the terms and conditions of a sinking or
purchase fund, if any, for the redemption or purchase of
such shares.
No change shall be made in any of the rights and preferences of
any series of Preferred Stock at the time outstanding in those respects in
which the shares thereof vary from the shares of other series of Preferred
Stock at the time outstanding without the affirmative vote in favor
thereof of the holders of at least 66-2/3% of the shares of such series of
Preferred Stock at the time outstanding, in addition to such other vote,
if any, as may be required for such change under the applicable provisions
of these Articles or of the Michigan General Corporation Act.
Series Established By Articles
------------------------------
There are hereby established six series of Preferred Stock
designated, respectively, as $4.50 Preferred Stock, $4.16 Preferred Stock,
$7.45 Preferred Stock, $7.72 Preferred Stock, $7.76 Preferred Stock and
$7.68 Preferred Stock.
$4.50 Preferred Stock
---------------------
The rights and preferences of the shares of $4.50 Preferred
Stock in those respects in which the shares thereof may vary from the
shares of other series are as follows:
(a) The rate of dividend is $4.50 per annum;
(b) The price at which shares may be redeemed is $110 per
share, plus accrued dividends to the date of redemption;
(c) The amount payable in event of involuntary liquidation is
$100 per share, plus accrued dividends;
(d) The amount payable in event of voluntary liquidation is
$105 per share, plus accrued dividends;
(e) Shares are not, by their terms, convertible or
exchangeable;
(f) Shares are not, by their terms, entitled to the benefit of
any sinking or purchase fund.
$4.16 Preferred Stock
---------------------
The rights and preferences of the shares of $4.16 Preferred
Stock in those respects in which the shares thereof may vary from the
shares of other series are as follows:
(a) The rate of dividend is $4.16 per annum;
(b) The price at which shares may be redeemed is $103.25 per
share, plus accrued dividends to the date of redemption;
(c) The amount payable in event of involuntary liquidation is
$100 per share, plus accrued dividends;
(d) The amount payable in event of voluntary liquidation is
$101 per share, plus accrued dividends;
(e) Shares are not, by their terms, convertible or
exchangeable;
(f) Shares are not, by their terms, entitled to the benefit of
any sinking or purchase fund.
$7.45 Preferred Stock
---------------------
The rights and preferences of the shares of $7.45 Preferred
Stock in those respects in which the shares thereof may vary from the
shares of other series are as follows:
(a) The rate of dividend is $7.45 per annum;
(b) The price at which shares may be redeemed is $108 per share
if redeemed prior to April 1, 1978; $106 per share if
redeemed thereafter and prior to April 1, 1981; $103 per
share if redeemed thereafter and prior to April 1, 1986;
and at $101 per share thereafter, plus, in each case,
accrued dividends to the date of redemption; provided,
however, that prior to April 1, 1978 none of the shares may
be redeemed if such redemption is a part of or in
anticipation of any refunding operation involving the
application, directly or indirectly, of borrowed funds or
the proceeds of an issue of any stock ranking prior to or
on a parity with the $7.45 Preferred Stock if such borrowed
funds have an interest rate or cost to the Company
(computed in accordance with generally accepted financial
practice), or such stock has a dividend rate or cost to the
Company (so computed), less than $7.45 per annum;
(c) The amount payable in event of involuntary liquidation is
$100 per share, plus accrued dividends;
(d) The amount payable in event of voluntary liquidation is
$100 per share, plus accrued dividends;
(e) Shares are not, by their terms, convertible or
exchangeable;
(f) Shares are not, by their terms, entitled to the benefit of
any sinking or purchase fund.
$7.72 Preferred Stock
---------------------
The rights and preferences of the shares of $7.72 Preferred
Stock in those respects in which the shares thereof may vary from the
shares of other series are as follows:
(a) The rate of dividend is $7.72 per annum;
(b) The price at which shares may be redeemed is $108 per share
if redeemed prior to July 1, 1977; $106 per share if
redeemed thereafter and prior to July 1, 1982; $103 per
share if redeemed thereafter and prior to July 1, 1987; and
at $101 per share thereafter, plus, in each case, accrued
dividends to the date of redemption; provided, however,
that prior to July 1, 1977 none of the shares may be
redeemed if such redemption is a part of or in anticipation
of any refunding operation involving the application,
directly or indirectly, of borrowed funds or the proceeds
of an issue of any stock ranking prior to or on a parity
with the $7.72 Preferred Stock if such borrowed funds have
an interest rate or cost to the Company (computed in
accordance with generally accepted financial practice), or
such stock has a dividend rate or cost to the Company (so
computed), less than 7.72% per annum;
(c) The amount payable in event of involuntary liquidation is
$100 per share, plus accrued dividends;
(d) The amount payable in event of voluntary liquidation is
$100 per share, plus accrued dividends;
(e) Shares are not, by their terms, convertible or
exchangeable;
(f) Shares are not, by their terms, entitled to the benefit of
any sinking or purchase fund.
$7.76 Preferred Stock
---------------------
The rights and preferences of the shares of $7.76 Preferred
Stock in those respects in which the shares thereof may vary from the
shares of other series are as follows:
(a) The rate of dividend is $7.76 per annum;
(b) The price at which shares may be redeemed is $109.19 per
share if redeemed prior to June 1, 1978; $107.25 per share
if redeemed thereafter and prior to June 1, 1983; $105.31
per share if redeemed thereafter and prior to June 1, 1988;
and at $102.21 per share thereafter, plus, in each case,
accrued dividends to the date of redemption; provided,
however, that prior to June 1, 1978 none of the shares may
be redeemed if such redemption is for the purpose or in
anticipation of refunding such share through the use,
directly or indirectly, of funds borrowed by the Company,
or through the use, directly or indirectly, of funds
derived through the issuance by the Company of stock
ranking prior to or on a parity with the $7.76 Preferred
Stock as to dividends or assets, if such borrowed funds
have an effective interest cost to the Company (computed in
accordance with generally accepted financial practice) or
such stock has an effective dividend cost to the Company
(so computed) of less than 7.7439% per annum;
(c) The amount payable in event of involuntary liquidation is
$100 per share, plus accrued dividends;
(d) The amount payable in the event of voluntary liquidation is
$101.43 per share, plus accrued dividends;
(e) Shares are not, by their terms, convertible or
exchangeable;
(f) Shares are not, by their terms, entitled to the benefit of
any sinking or purchase fund.
$7.68 Preferred Stock
---------------------
The rights and preferences of the shares of $7.68 Preferred
Stock in those respects in which the shares thereof may vary from the
shares of other series are as follows:
(a) The rate of dividend is $7.68 per annum;
(b) The price at which shares may be redeemed is $108 per share
if redeemed prior to November 1, 1978; $106 per share if
redeemed thereafter and prior to November 1, 1983; $103 per
share if redeemed thereafter and prior to November 1, 1988;
and at $101 per share thereafter, plus, in each case,
accrued dividends to the date of redemption; provided,
however, that prior to November 1, 1978 none of the shares
may be redeemed if such redemption is for the purpose or in
anticipation of refunding such share through the use,
directly or indirectly, of funds borrowed by the Company,
or through the use, directly or indirectly, of funds
derived through the issuance by the Company of stock
ranking prior to or on a parity with the $7.68 Preferred
Stock as to dividends or assets, if such borrowed funds
have an effective interest cost to the Company (computed in
accordance with generally accepted financial practice) or
such stock has an effective dividend cost to the Company
(so computed), of less than 7.68% per annum;
(c) The amount payable in event of involuntary liquidation is
$100 per share, plus accrued dividends;
(d) The amount payable in event of voluntary liquidation is
$100 per share, plus accrued dividends;
(e) Shares are not, by their terms, convertible or
exchangeable;
(f) Shares are not, by their terms, entitled to the benefit of
any sinking or purchase fund.
Authority of Board of Directors as to Other Series
--------------------------------------------------
To the extent that series of Preferred Stock have not been
established and variations in the relative rights and preferences as
between series have not been fixed and determined as hereinbefore set
forth in these Articles, authority is vested in the Board of Directors of
the Company to divide the shares of Preferred Stock into and to establish
series of Preferred Stock, to fix and determine within the limitations
hereinabove set forth in these Articles the relative rights and
preferences of the shares of any series so established, to issue and sell
any and all of the authorized and unissued shares of Preferred Stock as
shares of any series thereof established by these Articles or by action of
the Board of Directors pursuant hereto, and to create a sinking or
purchase fund for the redemption or purchase of shares of any series
without the necessity of providing a sinking or purchase fund for any
other series, and in the event that the Company shall acquire, by purchase
or redemption or otherwise, any issued shares of its Preferred Stock of
any series, the Board of Directors may resell or convert and sell or
otherwise dispose of, in their discretion, any shares so acquired as
shares of the same series or of any other duly created series of Preferred
Stock.
CLASS A PREFERRED STOCK
Class A Preferred Stock Issuable in Series
------------------------------------------
The shares of Class A Preferred Stock may be divided into and
issued in series. Each such series shall be so designated as to
distinguish the shares thereof from the shares of all other series and
classes, and all shares of the Class A Preferred Stock shall be identical,
except as to the following relative rights and preferences, as to which
there may be variations between different series:
(a) The rate of dividend;
(b) The price at which shares may be redeemed;
(c) The amount payable upon shares in event of involuntary
liquidation;
(d) The amount payable upon shares in event of voluntary
liquidation;
(e) The voting rights of the holders of such series, if any;
provided that such holders of all series shall have the
voting rights hereinafter specified in these Articles;
(f) The terms and conditions, if any, on which shares shall be
by their terms convertible into or exchangeable for any
other securities; and
(g) The terms and conditions of a sinking or purchase fund, if
any, for the redemption or purchase of such shares.
No change shall be made in any of the rights and preferences of
any series of Class A Preferred Stock at the time outstanding in those
respects in which the shares thereof vary from the shares of other series
of Class A Preferred Stock at the time outstanding without the affirmative
vote in favor thereof of the holders of at least 66-2/3% of the shares of
such series of Class A Preferred Stock at the time outstanding, in
addition to such other vote, if any, as may be required for such change
under the applicable provisions of these Articles or of the Michigan
Business Corporation Act.
Series Established by Articles
------------------------------
There is hereby established one series of Class A Preferred
Stock designated $2.08 Class A Preferred Stock, Cumulative, without par
value.
$2.08 Class A Preferred Stock
-----------------------------
The rights and preferences of $2.08 Class A Preferred Stock in
those respects in which the shares thereof may vary from the shares of
other series are as follows:
(a) The rate of dividend is $2.08 per annum;
(b) The shares of this series will not be redeemable prior to
April 1, 1999. On or after April 1, 1999, all or any of
the shares of the $2.08 Class A Preferred Stock will be
redeemable at the option of the Company, in the manner
provided in the Articles of the Company, upon not less than
30 nor more than 60 days' notice, at a redemption price
equal to $25 per share, plus an amount equivalent to
accrued dividends;
(c) The amount payable in event of involuntary liquidation is
$25 per share, plus accrued dividends;
(d) The amount payable in event of voluntary liquidation is $25
per share, plus accrued dividends;
(e) The holders of shares of this series shall not be entitled
to any voting rights, except for those voting rights
provided to such holders of all series of Class A Preferred
Stock as specified in the Articles or as provided by
applicable law;
(f) Shares are not, by their terms, convertible or
exchangeable;
(g) The holders of shares of this series shall not be entitled
to the benefit of a sinking or purchase fund.
Authority of Board of Directors As to Other Series
--------------------------------------------------
To the extent that series of Class A Preferred Stock have not
been established and variations in the relative rights and preferences as
between series have not been fixed and determined as hereinbefore set
forth in these Articles, authority is vested in the Board of Directors of
the Company to divide the shares of Class A Preferred Stock into and to
establish series of Class A Preferred Stock, to fix and determine the
relative rights and preferences of the shares of any series so
established, to issue and sell any and all of the authorized and unissued
shares of Class A Preferred Stock as shares of any series thereof
established by these Articles or by action of the Board of Directors
pursuant hereto, and to create a sinking or purchase fund for the
redemption or purchase of shares of any series without the necessity of
providing a sinking or purchase fund for any other series, and in the
event that the Company shall acquire, by purchase or redemption or
otherwise, any issued shares of its Class A Preferred Stock of any series,
the Board of Directors may resell or convert and sell or otherwise dispose
of, in their discretion, any shares so acquired as shares of the same
series or of any other duly created series of Class A Preferred Stock.
PREFERRED STOCK AND CLASS A PREFERRED STOCK
-------------------------------------------
General Provisions
------------------
In these General Provisions, the Company's Preferred Stock, par
value $100 per share, is referred to as the "Preferred Stock"; the
Company's Class A Preferred Stock is referred to as the "Class A Preferred
Stock"; and the Preferred Stock and Class A Preferred Stock are together
referred to as the "Company Preferred Stock".
(A) The holders of the Company Preferred Stock of each series
shall be entitled to receive dividends, payable when and as declared by
the Board of Directors, at such rates as shall be determined for the
respective series thereof from the first day of the current dividend
period within which such stock shall have been originally issued except
that, as to any share of Company Preferred Stock originally issued
subsequent to December 31, 1972, from the date upon which such share shall
have been originally issued, before any dividends shall be declared or
paid upon or set apart for the Common Stock or any other stock of the
Company not having preference over the Company Preferred Stock as to
payment of dividends. Such dividends shall be cumulative so that if for
any dividend period or periods dividends shall not have been paid or
declared and set apart for payment upon all outstanding Company Preferred
Stock at the rates determined for the respective series, the deficiency
shall be fully paid, or declared and set apart for payment, before any
dividends shall be declared or paid upon the Common Stock or any other
stock of the Company not having preference over the Company Preferred
Stock as to payment of dividends. Dividends shall not be declared and set
apart for payment, or paid, on the Company Preferred Stock of any one
series, for any dividend period, unless dividends have been or are
contemporaneously declared and set apart for payment or paid on all series
of the Company Preferred Stock for all dividend periods terminating on the
same or an earlier date. As to all series of the Company Preferred Stock,
the term "dividend period" shall mean any of the four calendar quarters in
each year commencing, respectively, the first day of January, April, July
and October and the first days of each such calendar quarter shall be the
dividend payment dates for the regular quarterly dividends payable for the
preceding dividend period on such series.
(B) When full cumulative dividends as aforesaid upon all series
of the Company Preferred Stock then outstanding for all past dividend
periods and for the current dividend periods shall have been paid or
declared and set apart for payment, the Board of Directors may declare
dividends on the Common Stock or any other stock over which the Company
Preferred Stock has a preference as to payment of dividends, and no
holders of any series of the Company Preferred Stock as such shall be
entitled to share therein; provided, however, that no dividends (other
than dividends paid in or presently thereafter repaid to the Company for
or as a capital contribution with respect to stock over which the Company
Preferred Stock has preference as to payment of dividends and as to
assets) shall be paid or any other distribution of assets made, by
purchase of shares or otherwise, on Common Stock or on any other stock
over which the Company Preferred Stock has preference as to payment of
dividends or as to assets except out of earned surplus of the Company
available for distribution to stock over which the Company Preferred Stock
has preference as to payment of dividends and as to assets, or if, at the
time of declaration thereof or the making of such distribution there shall
not remain to the credit of earned surplus account (after deducting
therefrom the amount of such dividends and distribution), an amount at
least equal to (i) $7.50 per share on all then outstanding shares of the
Preferred Stock, (ii) in respect to the Class A Preferred Stock 7.5% of
the aggregate amount established by the Board of Directors to be payable
on the shares of each series thereof in the event of involuntary
liquidation of the Company, and (iii) $7.50 per share on all then
outstanding shares of all other stock over which the Company Preferred
Stock does not have preference as to the payment of dividends and as to
assets.
So long as any shares of the Company Preferred Stock are
outstanding, the payment of dividends on the Common Stock (other than
dividends payable in Common Stock) and the making of any distribution of
assets to holders of Common Stock by purchase of shares or otherwise (each
of such actions being herein embraced within the term "payment of Common
Stock dividends") shall be subject to the following limitations (except as
such payments may be approved or permitted by subsequent order of the
Securities and Exchange Commission or any successor thereto or any other
Federal governmental agency having the same or similar jurisdiction, or,
in the event that the Company ceases to be subject to the jurisdiction of
said Commission or of any successor thereto or of any such other Federal
governmental agency, except as such payments may be permitted in
accordance with a waiver of such limitations which shall have been
approved by the affirmative vote in favor thereof of the holders of at
least 66-2/3% of the shares of Preferred Stock and Class A Preferred Stock
(voting as separate classes) at the time outstanding):
(a) If and so long as the ratio of the aggregate of the par
value of, or stated capital represented by, the outstanding
shares of Common Stock (including premiums on the Common
Stock but excluding premiums on the Company Preferred
Stock) and of the surplus of the Company to the total
capitalization and surplus of the Company at the end of a
period of twelve consecutive calendar months within the
fourteen calendar months immediately preceding the calendar
month in which the proposed payment of Common Stock
dividends is to be made (which period is hereinafter
referred to as the "base period"), adjusted to reflect the
proposed payment of Common Stock dividends (which ratio is
hereinafter referred to as the "capitalization ratio"), is
less than 20%, the payment of Common Stock dividends,
including the proposed payment, during the twelve calendar
months period ending with and including the calendar month
in which the proposed payment is to be made shall not
exceed 50% of the net income of the Company available for
the payment of dividends on the Common Stock during the
base period;
(b) If and so long as the capitalization ratio is 20% or more
but less than 25%, the payment of Common Stock dividends,
including the proposed payment, during the twelve calendar
months period ending with and including the calendar month
in which the proposed payment is to be made shall not
exceed 75% of the net income of the Company available for
the payment of dividends on the Common Stock during the
base period;
(c) Except to the extent permitted under paragraphs (a) and (b)
above, the Company shall not make any payment of Common
Stock dividends which would reduce the capitalization ratio
to less than 25%.
For the purpose of the foregoing provisions, the following terms
shall have the following meanings:
(1) The term "net income of the Company available for the
payment of dividends on the Common Stock" shall mean for
any base period the balance remaining after deducting from
the total gross revenues of the Company from all sources
during such period the following:
(a) All operating expenses and taxes, including charges to
income for general taxes and for federal and state
taxes measured by income, for retirement or
depreciation reserve and for amortization or other
disposition of amounts, if any, classified as amounts
in excess of original cost of utility plant; (b) the
amount, if any, by which the aggregate of the charges
to income during the period in question for repairs,
maintenance and provision for depreciation is less
than the maintenance and replacement requirement
embodied in the Indenture, or any indenture
supplemental thereto, succeeding the same or in
substitution therefor; (c) all interest charges and
other income deductions, including charges to income
for amortization of debt discount, premium and expense
and of the Company Preferred Stock premium and
expense; and (d) all dividends applicable to the
period in question on stock having preference over the
Common Stock as to the payment of dividends.
(2) The term "total capitalization" shall mean the aggregate of
the principal amount of all outstanding indebtedness of the
Company maturing more than twelve months after the date of
determination of total capitalization, plus the par value
of, or stated capital represented by, the outstanding
shares of all classes of stock of the Company, including
any premiums on capital stock.
(3) The term "surplus" shall include capital surplus, earned
surplus and any other surplus of the Company, adjusted to
eliminate any amounts which may then be classified by the
Company on its books as amounts in excess of the original
cost of utility plant and which are not provided for by
reserve and any items set forth on the asset side of the
balance sheet of the Company as a result of accounting
convention, such as unamortized debt discount and expense
and the Company Preferred Stock expense, unless any such
amount or item, as the case may be, is being amortized or
is being provided for by reserve.
(C) Upon any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the holders of the
Company Preferred Stock of each series, without any preference
of the shares of any series of the Company Preferred Stock over
the shares of any other series of the Company Preferred Stock,
shall be entitled to receive out of the assets of the Company,
whether capital, surplus or other, before any distribution of
the assets to be distributed shall be made to the holders of
Common Stock or of any other stock not having preference as to
assets over the Company Preferred Stock, the amount determined
to be payable on the shares of such series in the event of
voluntary or involuntary liquidation, as the case may be. In
case the assets shall not be sufficient to pay in full the
amounts determined to be payable on all the shares of the
Company Preferred Stock in the event of voluntary or involuntary
liquidation, as the case may be, then the assets available for
such payment shall be distributed to the extent available as
follows: first, to the payment, pro rata, of $100 per share on
each share of Preferred Stock outstanding irrespective of series
and the amount established by the Board of Directors to be
payable on each outstanding share of each series of Class A
Preferred Stock in the event of involuntary liquidation; second,
to the payment of the accrued dividends on such shares, such
payment to be made pro rata in accordance with the amount of
accrued dividends on each such share; and, third, to the payment
of any amounts in excess of $100 per share of the Preferred
Stock outstanding and the difference between the amount
established by the Board of Directors to be payable on the
outstanding shares of each series of Class A Preferred Stock in
the event of voluntary liquidation and the amount similarly
determined to be payable on such shares in the event of
involuntary liquidation, plus accrued dividends which shall have
been determined to be payable on the shares of any series in the
event of voluntary or involuntary liquidation, as the case may
be, such payment also to be made pro rata in accordance with the
amounts, if any, so payable on each such share. After payment
to the holders of the Company Preferred Stock of the full
preferential amounts hereinbefore provided for, the holders of
the Company Preferred Stock as such shall have no right or claim
to any of the remaining assets of the Company, either upon any
distribution of such assets or upon dissolution, liquidation or
winding up, and the remaining assets to be distributed, if any,
upon a distribution of such assets or upon dissolution,
liquidation or winding up, may be distributed among the holders
of the Common Stock or of any other stock over which the Company
Preferred Stock has preference as to assets. Without limiting
the right of the Company to distribute its assets or to
dissolve, liquidate or wind up in connection with any sale,
merger, or consolidation, the sale of all the property of the
Company to, or the merger or consolidation of the Company into
or with any other corporation shall not be deemed to be a
distribution of assets or a dissolution, liquidation or winding
up for the purposes of this paragraph.
(D) At the option of the Board of Directors of the Company, the
Company may redeem any series of the Company Preferred Stock determined to
be redeemable, or any part of any series, at any time at the redemption
price determined for such series; provided, however, that not less than
thirty nor more than sixty days previous to the date fixed for redemption
a notice of the time and place thereof shall be given to the holders of
record of the Company Preferred Stock so to be redeemed, by mail or
publication, in such manner as may be prescribed by the By-laws of the
Company or by resolution of the Board of Directors; and, provided,
further, that in every case of redemption of less than all of the
outstanding shares of any one series of the Company Preferred Stock, the
shares of such series to be redeemed shall be chosen by lot in such manner
as may be prescribed by resolution of the Board of Directors. At any time
after notice of redemption has been given in the manner prescribed by the
By-laws of the Company or by resolution of the Board of Directors to the
holders of stock so to be redeemed, the Company may deposit, or may cause
its nominee to deposit, the aggregate redemption price with some bank or
trust company named in such notice, payable on the date fixed for
redemption as aforesaid and in the amounts aforesaid to the respective
orders of the holders of the shares so to be redeemed, on endorsement to
the Company or its nominee, or otherwise, as may be required, and upon
surrender of the certificates for such shares. Upon the deposit of said
money as aforesaid, or, if no such deposit is made, upon said redemption
date (unless the Company defaults in making payment of the redemption
price as set forth in such notice), such holders shall cease to be
shareholders with respect to said shares, and from and after the making of
said deposit, or, if no such deposit is made, after the redemption date
(the Company not having defaulted in making payment of the redemption
price as set forth in such notice), the said holders shall have no
interest in or claim against the Company, or its nominee, with respect to
said shares, but shall be entitled only to receive said moneys on the date
fixed for redemption as aforesaid from said bank or trust company, or if
no such deposit is made, from the Company, without interest thereon, upon
endorsement, if required, and surrender of the certificates as aforesaid.
If such deposit shall be made by a nominee of the Company as
aforesaid, such nominee shall upon such deposit become the owner of the
shares with respect to which such deposit was made and certificates of
stock may be issued to such nominee in evidence of such ownership.
In case the holder of any such Company Preferred Stock shall
not, within six years after said deposit, claim the amount deposited as
above stated for the redemption thereof, the Depositary shall upon demand
pay over to the Company such amounts so deposited and the Depositary shall
thereupon be relieved from all responsibility to the holder thereof.
Nothing herein contained shall limit any legal right of the
Company to purchase any shares of the Company Preferred Stock.
(E) So long as any shares of the Preferred Stock are
outstanding, the Company shall not, without the affirmative vote in favor
thereof of the holders of at least 66-2/3% of the shares of the Preferred
Stock (voting together as a single class) at the time outstanding, adopt
an amendment to these Articles if such amendment would either (i)
authorize or create any class of stock preferred as to dividends or assets
over the Preferred Stock or (ii) change any of the rights and preferences
of the then outstanding Preferred Stock; provided, however, that nothing
in this paragraph contained shall authorize the adoption of any amendment
of these Articles by the vote of the holders of a less number of shares of
the Preferred Stock, or of any other class of stock, or of all classes of
stock, than is required for such amendment by the laws of the State of
Michigan at the time applicable thereto.
(F) So long as any shares of Class A Preferred Stock are
outstanding, the Company shall not, without the affirmative vote in favor
thereof of the holders of at least 66-2/3% of the shares of Class A
Preferred Stock at the time outstanding (voting together as a single
class) adopt an amendment to these Articles if such amendment would either
(i) authorize or create any class of stock preferred as to dividends or
assets over the Class A Preferred Stock or (ii) change any of the rights
and preferences of the then outstanding Class A Preferred Stock; provided,
however, that nothing in this paragraph contained shall authorize the
adoption of any amendment of these Articles by the vote of the holders of
a lesser number of shares of Class A Preferred Stock, or of any other
class of stock, or of all classes of stock, than is required for such
amendment by the laws of the State of Michigan at the time applicable
thereto.
(G) So long as any shares of the Company Preferred Stock are
outstanding, the Company shall not, without the affirmative vote in favor
thereof of the holders of at least 66-2/3% of the shares of the Preferred
Stock and Class A Preferred Stock (voting as separate classes) at the time
outstanding,
(a) issue, sell or otherwise dispose of any shares of the
Company Preferred Stock or issue, sell or otherwise dispose of
any stock over which the Company Preferred Stock does not have
preference as to the payment of dividends and as to assets,
unless, in any such case, (i) the net income of the Company
available for the payment of dividends for a period of twelve
consecutive calendar months within the fifteen calendar months
immediately preceding the issuance, sale or disposition of such
stock (including, in any case in which such stock is to be
issued, sold or otherwise disposed of in connection with the
acquisition of new property, the net income of the property to
be so acquired, computed on the same basis as the net income of
the Company available for the payment of dividends) is at least
equal to two times the annual dividend requirements on all
outstanding shares of the Company Preferred Stock and of all
stock over which the Company Preferred Stock does not have
preference as to the payment of dividends and as to assets,
including the shares proposed to be issued, and (ii) the gross
income of the Company available for the payment of interest for
a period of twelve consecutive calendar months within the
fifteen calendar months immediately preceding the issuance, sale
or disposition of such stock (including, in any case in which
such stock is to be issued, sold or otherwise disposed of in
connection with the acquisition of new property, the gross
income of the property to be so acquired, computed on the same
basis as the gross income of the Company available for the
payment of interest) is at least equal to one and one-half times
the aggregate of the annual interest requirements (adjusted by
provision for amortization of debt discount and expense or of
premium on debt, as the case may be) on all outstanding
indebtedness of the Company and the annual dividend requirements
(adjusted by provision for amortization of the Company Preferred
Stock premium and expense) on all outstanding shares of the
Company Preferred Stock and of all stock over which the Company
Preferred Stock does not have preference as to the payment of
dividends and as to assets, including the shares proposed to be
issued; or
(b) issue, sell or otherwise dispose of any shares of the
Company Preferred Stock or issue, sell or otherwise dispose of
any stock over which the Company Preferred Stock does not have
preference as to the payment of dividends and as to assets,
unless, in any such case, the aggregate of the par value of, or
stated capital represented by, the outstanding shares of Common
Stock and of the surplus of the Company (paid-in, earned and
other, if any) shall be not less than the aggregate amount
payable in the event of involuntary liquidation upon all
outstanding shares of the Company Preferred Stock and of all
stock over which the Company Preferred Stock does not have
preference as to the payment of dividends and as to assets,
including the shares proposed to be issued, provided that no
portion of the surplus of the Company utilized to satisfy the
foregoing requirement shall be available for dividends or other
distributions of assets, by purchase of shares or otherwise, on
Common Stock or on any other stock over which the Company
Preferred Stock has preference as to the payment of dividends
and as to assets until shares of the Company Preferred Stock or
of stock over which the Company Preferred Stock does not have
preference as to the payment of dividends and as to assets are
retired and then only to the extent of the amount payable in the
event of involuntary liquidation upon such shares or until and
then only to the extent that the par value of, or stated capital
represented by, the outstanding shares of Common Stock shall
have been increased.
For the purpose of the foregoing provisions, the following terms
shall have the following meanings:
(1) The term "net income of the Company available for the
payment of dividends" shall mean the balance remaining
after deducting from the total gross revenues of the
Company from all sources the following: (a) all operating
expenses and taxes, including charges to income for general
taxes and for federal and state taxes measured by income,
for retirement or depreciation reserve and for amortization
or other disposition of amounts, if any, classified as
amounts in excess of original cost of utility plant,
(b) the amount, if any, by which the aggregate of the
charges to income during the period in question for
repairs, maintenance and provision for depreciation is less
than the maintenance and replacement requirement embodied
in the Indenture, or any indenture supplemental thereto,
succeeding the same or in substitution therefor, and (c)
all interest charges and other income deductions, including
charges to income for the amortization of debt discount,
premium and expense and of the Company Preferred Stock
premium and expense.
(2) The term "gross income of the Company available for the
payment of interest" shall mean the balance remaining after
deducting from the total gross revenues of the Company from
all sources the following: (a) all operating expenses and
taxes, including charges to income for general taxes and
for federal and state taxes measured by income, for
retirement or depreciation reserve and for amortization or
other disposition of amounts, if any, classified as amounts
in excess of original cost of utility plant and (b) the
amount, if any, by which the aggregate of the charges to
income during the period in question for repairs,
maintenance and provision for depreciation is less than the
maintenance and replacement requirement embodied in the
Indenture, or any indenture supplemental thereto,
succeeding the same or in substitution therefor.
(3) The term "accrued dividends" shall be deemed to mean in
respect of any share of any series of the Company Preferred
Stock as of any given date, the amount, if any, by which
the product of the rate of dividend per annum, determined
upon the shares of such series, multiplied by the number of
years and any fractional part of a year which shall have
elapsed from the date after which dividends on such stock
became cumulative to such given date, exceeds the total
dividends actually paid on such stock and the dividends
declared and set apart for payment. Accumulations of
dividends shall not bear interest.
The term "outstanding", whenever used herein with respect to
shares of the Company Preferred Stock or of any other class of stock which
are by their terms redeemable, or with respect to bonds or other evidences
of indebtedness shall not include any such shares or bonds or evidences of
indebtedness which have been called for redemption in accordance with the
provisions applicable thereto, of which call for redemption notice shall
have been given, as required by such provisions and for the redemption of
which a sum of money sufficient to pay the amount payable on such
redemption shall have been deposited with a bank or trust company,
irrevocably in trust for such purpose, or any bonds or other evidences of
indebtedness for the payment of which at maturity provision has been made
in a similar manner.
The term "capital represented by" whenever used herein with
respect to shares of stock of the Company shall mean at any time the
amount paid in on or contributed, transferred or otherwise then held and
recorded or accounted for, as permitted by the provisions of law
applicable thereto, as capital with respect to said shares.
COMMON STOCK
------------
Each share of Common Stock of the Company shall be equal to
every other share of said stock in every respect. The entire
consideration received for shares of Common Stock shall be capital.
VOTING POWERS GENERALLY
-----------------------
At all meetings of the shareholders of the Company, the holders
of the Preferred Stock and the holders of Common Stock shall be entitled
on all questions to one vote for each share of stock held by them
respectively, regardless of class.
Whenever and as often as four quarterly dividends payable on the
Company Preferred Stock of any series shall be in default, in whole or in
part, the holders of the Company Preferred Stock of all series shall have
the exclusive right, voting separately and as a single class, to vote for
and to elect the smallest number of directors which shall constitute a
majority of the then authorized number of directors of the Company, and,
in all matters other than the election of directors, each holder of one or
more shares of the Company Preferred Stock shall be entitled to one vote
for each such share of stock held. In the event of defaults entitling the
holders of Company Preferred Stock to elect a majority of the directors as
aforesaid, the holders of the Common Stock shall, subject to the prior
rights of the holders of the Preference Stock, have the exclusive right,
voting separately and as a class, to vote for and to elect the greatest
number of directors which shall constitute a minority of the then
authorized number of directors of the Company, and, in all matters other
than the election of directors, each holder of Common Stock shall be
entitled to one vote for each such share of stock held. The right of the
holders of the Company Preferred Stock to elect a majority of the
directors, however, shall cease when all defaults in the payment of
dividends on their stock shall have been cured, and such dividends shall
be declared and paid out of any funds legally available therefor as soon
as, in the judgment of the Board of Directors, is reasonably practicable.
The terms of office of all persons who may be directors of the Company at
the time when the right to elect a majority of the directors shall accrue
to the holders of the Company Preferred Stock, as herein provided, shall
terminate upon the election of their successors at a meeting of the
shareholders of the Company then entitled to vote. Such election shall be
held at the next annual meeting of shareholders or may be held at a
special meeting of shareholders, which shall be held upon notice as
provided in the By-laws of the Company for a special meeting of the
shareholders, at the request in writing of the holders of not less than
1,000 shares of the then outstanding Company Preferred Stock entitled to
vote addressed to the Secretary of the Company at its principal business
office. Any vacancy in the Board of Directors occurring during any period
that the Company Preferred Stock shall have elected representatives on the
Board shall be filled by a majority vote of the remaining directors (or
the one director) representing the class of stock theretofore represented
by the director causing the vacancy. Upon the termination of such
exclusive right of the holders of the Company Preferred Stock to elect a
majority of the directors of the Company, the terms of office of all the
directors of the Company shall terminate upon the election of their
successors at a meeting of the shareholders of the Company then entitled
to vote. Such election shall be held at the next annual meeting of
shareholders or may be held at a special meeting of shareholders, which
shall be held upon notice as provided in the By-laws of the Company for a
special meeting of the shareholders, at the request in writing of the
holders of not less than 1,000 shares of the then outstanding Common Stock
addressed to the Secretary of the Company at its principal business
office.
At all meetings of the shareholders held for the purpose of
electing directors during such times as the holders of the Company
Preferred Stock shall have the exclusive right to elect a majority of the
directors of the Company, the presence in person or by proxy of the
holders of a majority of the outstanding shares of Common Stock shall be
required to constitute a quorum of such class for the election of
directors, and the presence in person or by proxy of the holders of a
majority of the outstanding shares of the Company Preferred Stock shall be
required to constitute a quorum of such class for the election of
directors; provided, however, that the absence of a quorum of the holders
of stock of either class shall not prevent the election at any such
meeting, or adjournment thereof, of directors by the other class if the
necessary quorum of the holders of stock of such class is present in
person or by proxy at such meeting; and provided, further, that, in the
absence of a quorum of the holders of stock of either class, a majority of
those holders of such stock who are present in person or by proxy shall
have the power to adjourn the election of those directors to be elected by
that class from time to time without notice, other than announcement at
the meeting, until the requisite amount of holders of stock of such class
shall be present in person or by proxy.
At all elections of directors, shareholders will be entitled to
as many votes as shall equal the number of their shares of stock
multiplied by the number of directors to be elected for whom such
shareholders may vote, and they may cast all of such votes for a single
director or may distribute them among the number to be voted for, or any
two or more of them, as they may see fit.
For the purposes of the foregoing provisions, the Company
Preferred Stock of all series shall be deemed to be a single class.
PRE-EMPTIVE RIGHTS
------------------
The holders of shares of Preferred Stock, Class A Preferred
Stock, or of Common Stock shall have no pre-emptive rights to subscribe
for or purchase any additional issues of shares of the capital stock of
the Company of any class now or hereafter authorized or any bonds,
debentures, or other obligations or rights or options convertible into or
exchangeable for or entitling the holder or owner to subscribe for or
purchase any shares of capital stock, or any rights to exchange shares
issued for shares to be issued.
PREFERENCE STOCK
Preference Stock Issuable in Series
-----------------------------------
The shares of Preference Stock may be divided into and issued in
series. Each such series shall be so designated as to distinguish the
shares thereof from the shares of all other series and classes, and all
shares of the Preference Stock shall be identical, except as to the
following relative rights and preferences, as to which there may be
variations between different series:
(a) The rate of dividend;
(b) The price at which shares may be redeemed;
(c) The amount payable upon shares in event of involuntary
liquidation;
(d) The amount payable upon shares in event of voluntary
liquidation;
(e) The terms and conditions, if any, on which shares shall be
by their terms convertible into or exchangeable for shares
of any other class of stock of the Company;
(f) The terms and conditions of a sinking or purchase fund, if
any, for the redemption or purchase of such shares.
No change shall be made in any of the rights and preferences of
any series of Preference Stock at the time outstanding in those respects
in which the shares thereof vary from the shares of other series of
Preference Stock at the time outstanding without the affirmative vote in
favor thereof of the holders of at least 66-2/3% of the shares of such
series of Preference Stock at the time outstanding, in addition to such
other vote, if any, as may be required for such change under the
applicable provisions of these Articles or of the laws of the State of
Michigan at the time applicable thereto.
PREFERENCE STOCK
----------------
Authority of Board of Directors as to Other Series
--------------------------------------------------
To the extent that series of Preference Stock have not been
established and variations in the relative rights and preferences as
between series have not been fixed and determined in these Articles,
authority is vested in the Board of Directors of the Company to divide the
shares of Preference Stock into and to establish series of Preference
Stock, to fix and determine the relative rights and preferences of the
shares of any series so established, to issue and sell any and all of the
authorized and unissued shares of Preference Stock as shares of any series
thereof established by action of the Board of Directors pursuant hereto,
and to create a sinking or purchase fund for the redemption or purchase of
shares of any series without the necessity of providing a sinking or
purchase fund for any other series.
PREFERENCE STOCK
----------------
General Provisions
------------------
The following provisions shall apply to all shares of the
Preference Stock irrespective of series:
(A) The shares of Preference Stock shall be subordinate to
the Preferred Stock but in preference to the Common Stock as to
the payment of dividends. The holders of the Preference Stock
of each series shall be entitled to receive dividends, payable
when and as declared by the Board of Directors, at such rates as
shall be determined for the respective series, from the date
upon which such share shall have been originally issued, before
any dividends shall be declared or paid upon or set apart for
the Common Stock or any other stock of the Company not having
preference over the Preference Stock as to payment of dividends.
Such dividends shall be cumulative so that if for any dividend
period or periods dividends shall not have been paid or declared
and set apart for payment upon all outstanding Preference Stock
at the rates determined for the respective series, the
deficiency shall be fully paid, or declared and set apart for
payment, before any dividends shall be declared or paid upon the
Common Stock or any other stock of the Company not having
preference over the Preference Stock as to payment of dividends.
Dividends shall not be declared and set apart for payment, or
paid, on the Preference Stock of any one series, for any
dividend period, unless dividends have been or are
contemporaneously declared and set apart for payment or paid on
the Preference Stock of all series for all dividend periods
terminating on the same or an earlier date. As to all series of
Preference Stock, the term "dividend period" shall mean any of
the four calendar quarters in each year commencing,
respectively, the first day of January, April, July and October
and the first days of each such calendar quarter shall be the
dividend payment dates for the regular quarterly dividends
payable for the preceding dividend period of such series.
(B) When full cumulative dividends as aforesaid upon the
Preference Stock of all series then outstanding for all past
dividend periods and for the current dividend periods shall have
been paid or declared and set apart for payment, the Board of
Directors may declare dividends on the Common Stock or any other
stock over which the Preference Stock has a preference as to
payment of dividends, and no holders of any series of the
Preference Stock as such shall be entitled to share therein.
(C) The shares of Preference Stock shall be subordinate to
the Preferred Stock but in preference to the Common Stock upon
any dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary. Upon any such dissolution,
liquidation or winding up of the Company, whether voluntary or
involuntary, the holders of Preference Stock of each series,
without any preference of the shares of any series of Preference
Stock over the shares of any other series of Preference Stock,
shall be entitled to receive out of the assets of the Company,
whether capital, surplus or other, before any distribution of
the assets to be distributed shall be made to the holders of
Common Stock or of any other stock not having preference as to
assets over the Preference Stock, the amount determined to be
payable on the shares of such series in the event of voluntary
or involuntary liquidation, as the case may be. In case the
assets shall not be sufficient to pay in full the amounts
determined to be payable on all the shares of Preference Stock
in the event of voluntary or involuntary liquidation, as the
case may be, then the assets available for such payment shall be
distributed ratably among the holders of the Preference Stock of
all series in accordance with the amounts determined to be
payable on the shares of each series, in the event of voluntary
or involuntary liquidation, as the case may be, in proportion to
the full preferential amounts to which they are respectively
entitled. After payment to the holders of the Preference Stock
of the full preferential amounts hereinbefore provided for, the
holders of the Preference Stock as such shall have no right or
claim to any of the remaining assets of the Company, either upon
any distribution of such assets or upon dissolution, liquidation
or winding up, and the remaining assets to be distributed, if
any, upon a distribution of such assets or upon dissolution,
liquidation or winding up, may be distributed among the holders
of the Common Stock or of any other stock over which the
Preference Stock has preference as to assets. Without limiting
the right of the Company to distribute its assets or to
dissolve, liquidate or wind up in connection with any sale,
merger, or consolidation, the sale of all the property of the
Company to, or the merger or consolidation of the Company into
or with any other corporation shall not be deemed to be a
distribution of assets or a dissolution, liquidation or winding
up for the purposes of this paragraph.
(D) At the option of the Board of Directors of the
Company, the Company may redeem any series of Preference Stock
determined to be redeemable, or any part of any series, at any
time at the redemption price determined for such series;
provided, however, that not less than thirty nor more than sixty
days previous to the date fixed for redemption a notice of the
time and place thereof shall be given to the holders of record
of the Preference Stock so to be redeemed, by mail or
publication, in such manner as may be prescribed by the By-laws
of the Company or by resolution of the Board of Directors; and,
provided, further, that in every case of redemption of less than
all of the outstanding shares of any one series of Preference
Stock, the shares of such series to be redeemed shall be chosen
by lot in such manner as may be prescribed by resolution of the
Board of Directors. At any time after notice of redemption has
been given in the manner prescribed by the By-laws of the
Company or by resolution of the Board of Directors to the
holders of stock so to be redeemed, the Company may deposit, or
may cause its nominee to deposit, the aggregate redemption price
with some bank or trust Company named in such notice, payable on
the date fixed for redemption as aforesaid and in the amounts
aforesaid to the respective orders of the holders of the shares
so to be redeemed, on endorsement to the Company or its nominee,
or otherwise, as may be required, and upon surrender of the
certificates for such shares. Upon the deposit of said money as
aforesaid, or, if no such deposit is made, upon said redemption
date (unless the Company defaults in making payment of the
redemption price as set forth in such notice), such holders
shall cease to be shareholders with respect to said shares and
from and after the making of said deposit, or, if no such
deposit is made, after the redemption date (the Company not
having defaulted in making payment of the redemption price as
set forth in such notice), the said holders shall have no
interest in or claim against the Company, or its nominee, with
respect to said shares, but shall be entitled only to receive
said moneys on the date fixed for redemption as aforesaid from
said bank or trust Company, or if no such deposit is made, from
the Company, without interest thereon, upon endorsement, if
required, and surrender of the certificates as aforesaid.
If such deposit shall be made by a nominee of the Company
as aforesaid, such nominee shall upon such deposit become the
owner of the shares with respect to which such deposit was made
and certificates of stock may be issued to such nominee in
evidence of such ownership.
In case the holder of any such Preference Stock shall not,
within six years after said deposit, claim the amount deposited
as above stated for the redemption thereof, the Depositary shall
upon demand pay over to the Company such amounts so deposited
and the Depositary shall thereupon be relieved from all
responsibility to the holder thereof.
Nothing herein contained shall limit any legal right of the
Company to purchase any shares of the Preference Stock.
(E-1) So long as any shares of the Preference Stock are
outstanding, the Company shall not, without the affirmative vote
in favor thereof of the holders of at least 66-2/3% of the
shares of Preference Stock at the time outstanding, adopt an
amendment to these Articles if such amendment would either (i)
authorize or create, or increase the authorized amount of, any
class of stock, other than shares of the Preferred Stock
(whether now or hereafter authorized), which is entitled to
dividends or assets in priority to the Preference Stock or (ii)
change any of the rights and preferences of the then outstanding
Preference Stock.
(E-2) So long as any shares of the Preference Stock are
outstanding, the Company shall not, without the affirmative vote
in favor thereof of the holders of at least a majority of the
shares of Preference Stock at the time outstanding, adopt an
amendment to these Articles if such amendment would either (i)
increase the authorized amount of Preference Stock or (ii)
authorize or create, or increase the authorized amount of, any
class of stock, which is entitled to dividends or assets on a
parity with the Preference Stock, provided; however, that
nothing in this paragraph or in paragraph E-1 above contained
shall authorize the adoption of any amendment of these Articles
by the vote of the holders of a less number of shares of
Preference Stock, or of any other class of stock, or of all
classes of stock, than is required for such amendment by the
laws of the State of Michigan at the time applicable thereto.
PREFERENCE STOCK
----------------
Voting Powers
-------------
The holders of Preference Stock shall not have any right to vote
for the election of directors or for any other purpose, except as
otherwise provided by law, as set forth in the two immediately preceding
paragraphs and as set forth below. Whenever and as often as six quarterly
dividends payable on the Preference Stock of any series shall be in
default, in whole or in part, the holders of the Preference Stock of all
series shall have the exclusive right, voting separately and as a single
class, to vote for and to elect two directors, subject to the prior rights
of the holders of the Preferred Stock. In the event of defaults entitling
the Preference Stock to elect two directors as aforesaid, the holders of
the Common Stock shall have the exclusive right, voting separately and as
a class, to elect the remaining number of directors of the Company,
subject to the prior rights of the holders of the Preferred Stock. The
right of the holders of the Preference Stock to elect two directors,
however, shall cease when all defaults in the payment of dividends on
their stock shall have been cured, and such dividends shall be declared
and paid out of any funds legally available therefor as soon as, in the
judgment of the Board of Directors, is reasonably practicable. The terms
of office of all persons who may be directors of the Company at the time
when the right to elect two directors shall accrue to the holders of the
Preference Stock, as herein provided, shall terminate upon the election of
their successors at a meeting of the shareholders of the Company then
entitled to vote. Such election shall be held at the next annual meeting
of shareholders or may be held at a special meeting of shareholders, which
shall be held upon notice as provided in the By-laws of the Company for a
special meeting of the shareholders, at the request in writing of the
holders of not less than 1,000 shares of the then outstanding Preference
Stock addressed to the Secretary of the Company at its principal business
office. Any vacancy in the Board of Directors occurring during any period
when the Preference Stock shall have elected representatives on the Board
shall be filled by a majority vote of the remaining directors (or the one
director) representing the class of stock theretofore represented by the
director causing the vacancy. In the event of simultaneous vacancies
among directors elected by the holders of the Preference Stock, an
election, pursuant to the provisions of this paragraph, will be held.
Upon the termination of such exclusive right of the holders of the
Preference Stock to elect two directors of the Company, the terms of
office of all the directors of the Company shall terminate upon the
election of their successors at a meeting of the shareholders of the
Company then entitled to vote. Such election shall be held at the next
annual meeting of shareholders or may be held at a special meeting of
shareholders, which shall be held upon notice as provided in the By-laws
of the Company for a special meeting of the shareholders at the request in
writing of the holders of not less than 1,000 shares of the then
outstanding Common Stock addressed to the Secretary of the Company at its
principal business office.
At all meetings of the shareholders held for the purpose of
electing directors during such times as the holders of the Preference
Stock shall have the exclusive right to elect two of the directors of the
Company, the presence in person or by proxy of the holders of a majority
of the outstanding shares of Common Stock shall be required to constitute
a quorum of such class for the election of directors, and the presence in
person or by proxy of the holders of a majority of the outstanding shares
of Preference Stock of all series shall be required to constitute a quorum
of such class for the election of directors; provided, however, that the
absence of a quorum of the holders of stock of either class shall not
prevent the election at any such meeting, or adjournment thereof, of
directors by the other class if the necessary quorum of the holders of
stock of such class is present in person or by proxy at such meeting; and
provided, further, that, in the absence of a quorum of the holders of
stock of either class, a majority of those holders of such stock who are
present in person or by proxy shall have the power to adjourn the election
of those directors to be elected by that class from time to time without
notice, other than announcement at the meeting, until the requisite amount
of holders of stock of such class shall be present in person or by proxy.
At all elections of directors, each shareholder will be entitled
to as many votes as shall equal the number of his shares of stock
multiplied by the number of directors to be elected for whom such
shareholder may vote, and he may cast all of such votes for a single
director or may distribute them between the two directors to be voted for,
as he may see fit.
For the purposes of the foregoing provisions, the Preference
Stock of all series shall be deemed to be a single class.
PREFERENCE STOCK
----------------
Pre-emptive Rights
------------------
The holders of shares of Preference Stock shall have no pre-
emptive rights to subscribe for or purchase any additional issues of
shares of the capital stock of the Company of any class now or hereafter
authorized or any bonds, debentures or other obligations or rights or
options convertible into or exchangeable for or entitling the holder or
owner to subscribe for or purchase any shares of capital stock, or any
rights to exchange shares issued for shares to be issued.
ARTICLE VIII
Each director shall be a shareholder of the Company and any
Director ceasing to be a shareholder shall thereupon immediately cease to
be a Director.
Signed on March 25, 1994
CONSUMERS POWER COMPANY
(SEAL)
By /s/Michael G. Morris
---------------------------------------
Michael G. Morris
President and Chief Executive Officer
STATE OF MICHIGAN)
) SS.
COUNTY OF JACKSON)
On this 25th day of March 1994 before me appeared Michael G. Morris, to me
personally known, who, being by me duly sworn, did say that he is
President and Chief Executive Officer of Consumers Power Company, who
executed the foregoing instrument, and that the seal affixed to said
instrument is the corporate seal of said corporation, and that said
instrument was signed and sealed in behalf of said corporation by
authority of its Board of Directors, and said officer acknowledged said
instrument to be the free act and deed of said corporation.
/s/Margaret Hillman
-----------------------------
Margaret Hillman
(SEAL) Notary Public for Jackson
County, State of Michigan.
My commission expires
August 21, 1995.
<PAGE>
<PAGE>
Exhibit (3)(d)
CONSUMERS ENERGY COMPANY
BYLAWS
ARTICLE I: LOCATION OF OFFICES
Section 1 - Registered Office: The registered office of
Consumers Energy Company, (the "Company") shall be at such place
in the City of Jackson, County of Jackson, Michigan, or elsewhere
in the State of Michigan, as the Board of Directors may from time
to time designate.
Section 2 - Other Offices: The Company may have and maintain
other offices within or without the State of Michigan.
ARTICLE II: CORPORATE SEAL
Section 1 - Corporate Seal: The Company shall have a corporate
seal bearing the name of the Company. The form of the corporate
seal may be altered by the Board of Directors.
ARTICLE III: FISCAL YEAR
Section 1 - Fiscal Year: The fiscal year of the Company shall
begin with the first day of January and end with the thirty-first
day of December of each year.
ARTICLE IV: SHAREHOLDERS' MEETINGS
Section 1 - Annual Meetings: An annual meeting of the
shareholders for election of Directors and for such other
business as may come before the meeting shall be held at the
registered office of the Company or at such other place within or
without the State of Michigan, at 10:00 AM, Eastern Daylight
Saving Time, or at such other time on the fourth Friday in April
of each year or upon such other date as the Board of Directors
may designate, but in no event shall such date be more than
ninety (90) days after the fourth Friday in April.
Section 2 - Special Meetings: Special meetings of the
shareholders may be called by the Board of Directors or by the
Chairman of the Board. Such meetings shall be held at the
registered office of the Company or at such other place within or
without the State of Michigan as the Board of Directors may
designate.
Section 3 - Notices: Except as otherwise provided by law,
written notice of any meeting of the shareholders shall be given,
either personally or by mail to each shareholder of record
entitled to vote at such meeting, not less than ten (10) days nor
more than sixty (60) days prior to the date of the meeting, at
their last known address as the same appears on the stock records
of the Company. Written notice shall be considered given when
deposited, with postage thereon prepaid, in a post office or
official depository under the control of the United States postal
service. Such notice shall specify the time and place of holding
the meeting, the purpose or purposes for which such meeting is
called, and the record date fixed for the determination of
shareholders entitled to notice of and to vote at such meeting.
The Board of Directors shall fix a record date for determining
shareholders entitled to notice of and to vote at a meeting of
shareholders, which record date shall not be more than sixty (60)
days nor less than ten (10) days before the date of the meeting.
Such record date shall apply to any adjournment of the meeting
unless the Board of Directors shall fix a new record date for
purposes of the adjourned meeting.
No notice of an adjourned meeting shall be necessary if the
time and place to which the meeting is adjourned are announced at
the meeting at which the adjournment is taken. At the adjourned
meeting only such business may be transacted as might have been
transacted at the original meeting. If, after an adjournment,
the Board of Directors shall fix a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be
mailed, in conformity with the provisions of the first paragraph
of this Section 3, to each shareholder of record on the new
record date entitled to vote at the adjourned meeting.
Section 4 - Quorum: Except as otherwise provided by law or by
the Articles of Incorporation of the Company, the holders of the
shares of stock of the Company entitled to cast a majority of the
votes at a meeting shall constitute a quorum for the transaction
of business at the meeting, but a lesser number may convene any
meeting and, by a majority vote of the shares present at the
meeting, may adjourn the same from time to time until a quorum
shall be present.
Section 5 - Voting: Shareholders may vote at all meetings in
person or by proxy in writing, but all proxies shall be filed
with the Secretary of the meeting before being voted upon.
The voting powers of the shares of Preferred Stock, Class A
Preferred Stock, Preference Stock and Common Stock shall be as
provided by law or set forth in the Articles of Incorporation of
the Company.
Section 6 - Inspectors: In advance of any meeting of
shareholders the Board of Directors shall appoint one or more
inspectors to act at such meeting or any adjournment thereof.
The inspectors shall have such powers and duties as are provided
by law.
ARTICLE V: DIRECTORS
Section 1 - Number: The Board of Directors of the Company shall
consist of not less than seven (7) nor more than seventeen (17)
members, as fixed from time to time by resolution of the Board of
Directors.
Section 2 - Election: The Directors shall be elected annually at
the annual meeting of the shareholders or at any adjournment
thereof.
Section 3 - Term of Office: Subject to the provisions of the
Articles of Incorporation of the Company and unless otherwise
provided by law, the Directors shall hold office from the date of
their election until the next succeeding annual meeting and until
their successors are elected and shall qualify.
Section 4 - Vacancies: Any vacancy or vacancies in the Board of
Directors arising from any cause may be filled by the affirmative
vote of a majority of the Directors then in office although less
than a quorum. An increase in the number of members shall be
construed as creating a vacancy.
ARTICLE VI: DIRECTORS' MEETINGS
Section 1 - Organization Meeting: As soon as possible after
their election, the Board of Directors shall meet and organize
and may also transact other business.
Section 2 - Other Meetings: Meetings of the Board of Directors
may be held at any time upon call of the Secretary or an
Assistant Secretary made at the direction of the Chairman of the
Board, the President, a Vice Chairman, if any, or a Vice
President.
Section 3 - Place of Meeting: All meetings of Directors shall be
held at such place within or without the State of Michigan as may
be designated in the call therefor.
Section 4 - Notice: A reasonable notice of all meetings, in
writing or otherwise, shall be given to each Director or sent to
the Director's residence or place of business; provided, however,
that no notice shall be required for an organization meeting if
held on the same day as the shareholders' meeting at which the
Directors were elected.
No notice of the holding of an adjourned meeting shall be
necessary.
Notice of all meetings shall specify the time and place of
holding the meeting and unless otherwise stated any and all
business may be transacted at any such meeting.
Notice of the time, place and purpose of any meeting may be
waived in writing either before or after the holding thereof.
Section 5 - Quorum: At all meetings of the Board of Directors a
majority of the Board then in office shall constitute a quorum
but a majority of the Directors present may convene and adjourn
any such meeting from time to time until a quorum shall be
present; provided, that if the Board shall consist of ten (10)
and not more than fifteen (15), then five (5) members shall
constitute a quorum; and if the Board shall consist of more than
fifteen (15), then seven (7) members shall constitute a quorum.
Section 6 - Voting: All questions coming before any meeting of
the Board of Directors for action shall be decided by a majority
vote of the Directors present at such meeting, unless otherwise
provided by law, the Articles of Incorporation of the Company or
by these Bylaws.
Section 7 - Participation by Communications Equipment: A
Director or a member of a Committee designated by the Board of
Directors may participate in a meeting by means of conference
telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other.
Participation in a meeting by such means shall constitute
presence in person at the meeting.
Section 8 - Action Without Meeting: Any action required or
permitted to be taken pursuant to authorization voted at a
meeting of the Board of Directors or a Committee thereof, may be
taken without a meeting if, before or after the action, all
members of the Board or of the Committee consent thereto in
writing. The written consents shall be filed with the minutes of
the proceedings of the Board or Committee, and the consents shall
have the same effect as a vote of the Board or Committee for all
purposes.
ARTICLE VII: EXECUTIVE AND OTHER COMMITTEES
Section 1 - Number and Qualifications: By resolution passed by a
majority of the whole Board, the Board of Directors may from time
to time designate one or more of their number to constitute an
Executive or any other Committee of the Board, as the Board of
Directors may from time to time determine to be desirable, and
may fix the number of and designate the Chairman of each such
Committee. Except as otherwise provided by law, the powers of
each such Committee shall be as defined in the resolution or
resolutions of the Board of Directors relating to the
authorizations of such Committee, and may include, if such
resolution or resolutions so provide, the power and authority to
declare a dividend or to authorize issuance of shares of stock of
the Company.
Section 2 - Appointment: The appointment of members of each such
Committee, or other action respecting any Committee, may take
place at any meeting of the Directors.
Section 3 - Term of Office: The members of each Committee shall
hold office at the pleasure of the Board of Directors.
Section 4 - Vacancies: Any vacancy or vacancies in any such
Committee arising from any cause shall be filled by resolution
passed by a majority of the whole Board of Directors. By like
vote the Board may designate one or more Directors to serve as
alternate members of a Committee, who may replace an absent or
disqualified member at a meeting of a Committee; provided,
however, in the absence or disqualification of a member of a
Committee, the members of the Committee present at a meeting and
not disqualified from voting, whether or not constituting a
quorum, may unanimously appoint another member of the Board of
Directors to act in the place of the absent or disqualified
member.
Section 5 - Minutes: Except as provided in Section 2 of Article
X hereof or as otherwise determined by the Board of Directors,
each such Committee shall make a written report or recommendation
following its meetings or keep minutes of all its meetings.
Section 6 - Quorum: At all meetings of any duly authorized
Committee of the Board of Directors, a majority of the members of
such Committee shall constitute a quorum but a majority of the
members present may convene and adjourn any such meeting from
time to time until a quorum shall be present; provided, that with
respect to any Committee of the Board other than the Executive
Committee, if the membership of such Committee is four (4) or
less, then two (2) members of such Committee shall constitute a
quorum and one member may convene and adjourn any such meeting
from time to time until a quorum shall be present.
ARTICLE VIII: OFFICERS
Section 1 - Election: The officers shall be chosen by the Board
of Directors. The Company shall have a Chairman of the Board, a
President, a Secretary and a Treasurer, and such other officers
as the Board of Directors may from time to time determine, who
shall have respectively such duties and authority as may be
provided by these Bylaws or as may be provided by resolution of
the Board of Directors not inconsistent herewith. Any two (2) or
more of such offices may be held by the same person but no
officer shall execute, acknowledge or verify any instrument in
more than one capacity if such instrument is required by law, by
the Articles of Incorporation of the Company or by these Bylaws
to be executed, acknowledged or verified by two (2) or more
officers.
Section 2 - Qualifications: The Chairman of the Board and Vice
Chairman, if any, shall be chosen from among the Board of
Directors, but the other officers need not be members of the
Board.
Section 3 - Vacancies: Any vacancy or vacancies among the
officers arising from any cause shall be filled by the Board of
Directors. In case of the absence of any officer of the Company
or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may delegate, for the time
being, the powers or duties, or any of them, of any officer to
any other officer or to any Director.
Section 4 - Term of Office: Each officer of the Company shall
hold office until the officer's successor is chosen and
qualified, or until the officer's resignation or removal. Any
officer appointed by the Board of Directors may be removed at any
time by the Board of Directors with or without cause.
Section 5 - Compensation: The compensation of the officers shall
be fixed by the Board of Directors.
ARTICLE IX: AGENTS
Section 1 - Resident Agent: The Company shall have and
continuously maintain a resident agent, which may be either an
individual resident in the State of Michigan whose business
office is identical with the Company's registered office or a
Michigan corporation or a foreign corporation authorized to
transact business in Michigan and having a business office
identical with the Company's registered office. The Board of
Directors shall appoint the resident agent.
Section 2 - Other Agents: The Board of Directors may appoint
such other agents as may in their judgment be necessary for the
proper conduct of the business of the Company.
ARTICLE X: POWERS AND DUTIES
Section 1 - Directors: The business and affairs of the Company
shall be managed by the Board of Directors which shall have and
exercise all of the powers and authority of the Company except as
otherwise provided by law, by the Articles of Incorporation of
the Company or by these Bylaws.
Section 2 - Executive Committee: In the interim between meetings
of the Board of Directors the Executive Committee shall have and
exercise all the powers and authority of the Board of Directors
except as otherwise provided by law. The Executive Committee
shall meet from time to time on the call of the Chairman of the
Board or the Chairman of the Committee. The Secretary shall keep
minutes in sufficient detail to advise fully the Board of
Directors of the actions taken by the Committee and shall submit
copies of such minutes to the Board of Directors for its approval
or other action at its next meeting.
Section 3 - Chairman of the Board: The Chairman of the Board
shall preside at all meetings of Directors and shareholders;
shall perform and do all acts and things incident to the position
of Chairman of the Board; and shall perform such other duties as
may be assigned from time to time by the Board of Directors or
the Executive Committee.
Unless otherwise provided by the Board or the Executive
Committee, the Chairman of the Board shall have full power and
authority on behalf of the Company to execute any shareholders'
consents and to attend and act and to vote in person or by proxy
at any meetings of shareholders of any corporation in which the
Company may own stock and at any such meeting shall possess and
may exercise any and all the rights and powers incident to the
ownership of such stock and which, as the owner thereof, the
Company might have possessed and exercised if present. If the
Chairman of the Board shall not exercise such powers, or in the
absence or inability to act of the Chairman, the President may
exercise such powers. In the absence or inability to act of the
President, a Vice Chairman, if any, may exercise such powers. In
the absence or inability to act of a Vice Chairman, any Vice
President may exercise such powers. The Board of Directors or
Executive Committee by resolution from time to time may confer
like powers upon any other person or persons.
Section 4 - President: The President shall be the chief
executive officer of the Company and, subject to the supervision
of the Board of Directors and of the Executive Committee, shall
have general charge of the business and affairs of the Company;
shall perform and do all acts and things incident to such
position; and shall perform such other duties as may be assigned
from time to time by the Board of Directors, the Executive
Committee or the Chairman of the Board. In the absence of the
Chairman of the Board and a Vice Chairman, the President shall
preside at meetings of Directors. In the absence of the Chairman
of the Board, the President shall preside at meetings of
shareholders.
Section 5 - Vice Chairman: The Vice Chairman, if any, shall
perform such of the duties of the Chairman of the Board or the
President on behalf of the Company as may be respectively
assigned from time to time by the Board of Directors, the
Executive Committee, the Chairman of the Board or the President.
In the absence of the Chairman of the Board, the Vice Chairman
shall preside at meetings of Directors. In the absence of the
Chairman of the Board and the President, the Vice Chairman shall
preside at meetings of shareholders.
Section 6 - Vice Presidents: Vice Presidents, if any, shall
perform such of the duties of the Chairman of the Board or the
President or the Vice Chairman, if any, on behalf of the Company
as may be respectively assigned from time to time by the Board of
Directors, the Executive Committee, the Chairman of the Board or
the President or a Vice Chairman. The Board of Directors or
Executive Committee may designate one or more of the Vice
Presidents as Executive Vice President or Senior Vice President.
Section 7 - Controller: Subject to the Board of Directors, the
Executive Committee, the Chairman of the Board, the President and
the Vice President having general charge of accounting, the
Controller, if any, shall have charge of the supervision of the
accounting system of the Company, including the preparation and
filing of all tax returns and financial reports required by law
to be made to any and all public authorities and officials; and
shall perform such other duties as may be assigned, from time to
time, by the Board of Directors, the Executive Committee, the
Chairman of the Board, the President, a Vice Chairman, if any, or
Vice President having general charge of accounting.
Section 8 - Treasurer: It shall be the duty of the Treasurer to
have the care and custody of all the funds and securities,
including the investment thereof, of the Company which may come
into the Treasurer's hands, and to endorse checks, drafts and
other instruments for the payment of money for deposit or
collection when necessary or proper and to deposit the same to
the credit of the Company in such bank or banks or depository as
the Treasurer may designate, and the Treasurer may endorse all
commercial documents requiring endorsements for or on behalf of
the Company. The Treasurer may sign all receipts and vouchers
for the payments made to the Company; shall render an account of
transactions to the Board of Directors or the Executive Committee
as often as the Board or the Committee shall require; and shall
perform all acts incident to the position of Treasurer, subject
to the control of the Board of Directors, the Executive
Committee, the Chairman of the Board, the President and a Vice
Chairman, if any.
Section 9 - Secretary: The Secretary shall act as custodian of
and record the minutes of all meetings of the Board of Directors,
of the Executive Committee, of the shareholders and of any
Committees of the Board of Directors which keep formal minutes;
shall attend to the giving and serving of all notices of the
Company; shall prepare or cause to be prepared the list of
shareholders required to be produced at any meeting; shall attest
the seal of the Company upon all contracts and instruments
executed under such seal and shall affix or cause to be affixed
the seal of the Company thereto and to all certificates of shares
of the capital stock; shall have charge of the stock records of
the Company and such other books and papers as the Board of
Directors, the Executive Committee, the Chairman of the Board,
the President or a Vice Chairman, if any, may direct; and shall,
in general, perform all the duties of Secretary, subject to the
control of the Board of Directors, the Executive Committee, the
Chairman of the Board, the President and a Vice Chairman, if any.
Section 10 - General Counsel: The General Counsel, if any, shall
have charge of all matters of a legal nature involving the
Company.
Section 11 - Assistant Controllers,
Assistant Secretaries and
Assistant Treasurers: An Assistant Controller, an
Assistant Secretary or an Assistant Treasurer, if any, shall, in
the absence or inability to act or at the request of the
Controller, Secretary or Treasurer, respectively, perform the
duties of the Controller or Secretary or Treasurer, respectively,
and shall perform such other duties as may from time to time be
assigned by the Board of Directors, the Executive Committee, the
Chairman of the Board, the President or a Vice Chairman, if any.
The performance of any such duty shall be conclusive evidence of
their right to act.
Section 12 - Principal Financial Officer and
Principal Accounting Officer: The Board of
Directors or the Executive Committee may from time to time
designate officers of the Company to be the Principal Financial
Officer and the Principal Accounting Officer of the Company.
ARTICLE XI: STOCK
Section 1 - Stock Certificates: The shares of stock of the
Company shall be represented by certificates which shall be
numbered and shall be entered on the stock records of the Company
and registered as they are issued. Each certificate shall state
on its face that the Company is formed under the laws of
Michigan, the name of the person or persons to whom issued, the
number and class of shares and the designation of the series the
certificate represents, and the par value of each share
represented by the certificate; shall be signed by the Chairman
of the Board or a Vice Chairman or the President or one of the
Vice Presidents and also may be signed by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary;
and shall be sealed with the seal of the Company or a facsimile
thereof. When such certificates are countersigned by a transfer
agent or registered by a registrar, the signatures of any such
Chairman of the Board, Vice Chairman, President, Vice President,
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary
may be facsimiles. In case any officer, who shall have signed or
whose facsimile signature shall have been placed on any such
certificate, shall cease to be such officer of the Company before
such certificate shall have been issued by the Company, such
certificate may nevertheless be issued by the Company with the
same effect as if the person, who signed such certificate or
whose facsimile signature shall have been placed thereon, were
such officer of the Company at the date of issue.
Each certificate shall set forth on its face or back or
state that the Company will furnish to a shareholder upon request
and without charge a full statement of the designations, relative
rights, preferences and limitations of the shares of stock of
each class authorized to be issued and of each series so far as
the same have been prescribed and the authority of the Board of
Directors to designate and prescribe the relative rights,
preferences and limitations of other series.
Section 2 - Stock Records: The shares of stock of the Company
shall be transferable on the stock records of the Company in
person or by proxy duly authorized and upon surrender and
cancellation of the old certificates therefor.
The Board of Directors may fix a date preceding the date
fixed for any meeting of the shareholders or any dividend payment
date or the date for the allotment of rights or the date when any
change, conversion or exchange of stock shall go into effect or
the date for any other action, as the record date for the
determination of the shareholders entitled to notice of and to
vote at such meeting or to receive payment of such dividend or to
receive such allotment of rights or to exercise such rights in
respect of any such change, conversion or exchange of stock or to
take such other action, as the case may be, notwithstanding any
transfer of shares on the records of the Company or otherwise
after any such record date fixed as aforesaid. The record date
so fixed by the Board shall not be more than sixty (60) nor less
than ten (10) days before the date of the meeting of the
shareholders, nor more than sixty (60) days before any other
action. If the Board of Directors does not fix a date of record,
as aforesaid, the record date shall be as provided by law.
Section 3 - Stock - Preferred, Class A Preferred, Preference and
Common: The Preferred Stock, Class A Preferred Stock, Preference
Stock and Common Stock of the Company shall consist of shares
having a par value of $100, no par value, $1 and $10 per share,
respectively.
The designations, relative rights, preferences, limitations
and voting powers, or restrictions, or qualifications of the
shares of Preferred Stock, Class A Preferred Stock, Preference
Stock and Common Stock shall be as set forth in the Articles of
Incorporation of the Company.
Section 4 - Replacing Certificates: In case of the alleged loss,
theft or destruction of any certificate of shares of stock and
the submission of proper proof thereof, a new certificate may be
issued in lieu thereof upon delivery to the Company by the owner
or the owner's legal representative of a bond of indemnity
against any claim that may be made against the Company on account
of such alleged lost, stolen or destroyed certificate or such
issuance of a new certificate.
ARTICLE XII: AUTHORIZED SIGNATURES
Section 1 - Authorized Signatures: All checks, drafts and other
negotiable instruments issued by the Company shall be made in the
name of the Company and shall be signed manually or signed by
facsimile signature by such one of the officers of the Company or
such other person as the Chairman of the Board may from time to
time designate.
ARTICLE XIII: INSURANCE
Section 1 - Insurance: The Company may purchase and maintain
liability insurance, to the full extent permitted by law, on
behalf of any person who is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of
the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and
incurred by such person in any such capacity.
ARTICLE XIV: AMENDMENTS OF BYLAWS
Section 1 - Amendments, How Effected: These Bylaws may be
amended or repealed, or new Bylaws may be adopted, either by the
majority vote of the votes cast by the shareholders entitled to
vote thereon or by the majority vote of the Directors then in
office at any meeting of the Directors.
March 11, 1997
<PAGE>
<PAGE>
Exhibit (10)(m)
EMPLOYMENT AGREEMENT
AGREEMENT between CMS Gas Transmission and Storage Company, a
Michigan corporation (the "Company"), and William J. Haener (the "Execu-
tive") dated this 2nd day of April, 1996.
Whereas the Company considers the maintenance of a vital
management essential to protecting and enhancing the best interests of the
Company and its shareholders. Whereas the Company has determined to
encourage the continuing attention and dedication of the key members of
its management without the distraction arising from the possibility of a
change in control.
Therefore, the parties hereto agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the
date on which a Change of Control (as defined in Section 2) shall occur.
2. Change of Control. As used in this Agreement, "Change of
Control" shall be deemed to have taken place if a person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934 becomes the beneficial owner of shares having 35% or more of the
total number of votes that may be cast in the election of Directors of
CMS Energy Corporation.
3. Employment. The Company hereby agrees to continue to
employ and engage the services of the Executive as its President and Chief
Executive Officer for the period beginning on the Effective Date and
ending on the earlier of the fifth anniversary of such date or the Normal
Retirement Date of the Executive under the Consumers Power Company's
Pension Plan (hereinafter "Employment Period"). The Executive agrees to
serve the Company in such position, unless an event shall occur which is
described in Section 6.
4. Duties. The Executive agrees during the Employment Period
to devote his full business time to the business and affairs of the
Company (except for (i) services on corporate, civic or charitable boards
or committees, (ii) such reasonable time as shall be required for the
investment of the Executive's assets, which do not significantly interfere
with the performance of his responsibilities hereunder and (iii) periods
of vacation and sick leave to which he is entitled) and to use his best
efforts to promote the interests of the Company and to perform faithfully
and efficiently the responsibilities of its President and Chief Executive
Officer.
5. Compensation and Other Terms of Employment.
(a) Base Salary. The Executive shall receive an annual
base salary ("Base Salary") of not less than his annual salary immediately
prior to the Effective Date (payable in equal semi-monthly installments)
from the Company.
The Base Salary shall be reviewed and may be increased at any
time and from time to time in accordance with the Company's regular
practices, and shall be reviewed at least annually by the Organization and
Compensation Committee of its Board of Directors.
(b) Incentive Compensation. As further compensation, the
Executive will be eligible for awards ("Incentive Compensation") under the
Company's Executive Incentive Compensation Plan in which he was
participating immediately prior to the Effective Date.
(c) Retirement, Savings and Stock Option Plans. In
addition to the Base Salary and Incentive Compensation payable as
hereinabove provided, the Executive shall be entitled to participate in
savings, stock options and other incentive plans and programs available to
executives of the Company or to opportunities provided under any such
plans in which he was participating immediately preceding the Effective
Date, whichever is greater.
(d) Vacation and Employee Benefits.
(i) The Executive shall be entitled to paid vacation
and other employee benefits and perquisites, in accordance with the
policies of the Company in effect for executive officers, or the vacation
employee benefits and perquisites to which he was entitled immediately
prior to the Effective Date, whichever is greater.
6. Termination.
(a) Death. This Agreement shall terminate automatically
upon the Executive's death. In the event of such termination, the Company
shall pay to the Executive's estate all benefits and compensation accrued
hereunder to the date of death, including a pro rata portion of incentive
compensation.
(b) Disability. In the event the Executive becomes unable
by reason of physical or mental disability to render the services required
hereunder and such disability continues for a continuous period of 6
months, the employment of the Executive hereunder shall terminate, unless
the employment is extended by agreement of the Company and the Executive.
Commencing at the date of termination of employment for disability, the
Executive shall receive annually a sum equal to 50% of his Base Salary at
the time of termination of employment, in monthly installments until his
62nd birthday, or his death if earlier. Disability payments hereunder
shall be reduced by the amount of other Company-sponsored disability
benefits paid to the Executive through insurance or otherwise.
(c) Termination with Cause. The Company may terminate the
Executive's employment for Cause. For purposes of this Agreement, "Cause"
shall mean an act or acts of dishonesty, fraud, misappropriation or
intentional material damage to the property or business of the Company or
commission of a felony on the Executive's part. If the Executive's
employment is terminated for Cause, the Company shall pay the Executive
his full accrued Base Salary through the date of such termination at the
rate in effect at the time of such termination, and the Company shall have
no further obligations to the Executive under this Agreement.
(d) Other Termination or Resignation of Executive.
(i) The Company may terminate the Executive's
employment without Cause.
(ii) In the event that the Executive determines in
his sole judgment that his position, authority, or responsibilities have
been diminished as a result of the "Change of Control," the Executive may
terminate his employment with the Company upon written notice given within
12 months after the Effective Date.
(iii) In the event of a termination of employment
under this subsection (d), the Executive shall receive a severance payment
equal to twice his Base Salary at the time of termination of employment
plus either twice his incentive compensation payable with respect to the
last full calendar year prior to the termination of employment or, if no
incentive compensation was awarded to the Executive with respect to the
last full calendar year prior to the termination of employment, twice the
standard incentive award, as defined in the Company's Executive Incentive
Compensation Plan for the salary grade of the Executive for such year.
The severance payment shall be paid in a lump sum payment, in cash, or as
otherwise directed by the Executive.
7. No Obligation to Mitigate Damages. The Executive shall not
be obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining
of any such other employment shall in no event effect any reduction of the
Company's obligations to make the payments and arrangements required to be
made under this Agreement.
8. Indemnification. The Company shall include the Executive
in its Director and Officer Liability Insurance policy, if any, during his
Employment Period and for a period of not less than five years after the
termination of the Executive's employment for any reason whatsoever. In
addition to insurance and any other indemnification available to the
Executive as an Officer, the Company shall indemnify, to the extent
permitted by applicable law, the Executive for settlements, judgments and
reasonable expenses in connection with activities arising from services
rendered by the Executive as a Director or Officer of the Company or any
affiliated company.
9. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in
writing and if sent by registered or certified mail to the Executive at
the last address he has filed in writing with the Company or, in the case
of the Company, Attn: Secretary, at its principal executive offices.
10. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien or security
interest upon any amounts provided under this Agreement; and no benefits
payable hereunder shall be assignable in anticipation of payment either by
voluntary or involuntary acts, or by operation of law, except by will or
the laws of descent and distribution.
11. Governing Law. The provisions of this Agreement shall be
construed in accordance with the laws of the State of Michigan.
12. Amendment. This Agreement may be amended or cancelled only
by mutual agreement of the parties in writing without the consent of any
other person and, so long as the Executive lives, no person, other than
the parties hereto, shall have any rights under or interest in this
Agreement or the subject matter hereof.
13. Successor to the Company. Except as may be otherwise
provided herein, this Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company.
14. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
IN WITNESS WHEREOF, the Company and the Executive have executed
this Agreement as of the date first above written.
/s/ William J. Haener
-----------------------------------------
William J. Haener
CMS GAS TRANSMISSION AND STORAGE COMPANY
By: /s/ William T. McCormick, Jr.
-----------------------------------------
William T. McCormick, Jr.
Chairman of the Board
<PAGE>
<PAGE>
Exhibit (10)(n)
EMPLOYMENT AGREEMENT
AGREEMENT between CMS Energy Corporation, a Michigan
corporation, CMS Enterprises Company, a Michigan corporation (the
"Companies"), and James W. Cook (the "Executive") dated this 4th day of
April, 1996.
Whereas the Companies consider the maintenance of a vital
management essential to protecting and enhancing the best interests of the
Companies and their shareholders. Whereas the Companies have determined
to encourage the continuing attention and dedication of the key members of
their management without the distraction arising from the possibility of a
change in control.
Therefore, the parties hereto agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the
date on which a Change of Control (as defined in Section 2) shall occur.
2. Change of Control. As used in this Agreement, "Change of
Control" shall be deemed to have taken place if a person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934 becomes the beneficial owner of shares having 35% or more of the
total number of votes that may be cast in the election of Directors of
CMS Energy Corporation.
3. Employment. The Companies hereby agree to continue to
employ and engage the services of the Executive as their Senior Vice
President of the Companies for the period beginning on the Effective Date
and ending on the earlier of the fifth anniversary of such date or the
Normal Retirement Date of the Executive under the Consumers Power
Company's Pension Plan (hereinafter "Employment Period"). The Executive
agrees to serve the Companies in such position, unless an event shall
occur which is described in Section 6.
4. Duties. The Executive agrees during the Employment Period
to devote his full business time to the business and affairs of the
Companies (except for (i) services on corporate, civic or charitable
boards or committees, (ii) such reasonable time as shall be required for
the investment of the Executive's assets, which do not significantly
interfere with the performance of his responsibilities hereunder and
(iii) periods of vacation and sick leave to which he is entitled) and to
use his best efforts to promote the interests of the Companies and to
perform faithfully and efficiently the responsibilities of Senior Vice
President.
5. Compensation and Other Terms of Employment.
(a) Base Salary. The Executive shall receive an annual
base salary ("Base Salary") of not less than his annual salary immediately
prior to the Effective Date (payable in equal semi-monthly installments)
from the Companies.
The Base Salary shall be reviewed and may be increased at any
time and from time to time in accordance with the Companies' regular
practices, and shall be reviewed at least annually by the Organization and
Compensation Committee of its Board of Directors.
(b) Incentive Compensation. As further compensation, the
Executive will be eligible for awards ("Incentive Compensation") under the
Companies' Executive Incentive Compensation Plan in which he was
participating immediately prior to the Effective Date.
(c) Retirement, Savings and Stock Option Plans. In
addition to the Base Salary and Incentive Compensation payable as
hereinabove provided, the Executive shall be entitled to participate in
savings, stock options and other incentive plans and programs available to
executives of the Companies or to opportunities provided under any such
plans in which he was participating immediately preceding the Effective
Date, whichever is greater.
(d) Vacation and Employee Benefits.
(i) The Executive shall be entitled to paid vacation
and other employee benefits and perquisites, in accordance with the
policies of the Companies in effect for executive officers, or the
vacation employee benefits and perquisites to which he was entitled
immediately prior to the Effective Date, whichever is greater.
6. Termination.
(a) Death. This Agreement shall terminate automatically
upon the Executive's death. In the event of such termination, the
Companies shall pay to the Executive's estate all benefits and
compensation accrued hereunder to the date of death, including a pro rata
portion of incentive compensation.
(b) Disability. In the event the Executive becomes unable
by reason of physical or mental disability to render the services required
hereunder and such disability continues for a continuous period of 6
months, the employment of the Executive hereunder shall terminate, unless
the employment is extended by agreement of the Companies and the
Executive. Commencing at the date of termination of employment for
disability, the Executive shall receive annually a sum equal to 50% of his
Base Salary at the time of termination of employment, in monthly
installments until his 62nd birthday, or his death if earlier. Disability
payments hereunder shall be reduced by the amount of other
Companies-sponsored disability benefits paid to the Executive through
insurance or otherwise.
(c) Termination with Cause. The Companies may terminate
the Executive's employment for Cause. For purposes of this Agreement,
"Cause" shall mean an act or acts of dishonesty, fraud, misappropriation
or intentional material damage to the property or business of the
Companies or commission of a felony on the Executive's part. If the
Executive's employment is terminated for Cause, the Companies shall pay
the Executive his full accrued Base Salary through the date of such
termination at the rate in effect at the time of such termination, and the
Companies shall have no further obligations to the Executive under this
Agreement.
(d) Other Termination or Resignation of Executive.
(i) The Companies may terminate the Executive's
employment without Cause.
(ii) In the event that the Executive determines in
his sole judgment that his position, authority, or responsibilities have
been diminished as a result of the "Change of Control," the Executive may
terminate his employment with the Companies upon written notice given
within 12 months after the Effective Date.
(iii) In the event of a termination of employment
under this subsection (d), the Executive shall receive a severance payment
equal to twice his Base Salary at the time of termination of employment
plus either twice his incentive compensation payable with respect to the
last full calendar year prior to the termination of employment or, if no
incentive compensation was awarded to the Executive with respect to the
last full calendar year prior to the termination of employment, twice the
standard incentive award, as defined in the Companies' Executive Incentive
Compensation Plan for the salary grade of the Executive for such year.
The severance payment shall be paid in a lump sum payment, in cash, or as
otherwise directed by the Executive.
7. No Obligation to Mitigate Damages. The Executive shall not
be obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining
of any such other employment shall in no event effect any reduction of the
Companies' obligations to make the payments and arrangements required to
be made under this Agreement.
8. Indemnification. The Companies shall include the Executive
in their Director and Officer Liability Insurance policy, if any, during
his Employment Period and for a period of not less than five years after
the termination of the Executive's employment for any reason whatsoever.
In addition to insurance and any other indemnification available to the
Executive as an Officer, the Companies shall indemnify, to the extent
permitted by applicable law, the Executive for settlements, judgments and
reasonable expenses in connection with activities arising from services
rendered by the Executive as a Director or Officer of the Companies or any
affiliated company.
9. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in
writing and if sent by registered or certified mail to the Executive at
the last address he has filed in writing with the Companies or, in the
case of the Companies, Attn: Secretary, at their principal executive
offices.
10. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien or security
interest upon any amounts provided under this Agreement; and no benefits
payable hereunder shall be assignable in anticipation of payment either by
voluntary or involuntary acts, or by operation of law, except by will or
the laws of descent and distribution.
11. Governing Law. The provisions of this Agreement shall be
construed in accordance with the laws of the State of Michigan.
12. Amendment. This Agreement may be amended or cancelled only
by mutual agreement of the parties in writing without the consent of any
other person and, so long as the Executive lives, no person, other than
the parties hereto, shall have any rights under or interest in this
Agreement or the subject matter hereof.
13. Successor to the Companies. Except as may be otherwise
provided herein, this Agreement shall be binding upon and inure to the
benefit of the Companies and any successor of the Companies.
14. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
15. The Employment Agreement effective May 16, 1989 between
CMS Enterprises Company and the Executive is hereby canceled.
IN WITNESS WHEREOF, the Companies and the Executive have
executed this Agreement as of the date first above written.
/s/ James W. Cook
-----------------------------------
James W. Cook
CMS ENERGY CORPORATION CMS ENTERPRISES COMPANY
By: /s/William T. McCormick, Jr. By: /s/ William T. McCormick, Jr.
-------------------------------- --------------------------------
William T. McCormick, Jr. William T. McCormick, Jr.
Chairman of the Board Chairman of the Board
and Chief Executive Officer
<PAGE>
<PAGE>
Exhibit (10)(o)
EMPLOYMENT AGREEMENT
AGREEMENT between Consumers Power Company, a Michigan corporation
(the "Company"), and David W. Joos (the "Executive") dated this 19th day
of March, 1996.
Whereas the Company considers the maintenance of a vital management
essential to protecting and enhancing the best interests of the Company
and its shareholders. Whereas the Company has determined to encourage the
continuing attention and dedication of the key members of its management
without the distraction arising from the possibility of a change in
control.
Therefore, the parties hereto agree as follows:
1. Operation of Agreement. The "Effective Date" shall be the date
on which a Change of Control (as defined in Section 2) shall occur.
2. Change of Control. As used in this Agreement, "Change of
Control" shall be deemed to have taken place if a person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934 becomes the beneficial owner of shares having 35% or more of the
total number of votes that may be cast in the election of Directors of
CMS Energy Corporation.
3. Employment. The Company hereby agrees to continue to employ and
engage the services of the Executive as its Executive Vice President and
Chief Operating Officer-Electric of the Company for the period beginning
on the Effective Date and ending on the earlier of the fifth anniversary
of such date or the Normal Retirement Date of the Executive under the
Company's Pension Plan (hereinafter "Employment Period"). The Executive
agrees to serve the Company in such position, unless an event shall occur
which is described in Section 6.
4. Duties. The Executive agrees during the Employment Period to
devote his full business time to the business and affairs of the Company
(except for (i) services on corporate, civic or charitable boards or
committees, (ii) such reasonable time as shall be required for the
investment of the Executive's assets, which do not significantly interfere
with the performance of his responsibilities hereunder and (iii) periods
of vacation and sick leave to which he is entitled) and to use his best
efforts to promote the interests of the Company and to perform faithfully
and efficiently the responsibilities of Executive Vice President and Chief
Operating Officer-Electric.
5. Compensation and Other Terms of Employment.
(a) Base Salary. The Executive shall receive an annual base
salary ("Base Salary") of not less than his annual salary immediately
prior to the Effective Date (payable in equal semi-monthly installments)
from the Company.
The Base Salary shall be reviewed and may be increased at any time
and from time to time in accordance with the Company's regular practices,
and shall be reviewed at least annually by the Organization and
Compensation Committee of its Board of Directors.
(b) Incentive Compensation. As further compensation, the
Executive will be eligible for awards ("Incentive Compensation") under the
Company's Executive Incentive Compensation Plan in which he was
participating immediately prior to the Effective Date.
(c) Retirement, Savings and Stock Option Plans. In addition to
the Base Salary and Incentive Compensation payable as hereinabove
provided, the Executive shall be entitled to participate in savings, stock
options and other incentive plans and programs available to executives of
the Company or to opportunities provided under any such plans in which he
was participating immediately preceding the Effective Date, whichever is
greater.
(d) Vacation and Employee Benefits.
(i) The Executive shall be entitled to paid vacation and
other employee benefits and perquisites, in accordance with the policies
of the Company in effect for executive officers, or the vacation employee
benefits and perquisites to which he was entitled immediately prior to the
Effective Date, whichever is greater.
6. Termination.
(a) Death. This Agreement shall terminate automatically upon
the Executive's death. In the event of such termination, the Company
shall pay to the Executive's estate all benefits and compensation accrued
hereunder to the date of death, including a pro rata portion of incentive
compensation.
(b) Disability. In the event the Executive becomes unable by
reason of physical or mental disability to render the services required
hereunder and such disability continues for a continuous period of 6
months, the employment of the Executive hereunder shall terminate, unless
the employment is extended by agreement of the Company and the Executive.
Commencing at the date of termination of employment for disability, the
Executive shall receive annually a sum equal to 50% of his Base Salary at
the time of termination of employment, in monthly installments until his
62nd birthday, or his death if earlier. Disability payments hereunder
shall be reduced by the amount of other Company-sponsored disability
benefits paid to the Executive through insurance or otherwise.
(c) Termination with Cause. The Company may terminate the
Executive's employment for Cause. For purposes of this Agreement, "Cause"
shall mean an act or acts of dishonesty, fraud, misappropriation or
intentional material damage to the property or business of the Company or
commission of a felony on the Executive's part. If the Executive's
employment is terminated for Cause, the Company shall pay the Executive
his full accrued Base Salary through the date of such termination at the
rate in effect at the time of such termination, and the Company shall have
no further obligations to the Executive under this Agreement.
(d) Other Termination or Resignation of Executive.
(i) The Company may terminate the Executive's employment
without Cause.
(ii) In the event that the Executive determines in his
sole judgment that his position, authority, or responsibilities have been
diminished as a result of the "Change of Control," the Executive may
terminate his employment with the Company upon written notice given within
12 months after the Effective Date.
(iii) In the event of a termination of employment under
this subsection (d), the Executive shall receive a severance payment equal
to twice his Base Salary at the time of termination of employment plus
either twice his incentive compensation payable with respect to the last
full calendar year prior to the termination of employment or, if no
incentive compensation was awarded to the Executive with respect to the
last full calendar year prior to the termination of employment, twice the
standard incentive award, as defined in the Company's Executive Incentive
Compensation Plan for the salary grade of the Executive for such year.
The severance payment shall be paid in a lump sum payment, in cash, or as
otherwise directed by the Executive.
7. No Obligation to Mitigate Damages. The Executive shall not be
obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining
of any such other employment shall in no event effect any reduction of the
Company's obligations to make the payments and arrangements required to be
made under this Agreement.
8. Indemnification. The Company shall include the Executive in its
Director and Officer Liability Insurance policy, if any, during his
Employment Period and for a period of not less than five years after the
termination of the Executive's employment for any reason whatsoever. In
addition to insurance and any other indemnification available to the
Executive as an Officer, the Company shall indemnify, to the extent
permitted by applicable law, the Executive for settlements, judgments and
reasonable expenses in connection with activities arising from services
rendered by the Executive as a Director or Officer of the Company or any
affiliated company.
9. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and if
sent by registered or certified mail to the Executive at the last address
he has filed in writing with the Company or, in the case of the Company,
Attn: Secretary, at its principal executive offices.
10. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien or security
interest upon any amounts provided under this Agreement; and no benefits
payable hereunder shall be assignable in anticipation of payment either by
voluntary or involuntary acts, or by operation of law, except by will or
the laws of descent and distribution.
11. Governing Law. The provisions of this Agreement shall be
construed in accordance with the laws of the State of Michigan.
12. Amendment. This Agreement may be amended or cancelled only by
mutual agreement of the parties in writing without the consent of any
other person and, so long as the Executive lives, no person, other than
the parties hereto, shall have any rights under or interest in this
Agreement or the subject matter hereof.
13. Successor to the Company. Except as may be otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of
the Company and any successor of the Company.
14. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
/s/ David W. Joos
-----------------------------------
David W. Joos
CONSUMERS POWER COMPANY
By: /s/ William T. McCormick, Jr.
-----------------------------------
William T. McCormick, Jr.
Chairman of the Board
<PAGE>
<PAGE>
<TABLE>
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges
(Millions of Dollars)
<CAPTION>
Years Ended December 31
1996 1995 1994 1993 1992
(b)
<S> <C> <C> <C> <C> <C>
Earnings as defined (a)
Net income $ 240 $ 204 $ 179 $ 155 $(297)
Income taxes 139 118 92 75 (146)
Exclude equity basis subsidiaries (85) (57) (18) (6) 10
Fixed charges as defined, adjusted to
exclude capitalized interest of $8,
$8, $6, $5, and $3 for the years
ended December 31, 1996, 1995,
1994, 1993, and 1992,
respectively 296 280 237 245 228
----- ----- ----- ----- -----
Earnings as defined $ 590 $ 545 $ 490 $ 469 $(205)
===== ===== ===== ===== =====
Fixed charges as defined (a)
Interest on long-term debt $ 230 $ 224 $ 193 $ 204 $ 169
Estimated interest portion of lease rental 10 9 9 11 16
Other interest charges 29 27 18 24 35
Preferred securities dividends
and distributions 54 42 36 17 16
----- ----- ----- ----- -----
Fixed charges as defined $ 323 $ 302 $ 256 $ 256 $ 236
===== ===== ===== ===== =====
Ratio of earnings to fixed charges 1.83 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.
</TABLE>
<PAGE>
<PAGE>
Exhibit (21)(a)
SUBSIDIARIES OF CMS ENERGY CORPORATION
at December 31, 1996
Percent Voting
Stock Owned
by CMS Energy Incorporated
-------------- ------------
Consumers Energy Company ("Consumers") 100 Michigan
Michigan Gas Storage Company 0 Michigan
(100% Owned by Consumers)*
CMS Enterprises Company 100 Michigan
*Subject to regulation by FERC
<PAGE>
<PAGE>
Exhibit (21)(b)
SUBSIDIARIES OF CONSUMERS ENERGY COMPANY
at December 31, 1996
Percent Voting
Stock Owned
by Consumers
Energy Company Incorporated
-------------- -------------
Michigan Gas Storage Company* 100 Michigan
*Subject to regulation by FERC
<PAGE>
<PAGE>
Exhibit (23)
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this
Form 10-K, into CMS Energy Corporation's previously filed Registration
Statements No. 33-29681, No. 33-47629, No. 33-64044, No. 33-60007, No. 33-
61595, No. 33-62573, No. 333-01261, No. 333-16793 and No. 333-17289.
Arthur Andersen LLP
Detroit, Michigan,
March 12, 1997.
<PAGE>
<PAGE>
Exhibit 24
CMS ENERGY
February 28, 1997
Mr. Alan M. Wright and
Mr. Thomas A. McNish
Fairlane Plaza South, Suite 1100
3300 Town Center Drive
Dearborn, MI 48126
CMS Energy Corporation and Consumers Energy Company are required to file
Annual Reports on Form 10-K for the year ended December 31, 1996 with the
Securities and Exchange Commission within 90 days after the end of the
year.
We hereby make, constitute and appoint each of you our true and lawful
attorney for each of us and in each of our names, places and steads to
sign and cause to be filed with the Securities and Exchange Commission
said Annual Reports with any necessary exhibits, and any amendments
thereto that may be required.
Very truly yours,
/s/ William T. McCormick, Jr. /s/ Lois A. Lund
- -------------------------------- --------------------------------
William T. McCormick, Jr. Lois A. Lund
/s/ John M. Deutch /s/ Michael G. Morris
- -------------------------------- --------------------------------
John M. Deutch Michael G. Morris
/s/ James J. Duderstadt /s/ W. U. Parfet
- -------------------------------- --------------------------------
James J. Duderstadt William U. Parfet
/s/ K. R. Flaherty /s/ Percy A. Pierre
- -------------------------------- --------------------------------
Kathleen R. Flaherty Percy A. Pierre
/s/ Victor J. Fryling /s/ K. Whipple
- -------------------------------- --------------------------------
Victor J. Fryling Kenneth Whipple
/s/ Earl D. Holton /s/ John B. Yasinsky
- -------------------------------- --------------------------------
Earl D. Holton John B. Yasinsky
Fairlane Plaza South 3300 Town Center Drive Suite 1100
Dearborn, Michigan 48126 (313)436-9200 FAX (313)436-9225
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,428
<OTHER-PROPERTY-AND-INVEST> 1,855
<TOTAL-CURRENT-ASSETS> 1,014
<TOTAL-DEFERRED-CHARGES> 1,318
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,615
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,045
<RETAINED-EARNINGS> (338)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,702
100
356
<LONG-TERM-DEBT-NET> 1,892
<SHORT-TERM-NOTES> 333
<LONG-TERM-NOTES-PAYABLE> 950
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 370
0
<CAPITAL-LEASE-OBLIGATIONS> 103
<LEASES-CURRENT> 39
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,764
<TOT-CAPITALIZATION-AND-LIAB> 8,615
<GROSS-OPERATING-REVENUE> 4,333
<INCOME-TAX-EXPENSE> 139
<OTHER-OPERATING-EXPENSES> 3,656
<TOTAL-OPERATING-EXPENSES> 3,809
<OPERATING-INCOME-LOSS> 524
<OTHER-INCOME-NET> (11)
<INCOME-BEFORE-INTEREST-EXPEN> 527
<TOTAL-INTEREST-EXPENSE> 251
<NET-INCOME> 276
36
<EARNINGS-AVAILABLE-FOR-COMM> 240
<COMMON-STOCK-DIVIDENDS> 103
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 661
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 0
<FN>
<F1> EPS for CMS Energy Common Stock $2.45
EPS for Class G Common Stock $1.82
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND
STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000201533
<NAME> CONSUMERS ENERGY COMPANY
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,428
<OTHER-PROPERTY-AND-INVEST> 695
<TOTAL-CURRENT-ASSETS> 734
<TOTAL-DEFERRED-CHARGES> 1,168
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,025
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 504
<RETAINED-EARNINGS> 297
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,679
100
356
<LONG-TERM-DEBT-NET> 1,475
<SHORT-TERM-NOTES> 333
<LONG-TERM-NOTES-PAYABLE> 425
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 59
0
<CAPITAL-LEASE-OBLIGATIONS> 100
<LEASES-CURRENT> 39
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,496
<TOT-CAPITALIZATION-AND-LIAB> 7,025
<GROSS-OPERATING-REVENUE> 3,770
<INCOME-TAX-EXPENSE> 150
<OTHER-OPERATING-EXPENSES> 3,173
<TOTAL-OPERATING-EXPENSES> 3,335
<OPERATING-INCOME-LOSS> 435
<OTHER-INCOME-NET> 1
<INCOME-BEFORE-INTEREST-EXPEN> 448
<TOTAL-INTEREST-EXPENSE> 152
<NET-INCOME> 296
36
<EARNINGS-AVAILABLE-FOR-COMM> 260
<COMMON-STOCK-DIVIDENDS> 200
<TOTAL-INTEREST-ON-BONDS> 133
<CASH-FLOW-OPERATIONS> 672
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<PAGE>
</TABLE>
<PAGE> 1
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
----------------------------------------
To CMS Energy Corporation:
We have audited the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Energy Company ("Consumers")
and its wholly-owned subsidiary, Michigan Gas Storage Company) as of
December 31, 1996 and 1995, and the related statements of income, common
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the management of CMS Energy Corporation, the parent of
Consumers. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Gas Group as
of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 24, 1997.
<PAGE>
<PAGE> 2
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 1996 Annual Report of CMS Energy included and incorporated by
reference herein.
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.
Earnings
Net income for Consumers Gas Group for 1996 totaled $59 million, compared
with $62 million for 1995. The decrease in 1996 net income reflects the
reversal of a previously recorded gas contract contingency in 1995 and
higher operating expenses during 1996. Partially offsetting these
decreases were higher gas deliveries and revenues from value-added
services and gas loaning activities during 1996. For further information,
see CMS Energy's MD&A.
Cash Position, Investing and Financing
Operating Activities: 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 1996 and 1995 totaled $141 million
and $180 million, respectively. The $39 million decrease 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: Cash used in investing activities totaled $145
million and $132 million for 1996 and 1995, respectively. The $13 million
increase resulted from higher capital expenditures.
Financing Activities: Cash provided by financing activities in 1996 and
used by financing activities in 1995 totaled $8 million and $47 million,
respectively. The $55 million increase reflects cash from the issuance of
long-term notes, proceeds from a bank loan and a reduction in cash used to
pay common stock dividends, partially offset by a reduction in
contributions from CMS Energy stockholders.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At December 31, 1996, receivables sold totaled $318 million. Consumers
Gas Group's attributed portion of these receivables sold totaled $137
million. For further information, see CMS Energy's MD&A.
Results of Operations
For Consumers Gas Group results of operations, see Gas Utility Results of
Operations in CMS Energy's MD&A.
Gas Issues
For Consumers Gas Group's discussion of Gas Rate Proceedings, GCR Matters
and Gas Environmental Matters, see Gas Utility Issues in CMS Energy's
MD&A.
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.
Capital Expenditures: CMS Energy estimates the following capital
expenditures for Consumers Gas Group, including new lease commitments,
over the next three years. These estimates are prepared for planning
purposes and are subject to revision.
In Millions
Years Ended December 31 1997 1998 1999
Gas utility (a) $112 $100 $100
Michigan Gas Storage 3 3 3
---- ---- ----
$115 $103 $103
==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to
Consumers' gas and electric utility businesses.
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
discussion in CMS Energy's MD&A.
<PAGE>
<PAGE> 4
<TABLE>
Statements of Income Consumers Gas Group
<CAPTION>
In Millions, Except Per Share Amounts
Years Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Operating Revenue $1,282 $1,195 $1,151
------ ------ ------
Operating Expenses Operation
Cost of gas sold 750 674 662
Other 198 194 185
------ ------ ------
Total operation 948 868 847
Maintenance 40 39 39
Depreciation, depletion and amortization 87 83 76
General taxes 54 54 54
------ ------ ------
Total operating expenses 1,129 1,044 1,016
------ ------ ------
Pretax Operating Income 153 151 135
------ ------ ------
Other Income (Deductions) (6) - (2)
------ ------ ------
Fixed Charges Interest on long-term debt 30 30 29
Other interest 6 6 5
Capitalized interest (1) (1) -
Preferred dividends 6 6 5
------ ------ ------
Net fixed charges 41 41 39
------ ------ ------
Income Before Income Taxes 106 110 94
Income Taxes 47 48 41
------ ------ ------
Net Income $ 9 $ 62 $ 53
====== ====== ======
Net Income Attributable to CMS Energy Shareholders
through Retained Interest $ 45 $ 59 $ 53
====== ====== ======
Net Income Attributable to Class G Shareholders $ 14 $ 3 $ -
====== ====== ======
Average Class G Common Shares Outstanding 8 8 -
====== ====== ======
Earnings Per Average Class G Common Share $ 1.82 $ .38 $ -
====== ====== ======
Dividends Declared Per Class G Common Share $ 1.15 $ .56 $ -
====== ====== ======
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 5
<TABLE>
Statements of Cash Flows Consumers Gas Group
<CAPTION>
In Millions
Years Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Net income $ 59 $ 62 $ 53
Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities
Depreciation, depletion and amortization 87 83 76
Capital lease and other amortization 4 5 4
Deferred income taxes and investment tax credit 13 14 4
Other 2 - 1
Changes in other assets and liabilities (Note 12) (24) 16 15
------ ------ ------
Net cash provided by operating activities 141 180 153
------ ------ ------
Cash Flows From Capital expenditures (excludes assets placed under
Investing capital lease) (Note 12) (137) (124) (129)
Activities Cost to retire property, net (9) (10) (8)
Other 1 2 3
------ ------ ------
Net cash used in investing activities (145) (132) (134)
------ ------ ------
Cash Flows From Payment of common stock dividends (37) (58) (46)
Financing Retirement of bonds and other long-term debt (8) (6) (31)
Activities Payment of capital lease obligations (4) (5) (4)
Proceeds from bank loans 23 - 88
Proceeds from long-term note 22 - -
Increase in notes payable, net 9 6 16
Contribution from CMS Energy stockholders 3 18 22
Repayment of bank loans - (2) (106)
Issuance of preferred stock - - 42
------ ------ ------
Net cash provided by (used in)
financing activities 8 (47) (19)
------ ------ ------
Net Increase in Cash and Temporary Cash Investments 4 1 -
Cash and temporary cash investments
Beginning of year 5 4 4
------ ------ ------
End of year $ 9 $ 5 $ 4
====== ====== ======
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 6
<TABLE>
Balance Sheets Consumers Gas Group
<CAPTION>
ASSETS In Millions
December 31 1996 1995
<S> <C> <C>
Plant and Property Plant and property $2,203 $2,169
(At Cost) Less accumulated depreciation, depletion
and amortization (Note 2) 1,133 1,179
------ ------
1,070 990
Construction work-in-progress 46 55
------ ------
1,116 1,045
------ ------
Current Assets Cash and temporary cash investments at cost,
which approximates market 9 5
Accounts receivable and accrued revenue, less allowances
of $4 in 1996 and $2 in 1995 (Note 5) 97 99
Inventories at average cost
Gas in underground storage 186 184
Materials and supplies 8 10
Trunkline settlement 25 30
Deferred income taxes (Note 4) 4 9
Prepayments and other 49 49
------ ------
378 386
------ ------
Non-current Assets Postretirement benefits (Note 9) 153 161
Deferred income taxes (Note 4) 11 14
Trunkline settlement - 25
Other 59 59
------ ------
223 259
------ ------
Total Assets $1,717 $1,690
====== ======
</TABLE>
<PAGE>
<PAGE> 7
<TABLE>
Consumers Gas Group
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1996 1995
<S> <C> <C>
Capitalization Common stockholders' equity
(Note 6) Common stock $ 184 $ 184
Paid-in-capital 128 125
Retained earnings since December 31, 1992 52 30
------ ------
364 339
Preferred stock 78 78
Long-term debt 446 411
Non-current portion of capital leases (Note 10) 17 20
------ ------
905 848
------ ------
Current Liabilities Current portion of long-term debt and capital leases 24 23
Notes payable 114 105
Accounts payable 85 79
Accrued taxes 61 66
Trunkline settlement 25 30
Accrued refunds 7 20
Accrued interest 7 7
Other 52 52
------ ------
375 382
------ ------
Non-current Postretirement benefits (Note 9) 171 175
Liabilities Regulatory liabilities for income taxes, net
(Notes 4 and 13) 169 162
Deferred investment tax credit 27 28
Trunkline settlement - 25
Other 70 70
------ ------
437 460
------ ------
Commitments and Contingencies (Notes 3, 10 and 11)
Total Stockholders' Investment and Liabilities $1,717 $1,690
====== ======
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 8
<TABLE>
Statements of Common Stockholders' Equity Consumers Gas Group
<CAPTION>
In Millions
Other
Common Paid-in Retained
Stock Capital Earnings Total
<S> <C> <C> <C> <C>
Balance at January 1, 1994 (a) $184 $ 85 $ 19 $288
Net income 53 53
Common stock dividends declared (46) (46)
CMS Energy stockholders' contribution 22 22
---- ---- ---- ----
Balance at December 31, 1994 (a) 184 107 26 317
Net income 62 62
Common stock dividends declared (58) (58)
CMS Energy stockholders' contribution 18 18
---- ---- ---- ----
Balance at December 31, 1995 (a) 184 125 30 339
Net income 59 59
Common stock dividends declared (37) (37)
CMS Energy stockholders' contribution 3 3
---- ---- ---- ----
Balance at December 31, 1996 (a) $184 $128 $ 52 $364
==== ==== ==== ====
<FN>
(a) Number of shares of Consumers' common stock outstanding was 84,108,789. Common stock allocated to the
Consumers Gas Group is consistent with the allocation method discussed in Note 6.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 9
Consumers Gas Group
Notes to Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the business of CMS Energy, see the
Notes to the Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
In 1995, CMS Energy issued a total of 7.62 million shares of Class G
Common Stock. This new class of common stock reflects the separate
performance of the gas distribution, storage and transportation businesses
conducted by Consumers and Michigan Gas Storage (collectively, Consumers
Gas Group). For further information regarding the nature and issuance of
the Class G Common Stock, see Note 8 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
These financial statements and their related notes should be read along
with the financial statements and notes contained in the 1996 Annual
Report of CMS Energy that includes the Report of Independent Public
Accountants, included and incorporated by reference herein.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: Consumers is a regulated utility. Accordingly,
the majority of the accounting allocation policies described within these
notes have a long-standing basis and have historically been used in
proceedings conducted before the MPSC. The financial statements for
Consumers Gas Group have been prepared based upon consistent methods that
management believes are reasonable and appropriate to reflect its
financial position, results of operations and cash flows. Where
appropriate, the financial statements reflect the assets, liabilities,
revenues and expenses directly related to Consumers Gas Group. However,
in instances where common accounts (containing both electric and gas
activities) were not readily attributable to a single business segment,
management allocated to Consumers Gas Group's financial statements based
on certain measures of business activities, such as gas revenues,
salaries, other operation and maintenance expenditures, number of gas
customers in relationship to total utility customers and/or functional use
surveys. Management believes the attributions are reasonable.
Although the financial statements of Consumers Gas Group separately report
the assets, liabilities and stockholders' equity, legal title to such
assets and the responsibility for such liabilities are not separately
identifiable to a specific class of common stock. Therefore, the
creditors of CMS Energy are unaffected by the implementation of Consumers
Gas Group, because all assets of the corporation remain available to
satisfy all liabilities. The holders of CMS Energy Common Stock and the
Class G Common Stock will be subject to all risks associated with
investments in CMS Energy. Holders of Class G Common Stock have no direct
rights in the equity or assets of Consumers Gas Group, but rather have
rights in the equity and assets of CMS Energy.
The financial statements of Consumers Gas Group incorporate Consumers'
natural gas utility business and the related business of Michigan Gas
Storage. The Consumers Gas Group and the remaining business segments of
CMS Energy comprise all of the accounts included in the Consolidated
Financial Statements of CMS Energy.
The financial statements of Consumers Gas Group were prepared in
accordance with generally accepted accounting principles on a consistent
basis and include the use of management's estimates. Any future changes
in accounting policy not mandated by appropriate authorities must be, in
management's opinion, preferable to the policy in place and must be
disclosed in accordance with generally accepted accounting principles.
For presentation purposes, all material transactions between companies
within Consumers Gas Group have been eliminated.
Earnings Per Share and Dividends: Earnings per share for the year ended
December 31, 1996, reflects the performance of Consumers Gas Group.
Earnings per share reflects the performance of Consumers Gas Group since
the initial issuance of the Class G Common Stock in 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 attributable to outstanding Class G Common Stock are equal to
Consumers Gas Group's net income 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 years ended December
31, 1996 and 1995, are based on 23.79 percent of the income of Consumers
Gas Group and 23.45 percent of the income of Consumers Gas Group since the
initial issuance, respectively.
Earnings per share for Class G Common Stock is omitted from the statement
of income, for the year ended December 31, 1994, since the Class G Common
Stock was not part of the equity structure of CMS Energy. For purpose of
analysis, following are pro forma data for the years ended December 31,
1995 and 1994 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.
In Millions, Except Per Share Amounts
Actual Pro Forma Pro Forma
Years Ended December 31 1996 1995 1994
Consumers Gas Group net income $ 59 $ 62 $ 53
Net Income attributable to CMS Energy
Common Stock through Retained Interest $ 45 $ 47 $ 41
Net Income attributable to outstanding
Class G Common Stock $ 14 $ 15 $ 12
Average shares outstanding of Class G
Common Stock 7.727 7.536 7.520
Earnings per share attributable to
outstanding Class G Common Stock $1.82 $1.93 $1.66
Holders of Class G Common Stock have no direct rights in the equity or
assets of Consumers Gas Group, but rather have rights in the equity and
assets of CMS Energy as a whole. In the sole discretion of the Board of
Directors, dividends may be paid exclusively to the holders of Class G
Common Stock, exclusively to the holders of CMS Energy Common Stock, or to
the holders of both classes in equal or unequal amounts. Dividends on
Class G Common Stock are paid at the discretion of the Board of Directors
based primarily upon the earnings and financial condition of Consumers Gas
Group, and to a lesser extent, CMS Energy as a whole. It is the Board of
Directors' current intention that the declaration or payment of dividends
with respect to the Class G Common Stock will not be reduced, suspended or
eliminated as a result of factors arising out of or relating to the
electric utility business or the non-utility businesses of CMS Energy
unless such factors also require, in the Board of Directors' sole
discretion, the omission of the declaration or reduction in payment of
dividends on both the CMS Energy Common Stock and the Class G Common
Stock.
The portion of Consumers' common dividends attributed to Consumers Gas
Group, for periods prior to the 1995 issuance of the Class G Common Stock,
have been reflected in the financial statements. These dividend amounts
were allocated based on the ratio of Consumers Gas Group's net income to
Consumers' consolidated net income after dividends on preferred stock.
This ratio was then applied to Consumers' total dividend payments for
these periods. Dividends declared on the Class G Common Stock following
the issuance are also reflected in the financial statements. In February
and May 1996, CMS Energy paid dividends of $.28 per share on Class G
Common Stock. In August and November of 1996, and February 1997,
CMS Energy paid dividends of $.295 per share on Class G Common Stock.
Related Party Transactions: Consumers Gas Group sold, stored and
transported natural gas and provided other services to the MCV Partnership
totaling approximately $13 million for 1996, 1995 and 1994. Consumers Gas
Group purchases a portion of its gas from CMS NOMECO. The amounts of
purchases for the years ended December 31, 1996, 1995 and 1994 totaled $24
million, $19 million and $1 million, respectively.
Other: For significant accounting policies refer to the following Notes
to Consolidated Financial Statements of CMS Energy: for Consumers Gas
Group's gas inventory, maintenance, depreciation and depletion, revenue
and fuel costs, and utility regulation, see Note 2; for income taxes, see
Note 5; for executive incentive compensation, see Note 11; for pensions
and other postretirement benefits, see Note 12; and for cash equivalents,
see Note 17 included and incorporated by reference herein.
3: Rate Matters
For information regarding rate matters directly affecting Consumers Gas
Group, see the Gas Proceedings discussion in Note 4 to the Consolidated
Financial Statements of CMS Energy included and incorporated by reference
herein.
4: Income Taxes
Consumers Gas Group is included in the consolidated federal income tax
return filed by CMS Energy (see Note 5 to the Consolidated Financial
Statements of CMS Energy). The financial statement provision and actual
cash tax payments have been reflected in Consumers Gas Group's financial
statements in accordance with CMS Energy's tax allocation policy. The
financial statement amounts reflect management's estimate of the separate
taxable income of the segment, the effect of deferred tax accounting for
temporary differences that arise and the amortization of ITC over the life
of the related property included within the Consumers Gas Group. Tax
settlements at Consumers Gas Group are consistent with settlements of
CMS Energy's consolidated tax returns and are generally settled in the
year, or in the year following the year in which such amounts are accrued.
The significant components of income tax expense (benefit) for Consumers
Gas Group consisted of:
In Millions
Years Ended December 31 1996 1995 1994
Current federal income taxes $34 $34 $37
Deferred income taxes 14 16 6
Deferred ITC, net (1) (2) (2)
--- --- ---
$47 $48 $41
=== === ===
Operating $49 $48 $41
Other (2) - -
--- --- ---
$47 $48 $41
=== === ===
The principal components of deferred tax assets (liabilities) recognized
in the balance sheet for Consumers Gas Group are as follows.
In Millions
December 31 1996 1995
Property $(60) $(54)
Postretirement benefits (Note 9) (57) (59)
Employee benefit obligations (includes post-
retirement benefits of $57 and $59) (Note 9) 69 70
Regulatory liability for income taxes 59 57
Other 4 9
---- ----
$ 15 $ 23
===== =====
Gross deferred tax liabilities $(226) $(227)
Gross deferred tax assets 241 250
----- -----
$ 15 $ 23
===== =====
The actual income tax expense for Consumers Gas Group differs from the
amount computed by applying the statutory federal tax rate to income
before income taxes as follows.
In Millions
Years Ended December 31 1996 1995 1994
Net income before preferred
dividends $ 65 $ 68 $ 58
Income tax expense 47 48 41
---- ---- ----
112 116 99
Statutory federal income tax rate x 35% x 35% x 35%
---- ---- ----
Expected income tax expense 39 41 35
Increase (decrease) in taxes from:
Differences in book and tax
depreciation not previously
deferred 10 9 8
ITC amortization (2) (2) (2)
---- ---- ----
Actual income tax expense $ 47 $ 48 $ 41
==== ==== ====
5: Short-Term Financings
Consumers' short-term financings are discussed in Note 6 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 both December 31, 1996 and 1995, is estimated by
management to be $137 million. 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. The
allocation of short-term financings and related interest charges to
Consumers Gas Group generally follows the ratio of gas utility assets to
total Consumers' assets. Additionally, the carrying costs for Consumers'
sales of certain of its accounts receivable under its trade receivable
purchase and sale agreement generally are allocated to Consumers Gas Group
based on the ratio of customer revenues contributed by Consumers' gas
customers to total Consumers' revenue. However, as a result of the
centralized management of short-term financing, the amounts allocated to
Consumers Gas Group are further adjusted in both the seasonal gas
inventory build-up period (second and third quarters) and the high
seasonal gas sales period (first and fourth quarters) to more closely
reflect the higher short-term financing requirements of the inventory
build-up period and conversely the lower financing requirements during the
higher sales periods. Management believes these allocations to be
reasonable.
6: Capitalization
Capital Stock and Long-Term Debt: Consumers Gas Group's capital stock and
long-term debt, including debt resulting from the sale of Trust Originated
Preferred Securities, have been allocated based on the ratio of gas
utility assets (including common assets attributed to the gas utility
segment) to total Consumers' assets. Management believes these
measurements are reasonable. For information regarding the capital stock
and long-term debt of CMS Energy and Consumers, see Notes 7 and 8 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein.
7: Financial Instruments
The carrying amount of Consumers Gas Group's long-term debt was $446
million and $411 million and the fair value was $448 million and $417
million as of December 31, 1996 and 1995, respectively. For additional
information regarding financial instruments, see Note 10 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein.
8: Executive Incentive Compensation
For information regarding CMS Energy's Performance Incentive Stock Plan,
restricted shares of Common Stock, stock options and stock appreciation
rights, see Note 11 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein. This plan allows for
awards of Class G Common Stock, and has established criteria for certain
plan awards.
9: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers Gas Group's
attributed portion of CMS Energy's net periodic cost for health and life
insurance benefits totaled $15 million, $15 million and $17 million in
1996, 1995 and 1994, respectively. These allocations were based on the
ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Management believes these
allocations are reasonable.
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for postretirement benefit plans is estimated to be $163 million
and $169 million at December 31, 1996 and 1995, respectively. These
amounts were allocated based on policies Consumers has historically used
in proceedings conducted before the MPSC. For further information
regarding CMS Energy's postretirement benefit plans other than pensions,
see Note 12 to the Consolidated Financial Statements of CMS Energy
included and incorporated by reference herein.
Supplemental Executive Retirement Plan: The attributed trust assets of
Consumers Gas Group were $6 million at December 31, 1996 and 1995, and
were classified as other non-current assets. These allocations were based
on a ratio of salaries and wages related to Consumers' gas operations to
Consumers' total salaries and wages. Management believes these
allocations are reasonable. For further information, see Note 12 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit Pension Plan covers substantially all employees. Consumers Gas
Group's attributed portion of CMS Energy's net periodic pension cost
totaled $4 million in 1996, and $3 million in 1995 and 1994. These
allocations were based on the ratio of salaries and wages related to
Consumers' gas operations to Consumers' total salaries and wages.
Management believes these allocations are reasonable.
Consumers Gas Group's attributed portion of CMS Energy's total recorded
liability for the Pension Plan totaled $13 million at December 31, 1996
and $10 million at December 31, 1995 and was allocated to Consumers Gas
Group based on the ratio of salaries and wages related to Consumers' gas
operations to Consumers' total salaries and wages. Consumers Gas Group's
estimated portion of CMS Energy's recorded liability for the SERP totaled
$6 million at December 31, 1996 and $5 million at December 31, 1995 and
was allocated to Consumers Gas Group based on the ratio of salaries and
wages related to Consumers' gas operations to Consumers' total salaries
and wages. Management believes these allocations are reasonable. For
further information, see Note 12 to the Consolidated Financial Statements
of CMS Energy included and incorporated by reference herein.
Defined Contribution Plan: Consumers provides a defined contribution
401(k) plan to all U.S. employees of CMS Energy and its subsidiaries which
are at least 80 percent owned and have adopted the plan. Consumers'
contributions to the plan are invested in CMS Energy Common Stock. For
further information, see Note 12 to the Consolidated Financial Statements
of CMS Energy included and incorporated by reference herein.
10: Leases
CMS Energy and its subsidiaries lease various assets, including vehicles,
aircraft, construction equipment, computer equipment and buildings.
Consumers Gas Group's attributed portion of CMS Energy's minimum rental
commitments under non-cancelable leases at December 31, 1996, were:
In Millions
Capital Leases
1997 $ 6
1998 5
1999 4
2000 3
2001 3
2002 and thereafter 5
----
Total minimum lease payments 26
Less imputed interest 5
----
Present value of net minimum lease payments 21
Less current portion 4
----
Non-current portion $ 17
====
Consumers recovers these charges from customers and accordingly charges
payments for its capital and operating leases to operating expense. There
were no operating lease charges for Consumers Gas Group in 1996.
Operating lease charges, including charges to clearing and other accounts,
for the years ended December 31, 1995 and 1994 were $1 million. Capital
lease expenses for Consumers Gas Group for the years ended December 31,
1996, 1995 and 1994 were $6 million, $7 million and $6 million,
respectively.
Consumers Gas Group's minimum rental commitments and lease expenses are
generally allocated based on the specific use of the leased item. Common
leases are allocated to Consumers Gas Group through functional use
surveys, which management believes to be reasonable.
11: Commitments and Contingencies
Capital Expenditures: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $115 million for 1997 and $103 million
for 1998 and 1999. 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, Commitments
for Coal and Gas Supplies, and Other discussions in Note 14 to the
Consolidated Financial Statements of CMS Energy included and incorporated
by reference herein.
12: 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 years ended December
31 were:
In Millions
1996 1995 1994
Cash transactions
Interest paid (net of amounts capitalized) $ 34 $ 35 $ 33
Income taxes paid (net of refunds) 33 25 31
Non-cash transactions
Assets placed under capital lease $ 1 $ 2 $ 5
Capital leases refinanced - 9 -
Changes in other assets and liabilities as shown on the Statements of Cash
Flows at December 31 are described below:
In Millions
1996 1995 1994
Sale of receivables, net $ - $ 26 $ (13)
Accounts receivable 7 (39) 11
Accrued revenue (5) (35) 30
Inventories - 50 (6)
Accounts payable 6 11 1
Accrued refunds (13) - -
Other current assets and liabilities, net (5) (8) (1)
Non-current deferred amounts, net (14) 11 (7)
----- ----- ----
$ (24) $ 16 $ 15
===== ===== ====
13: Effects of the Ratemaking Process
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in Consumers Gas Group's Balance
Sheets. These assets represent probable future revenue to Consumers
associated with certain incurred costs as these costs are recovered
through the ratemaking process. Virtually all of these costs are being
recovered through current rates.
In Millions
December 31 1996 1995
Postretirement benefits (Note 9) $ 162 $ 169
Trunkline settlement 25 55
Manufactured gas plant sites 47 47
Other 3 5
------ ------
Total regulatory assets $ 237 $ 276
====== ======
Regulatory liabilities for income taxes $ (169) $ (162)
====== ======
<PAGE>
<PAGE> 18
<TABLE>
Quarterly Financial and Common Stock Information Consumers Gas Group
<CAPTION>
In Millions, Except Per Share Amounts
1996 (Unaudited) 1995 (Unaudited)
Quarters Ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $548 $209 $123 $402 $482 $197 $122 $394
Pretax operating income (loss) $91 $22 $(1) $41 $91 $17 $2 $41
Net income (loss) $48 $5 $(9) $15 $49 $3 $(8) $18
Earning (loss) per average
common share $1.50 $.16 $(.28) $.44 - - $(.17) $.55
Dividends declared per
common share $.28 $.28 $.295 $.295 - - $.28 $.28
Common stock prices (a)
High $20 $19-3/8 $18-7/8 $19-1/4 - - $18-3/4 $18-7/8
Low $17-7/8 $17-1/2 $16-5/8 $17-3/8 - - $16-1/8 $17-5/8
<FN>
(a) Based on New York Stock Exchange - Composite transactions.
</TABLE>
<PAGE>
<PAGE>
Exhibit (99)(b)
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
In the matter, on the Commission's own )
motion, to consider the restructuring of ) Case No. U-11290
the electric utility industry )
_____________________________________________)
RESPONSE OF CONSUMERS ENERGY COMPANY
TO COMMISSION REQUEST FOR INFORMATION
March 7, 1997<PAGE>
<PAGE> -i-
TABLE OF CONTENTS
Page
----
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. RESPONSE TO COMMISSION REQUEST . . . . . . . . . . . . . . . . 3
Question 1: A detailed calculation of anticipated
stranded costs, including possible
mitigation measures, and transition
charges given the definition in the
Staff Report. The utility should also
provide information on any alternative
method of calculating stranded cost
that it has developed . . . . . . . . . . . . . . 3
A. Determination of Transition Costs . . . . . . . . . . . 3
1. Regulatory Assets . . . . . . . . . . . . . . . . 4
2. Nuclear Facilities . . . . . . . . . . . . . . . 7
3. Decommissioning of Hydroelectric and Pumped
Storage Facilities . . . . . . . . . . . . . . . 8
4. Contract Capacity Charges . . . . . . . . . . . . 9
5. Employee-Related Restructuring Costs . . . . . . 11
6. Other Implementation Costs . . . . . . . . . . . 12
B. Determination of Transition Charges . . . . . . . . . . 13
C. Mitigation . . . . . . . . . . . . . . . . . . . . . . . 14
Question 2: The items the utility would expect to
securitize if authorized to do so, and an
analysis regarding the anticipated
financial and rate effects . . . . . . . . . . . 17
Question 3: A description of how the utility would
allocate direct access capacity, including
procedures for bidding and aggregation.
The utility should also indicate any
appropriate alternatives to the phase-in
schedule . . . . . . . . . . . . . . . . . . . . 21
A. Allocation . . . . . . . . . . . . . . . . . . . . . . . 21
B. Bidding . . . . . . . . . . . . . . . . . . . . . . . . 22
C. Aggregation . . . . . . . . . . . . . . . . . . . . . . 22
D. Alternatives to the Phase-In Schedule . . . . . . . . . 23
Question 4: Tariff sheets for direct access service,
with supporting workpapers and applicable
FERC tariffs . . . . . . . . . . . . . . . . . . 24
Question 5: A description, including tariff sheets, for
the standby service that the utility would
provide to direct access customers . . . . . . . 26
Question 6: A list of any new or additional
charges that the utility does not
currently assess that would be imposed
under a direct access program . . . . . . . . . . 27
Question 7: A description of any transmission
constraints or limitations on the ability
to import power into the utility's system.
This description should include: (a) the
amount of electricity currently being
imported into the system from Michigan
sources and from outside the state; (b) the
nature of the existing imports, e.g.,
wholesale transactions; (c) the nature and
location of the constraints; (d) an
estimate of the amount of direct access
electricity that could be imported into the
utility's system given existing
constraints; and (e) methods of removing
constraints and their estimated costs and
effects . . . . . . . . . . . . . . . . . . . . . 29
Question 8: The status of any ongoing discussions
regarding the development of an
Independent System Operator . . . . . . . . . . . 31
Question 9: A description of the methods that the
utility would propose to alleviate
concerns regarding market power in a
competitive market . . . . . . . . . . . . . . . 34
III. SUMMARY OF ESSENTIAL FEATURES OF RESTRUCTURING PLAN . . . . . 40
A. Retail Direct Access Schedule . . . . . . . . . . . . . . . 40
B. Allocation and Bidding . . . . . . . . . . . . . . . . . . 40
C. Transition Cost Recovery . . . . . . . . . . . . . . . . . 41
D. Rates, Terms and Conditions of Retail Direct
Access Service . . . . . . . . . . . . . . . . . . . . . . 42
E. Rate Freeze . . . . . . . . . . . . . . . . . . . . . . . . 42
F. PSCR Suspension . . . . . . . . . . . . . . . . . . . . . . 42
G. Performance-Based Ratemaking Mechanism . . . . . . . . . . 44
H. Obligation To Serve . . . . . . . . . . . . . . . . . . . . 44
I. Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . 45
J. Creation of an Independent System Operator . . . . . . . . 46
IV. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . 46
Attachment 1
Attachment 2
Attachment 3
Attachment 4
Attachment 5
Attachment 6
Attachment 7
Attachment 8<PAGE>
<PAGE>
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
In the matter, on the Commission's own )
motion, to consider the restructuring of ) Case No. U-11290
the electric utility industry )
_____________________________________________)
RESPONSE OF CONSUMERS ENERGY COMPANY
TO COMMISSION REQUEST FOR INFORMATION
I. INTRODUCTION
On December 20, 1996, the Commission initiated this proceeding
to review a report on electric industry restructuring which had been
prepared by the MPSC Staff ("Staff Report"). On January 21, 1997,
Consumers Energy Company ("Consumers Energy"), along with many other
parties, filed comments on the Staff Report. The Commission also held
several public hearings at which additional comments were received.
On February 5, 1997, the Commission issued an "Order Requesting
Comments and Notice of Hearing" ("February 5 Order"). In that order, the
Commission requested Consumers Energy and The Detroit Edison Company
("Detroit Edison") (and any other electric utilities who so desire) to
make, by March 7, 1997, additional filings which would address in greater
detail how the recommendations in the Staff Report could be implemented.
The order includes a list of specific questions which the Commission
requested the utilities to address. This is Consumers Energy's Response
to the Commission's request.
In preparing this Response, Consumers Energy has provided the
Commission not only with information which is responsive to the questions
asked, but also with a detailed program for the initial implementation of
the Staff plan. As set forth in its January 21, 1997 Comments, Consumers
Energy continues to be willing to voluntarily implement the retail direct
access program set forth in this submission, subject to (i) the Commission
approving the entirety of the plan set forth herein, and (ii) the
Commission specifically approving the calculation of transition costs and
the associated charges set forth below. In addition, because it is
essential to gain legislative authorization of the restructuring plan, the
Company's willingness to voluntarily implement this plan will cease as of
December 31, 1997, unless appropriate utility restructuring legislation
has been enacted by the Legislature and signed into law by that date.
Upon completing its review of the March 7 filings and other parties
comments, the Company hopes that the Commission will issue an order (1)
endorsing the Staff plan as further developed in this Response, (2)
recommending to the Legislature the enactment of legislation which is
consistent with that plan, and (3) accepting the Company's offer of
voluntary implementation.
The Company emphasizes that since the issuance of the February 5
Order, it has done considerable analysis of the transition cost and
securitization features of the Staff's proposed restructuring plan in an
effort to be fully responsive to the Commission's inquiries. Consumers
Energy now believes that securitization offers significantly greater
customer benefits than were previously identified. Specifically,
securitization offers over a $200 million annual savings to customers
compared to the rates which customers would otherwise pay. This is
discussed in greater detail below.<PAGE>
<PAGE> -3-
II. RESPONSE TO COMMISSION REQUESTS
This portion of the Company's Response addresses the specific
information requests made by the Commission in the February 5 Order.
Question 1: A detailed calculation of anticipated stranded
costs, including possible mitigation measures,
and transition charges given the definition in
the Staff Report. The utility should also
provide information on any alternative method of
calculating stranded cost that it has developed.
A. Determination of Transition Costs
The critical element of electric utility restructuring is the
provision to regulated electric utilities of a reasonable opportunity to
recover: (i) costs associated with investments and commitments that were
made during the regulated era which will be above prevailing near term
market prices in a competitive environment, and (ii) costs that are
incurred to facilitate the transition from regulated market status to
competitive market status. The Staff Report properly recognizes that:
"[t]he opportunity to recover transition costs is
necessary to assure a fair, smooth, and realizable
restructuring of the electric industry. Without
reasonable recovery of transition costs, significant
adverse and unacceptable impacts on various interested
parties will occur. In short, reasonable recovery of
transition costs helps to assure financially healthy
utilities and reliable electric service in the State."
Staff Report, p. 13.
The definition of transition costs adopted by the Staff in its
report includes the following categories:
1. Regulatory assets approved for cost recovery by the
Commission;
2. The net book capital costs of nuclear facilities;
3. The contract capacity charges included in long-term power
purchase agreements, to the extent those charges have
already been approved for cost recovery by the Commission,
and to the extent those charges exceed the estimated near
term market value of the associated capacity;
4. Employee-related restructuring costs;
5. Other costs related to the implementation of industry
restructuring, such as the creation and implementation of
new metering and billing systems, and the establishment of
an independent system operator.
In addition, Consumers Energy believes that the decommissioning
costs associated with the Ludington Pumped Storage Plant and other hydro
facilities should be added to the list. These facilities are licensed by
the Federal Regulatory Energy Commission ("FERC"). Similar to federal law
governing nuclear plants, the FERC requires hydro electric and pumped
storage sites to be decommissioned at the end of their useful lives.
Including these decommissioning costs in the category of transition costs
is, in Consumers Energy's opinion, consistent with the Staff's approach to
this issue.
Consumers Energy believes the above categories of costs provide
a reasonable means of analyzing and measuring transition costs. The bulk
of these items represent costs that, pursuant to the current regulated
industry structure, have already been subjected to regulatory scrutiny,
and have been found to be properly recoverable from customers. Categories
4 and 5 represent costs that will have to be incurred in the future in
order to move to the competitive industry structure envisioned by the
Staff Report. Each of these categories are quantified and discussed
below. Except where specifically noted, the costs identified in this
response reflect only those costs which Consumers Energy will incur during
the 1997-2007 time period; i.e., costs expected to be incurred beyond 2007
are not included in this analysis.
1. Regulatory Assets
The individual items and the associated dollar amounts within
this category are listed below. It should be noted that the dollar
amounts listed are stated in nominal dollars, and are only the estimated
generation-related portion of each item which will be stated on Consumers
Energy's books as of December 31, 1997.
<PAGE>
<PAGE> -5-
Table 1
Item $(million)
A. The remaining Midland 3B amortization amount 86.6
first authorized in Case No. U-7830.
B. The remaining SFAS 106 (other post 97.2
employment benefits) obligation, first
authorized in Case No. U-10335.
C. The remaining Demand Side Management 42.5
("DSM") costs approved for recovery in
Cases No. U-9346, U-10335 and U-10685.
D. The remaining Department of Energy 19.5
assessment for decontamination and
decommissioning of enrichment facilities
most recently authorized in Case No. U-10445.
E. Previously flowed through income tax 49.0
benefits (SFAS 109) first authorized in
Case No. U-10083.
F. The remaining Ludington Settlement 12.3
amortization amount approved for recovery
in Case No. U-10685.
G. Refunded debt costs approved for recovery
in Case No. U-10685. 4.5
______
Total--Regulatory Assets $311.6
Under current rates, these items would all be fully amortized on
Consumers Energy's books before 2007, except for item B (SFAS 106), item E
(SFAS 109) and item G (refunded debt). The recovery period for these
three items under current rates extends to 2011, 2016, and 2010,
respectively.
It must be noted that the dollar amounts identified in Table 1
reflect the entire generation-related amount of these regulatory assets as
of December 31, 1997. Given the Staff phase-in schedule, however, a
substantial portion of these costs will be paid by non-retail access
customers via bundled rates. Based upon the Staff phase-in schedule, the
appropriate dollar amount recoverable through the transition charge is the
present value amount associated with only the retail direct access load,
or $70.3 million. See Attachment 1.(1)
Consumers Energy does not believe extended discussion of each of
these items is necessary, or was contemplated by the Commission's
February 5 Order. These are all cost items that have previously been
approved for recovery from customers by the Commission, and are currently
included in rates, but which, in the absence of appropriate ratemaking
treatment, would not be recovered from customers who engage in retail
direct access. Indeed, the Commission has already formally determined
that these types of costs are properly recoverable from customers who
engage in retail direct access. See June 19, 1995 Order in Cases No. U-
10143/U-10176 and November 14, 1996 Order in Cases No. U-10685/U-10787/U-
10754. The Staff's recommendations that these items should be included as
transition costs, and that retail direct access customers should continue
to pay their share of these costs, is just and reasonable.
- ---------------------
(1)Attachment 1 shows the detailed calculations and assumptions which
underlie the transition cost and securitization figures discussed in this
Response.<PAGE>
<PAGE> -7-
2. Nuclear Facilities
The total net book cost of Consumers Energy's two nuclear units
which are projected to be stated on the Company's books as of December 31,
1997 is $552,493,000. The detail corresponding to this total is as
follows:
Table 2
Category Palisades Big Rock Total
(000) (000) (000)
Gross Plant $735,856 $65,252 $801,108
Construction 32,111 2 32,113
Work in Progress
Inventory 17,823 2,339 20,162
Accumulated (248,493) (52,397) (300,890)
Depreciation
Reserve _________ ________ _________
Net Plant $537,297 $15,196 $552,493
As noted above with respect to regulatory assets, part of the
$552.493 million figure will be recovered from non-retail access customers
over the phase-in period. Based upon the phase-in schedule recommended in
the Staff Report, the proper amount recoverable via the transition charge
is the present value amount associated with only the retail direct access
load, or $220.1 million. See Attachment 1.
Under current rates, Big Rock will be fully depreciated in 1998,
while Palisades will be fully depreciated in 2007. As stated in the Staff
Report, it is appropriate to consider the entire net book capital cost of
these nuclear units (and the associated return) in the transition cost
calculations because the near term market price of power in a competitive
environment will not likely even offset the fuel and other operating and
maintenance ("other O&M") costs associated with these units, let alone
make a contribution toward recovery of the capital costs. The average per
kilowatt-hour fuel/other O&M cost at Palisades is approximately 2.9 cents.
There are also substantial continuing capital investment requirements
associated with these units which are not reflected in the above figures.
For example, the average annual capital expenditure at Palisades in 1994
and 1995 was $33 million. Under the approach recommended by the Staff,
Consumers Energy will be at risk for the recovery of all future nuclear
plant capital additions, as well as of ongoing fuel and other O&M
expenses. It may be noted that this approach stands in contrast to that
being followed in California, where the recently enacted legislation
creates a procedure which allows for recovery of nuclear plant capital
additions for a period extending through the end of the transition cost
recovery period (i.e., December 31, 2001 under California's plan). See
1996 Cal. AB. 1890, Section 367.
3. Decommissioning of Hydroelectric
and Pumped Storage Facilities
Consumers Energy owns and operates eleven hydroelectric
facilities, as well as a 51% ownership interest in the Ludington Pumped
Storage Plant. As is the case with the Company's nuclear generating
units, these units will have to be decommissioned at the end of their
useful lives. The currently estimated costs of decommissioning these
facilities are reflected in the depreciation rates which the Commission
has approved, and are included in the Company's rates. Since these units
were constructed to serve the Company's entire customer base, customers
electing retail access should be required to pay their share of these
decommissioning costs.
Under current rates, the Ludington Plant is expected to be
retired and decommissioned in 2028. The corresponding date for the eleven
hydro plants is 2034. The appropriate amount to be reflected in the
transition cost calculation for this item was determined based upon the
present value of the revenues which would otherwise be collected in rates
for decommissioning of these units in the absence of a retail access
program. The appropriate amount is $16,174,000. See Attachment 1.
4. Contract Capacity Charges
Consumers Energy has a substantial number of power purchase
agreements with non-utility generators ("NUG's") pursuant to which it
purchases nearly 1700 megawatts of capacity. All of the power so
purchased has been and continues to be used to serve customers. All of
these NUG's are qualifying facilities, as that term is defined in the
Public Utility Regulatory Policies Act of 1978 ("PURPA"). As the
Commission is, of course, aware, PURPA was the U.S. Congress' policy
response to the claimed "energy crisis" of the 1970's. That act obligated
electric public utilities to purchase power supplied by qualifying
facilities at rates that reflected the purchasing utility's "avoided
cost," as determined by state regulatory bodies. Pursuant to PURPA's
mandate, and due to Consumers Energy's need for additional generating
capacity at that time, the Company entered into these power purchase
agreements beginning in 1983. Additional qualifying facility agreements
were entered into in connection with a Commission-approved settlement of
various disputes in 1993. Finally, in compliance with the directives of
the Michigan legislature as set forth in 1989 PA 2, which obligated
Consumers Energy to enter into contracts for 120 megawatts of capacity
from "waste-to-energy" facilities, the Company signed additional power
purchase agreements in 1993. See Attachment 2 for a list of NUG contracts
and Commission orders in which cost recovery of contract capacity charges
has been approved. The capacity and energy charges contained in these NUG
contracts were determined according to methodologies which were approved
by the Commission, and reflect estimates of Consumers Energy's avoided
costs determined at the time the contracts were signed. The costs
associated with these power purchase agreements have been approved for
recovery through Consumers Energy's rates in orders issued from 1984
through 1996.
In other states which are also in the process of restructuring
the electric utility industry, it has uniformly been recognized that the
costs associated with purchases from PURPA qualifying facilities pursuant
to contracts entered into over the past 10-15 years will exceed the market
price of power in a competitive marketplace, at least over the near term,
and that such costs should be recoverable as a component of transition
costs. The recently-enacted Pennsylvania legislation states that the
Pennsylvania Commission "shall allow" recovery of "cost obligations under
contracts with non-utility generating projects that have received a
commission order. . . ." See 1995 Pa. Laws 138, Title 66, Chapter 28.
The California legislation provides for recovery of "power purchase
contract obligations", along with recovery of "costs associated with any
buy-out, buy-down, or renegotiation" of those contracts. See 1996 Cal.
AB. 1890. The Rhode Island legislation also provides for such recovery.
See 1996 R.I. Pub. Laws, Chapter 316.
The Staff Report similarly recognizes that the contract
obligations of the purchasing utility which resulted from the
implementation of the legislative directives contained in PURPA and 1989
PA 2 must be dealt with in any realistic restructuring plan. The
recommendation of the Staff would leave the purchasing utility at risk for
recovery of the energy charge (both fixed and variable) and for the
estimated near term market value of the capacity in an open access
competitive market. The remaining contract costs would be recoverable as
part of total transition costs. Based upon the capital costs associated
with the construction and maintenance of a gas peaking unit built to
provide standby service in an open access environment, the near term
market value for purposes of this calculation would approximate 0.5<PAGE>
<PAGE> -11-
cents per kWh.(2) Based upon (i) this 0.5 cents per kWh figure, and
(ii) the anticipated purchases from NUG contracts over the 1997-2007
period, the total present value amount of contract capacity costs in
excess of this value is approximately $3,194.9 million. For the same
reasons noted earlier with respect to regulatory assets and nuclear
facilities, the present value amount of these costs associated with retail
direct access load, based upon the Staff phase-in schedule, is $1,459
million. See Attachment 1.
5. Employee-Related Restructuring
Costs
The transition to a competitive generation market will require
many changes in the way electric utilities conduct business. Many of
these changes will undoubtedly affect the amount and nature of staffing
requirements in the various segments of the utility's current business
operations. The California legislation recognized that this would occur,
and explicitly stated that costs associated with employee severance,
retraining programs, early retirement programs, out placement programs and
similar items should be included in recoverable transition costs. The
Staff Report similarly recognized that such costs should be recoverable,
and further recommended that some means of auditing and verifying such
costs should be implemented.
Consumers Energy currently estimates that such costs would
approximate $50 million over the 1998-2002 time period. These costs
should be added to the total transition costs
- ---------------------
(2)Consumers believes 0.5 cents/kWh is a reasonable near term
assumption for the value of capacity based on the following reference
points:
* Current estimates for construction of new simple cycle gas turbine
generation facilities range from $250-$350/kW. While fixed charge
rate and load factor assumptions affect the cents/kWh rate which
results from such facility costs, this range is consistent with 0.5
cents/kWh.
* In other countries such as Great Britain and Argentina which have
already deregulated generation, the value of capacity has settled at
approximately 0.5 cents/kWh.<PAGE>
<PAGE> -12-
used to calculate the appropriate initial transition charge, and should be
subject to periodic review and adjustment to the extent actual employee-
related restructuring costs are different than this estimate.
6. Other Implementation Costs
The implementation of any meaningful restructuring plan will
require the expenditure of significant sums for new billing systems, new
computer systems infrastructure to accommodate changes in metering
equipment, the establishment of an independent system operator and other
similar items. For example, the technology needed to gather and
communicate the information necessary to allow large scale retail direct
access includes the installation of communication equipment on customer
meters, infrastructure investment needed to transmit the customer
information gathered at the meter, and computer hardware/software
investment necessary to process the information for use in preparing
bills. In addition, a completely new billing system must ultimately be
developed to accommodate unbundled pricing, and the preparation of bills
containing multiple pricing structures from multiple suppliers of
generation services and other services.(3) Additional investments will
also be necessary to implement an automated power transactions scheduling
system, along with the costs of developing and implementing an independent
transmission system operator system. Consumers Energy currently estimates
that such costs will be $150 million over the 1998-2002 time period.
These costs should be added to the total transition costs used to
calculate the appropriate transition charge, and should be subject to
periodic review and adjustment to the extent actual costs are different
than this estimate.
- ---------------------
(3)A general description of the activities necessary to develop and
install the technology improvements needed to implement retail direct
access, as well as a potential schedule for those activities, is provided
as Attachment 3.<PAGE>
<PAGE> -13-
B. Determination of Transition Charges
Based upon the above cost determinations, transition and
implementation charges were developed which would be applicable only to
those customers electing retail direct access service during the 1997-2007
time period. The basic assumptions underlying the calculation of the
charge, and the details of the calculation are set forth on Attachment 1.
In summary, this approach:
(i) Reflects only those costs to be incurred (or amortized)
over the 1998-2007 time period. The only exceptions to this are, as
noted above, the SFAS 106, SFAS 109 and refunded debt regulatory
assets, which, under current rates, would be amortized over periods
extending to 2011, 2016, and 2010, respectively, and the Ludington
and hydro plant decommissioning cost.
(ii) Calculates a per kWh charge based upon the October 1996
sales forecast for the 1998-2007 time period.
(iii) Reflects a $4.9 million reduction in total transition
costs based upon the assumption that a portion of the payments made
by Rate DA participants during 1998-2000 will allow recovery of a
portion of total transition costs.
(iv) Assumes the schedule for retail direct access set forth in
the Staff Report is followed, and calculates the load associated with
the customers opting for retail direct access pursuant to that
schedule.
(v) Uses the overall pre-tax rate of return approved in the
most recent electric rate order of 10.63%, (see February 5, 1996
Order in Case No. U-10685), and a 7% discount rate to determine the
present value of future revenues.
(vi) Develops a levelized transition charge which would be
applicable for the entire 1998-2007 time period, only for those
customers eligible for retail direct access. Other customers are
assumed to continue to pay bundled rates during this period.
Similarly, the implementation charge (covering employee-related and
other restructuring costs) would also apply only to retail access
customers.
(vii) Assumes that all nuclear decommissioning costs
continue to be recovered through a separate charge applicable to all
customers.
The levelized transition charge (i.e., for recovery of the costs
associated with regulatory assets, Ludington/hydro decommissioning,
nuclear facilities and power purchase agreements) which results from this
approach is 1.31 cents per kWh. The levelized implementation charge (i.e.,
for recovery of employee-related restructuring costs and other
implementation costs) is 0.14 cents per kWh. The total charge is 1.45
cents per kWh. See Attachment 1. This is the charge that would apply in
the absence of securitization.
Because the above calculations are based upon a relatively long-
term sales forecast, it is essential to periodically "true-up" the
collection of these amounts to reflect actual sales levels. Neither
utilities nor customers should be put at risk for factors such as the
performance of the Michigan economy and weather over a ten year period.
Thus, the charges should be adjusted on January 1, 2001 and January 1,
2004 to reflect what actual sales levels have been. There would be no
true-ups for any other factors.
C. Mitigation
The February 5 Order asked the utilities to address to what
degree transition cost mitigation measures are reflected in the Staff
recommendation. There are numerous examples of such mitigation measures
which are inherent in the Staff Report. These include the following:
(A) During the transition period, the above-described
calculation of transition costs effectively assumes that, for the
load lost to third party power suppliers, the Company will be able to
sell the displaced generation to some other buyer at a price at least
equal to market value. The inability to do so would mean that the
estimate of transition (or stranded) costs set forth above is
significantly understated. Thus, there is a business risk associated
with being able to negotiate transactions which allow those sales to
take place. This also highlights the importance of the reciprocity
condition which the Staff Report properly recommends. Without the
ability to sell into other utilities' markets, Consumers Energy's
generation would effectively be land-locked, and its transition costs
would be substantially increased.
(B) The utility assumes all risk associated with the
recoverability of existing and future capital costs of its fossil and
hydro electric generating units. The current net book value of these
units on Consumers Energy's books is over $800 million (excluding
CWIP and inventories). Average annual capital expenditures for
these units during 1993-1995 was approximately $40 million. The rate
freeze recommended by the Staff will prevent recovery of any capital
additions during the transition period, and the Company will be
solely at risk for the recovery of all capital, fuel and other O&M
costs after the full phase-in of retail direct access.
(C) The utility also assumes all risk associated with the
recoverability of the fuel, and other O&M expenses associated with
its fossil and hydro units. The rate freeze (and PSCR suspension)
recommended by the Staff would prevent recovery of any increases in
these costs during the transition period, and the Company would be
fully at risk for recovery of all of these costs after the phase-in
of direct access.
(D) As was noted earlier, the utility assumes all risk
associated with future capital additions for its nuclear units. The
substantial regulatory requirements associated with the operation of
these units makes this a particularly significant risk.
(E) The utility also assumes all risk associated with the
recoverability of nuclear fuel, and nuclear other O&M expenses for
these units. The level of these costs recoverable through rates is
frozen during the transition period, and is recoverable only to the
extent the market permits recovery thereafter.
(F) The above calculations cover only the period through
December 31, 2007. This limitation also applies to the NUG
agreements, even though the terms of all of those agreements extend
well past 2007. For purposes of this Response, Consumers Energy has
accepted the implicit conclusion in the Staff Report that market
conditions beyond 2007 are difficult to predict, and that it is
therefore appropriate to limit the calculation of NUG-related
transition costs to the 1998-2007 time period. Given the long term
nature of these power supply contracts, there are substantial
contract costs that Consumers Energy will incur beyond 2007, however,
and the recoverability of those costs will depend upon market
conditions existing at that future time, or, to the extent market
conditions do not permit such recovery, the ability to obtain
recovery of any future stranded costs via some regulatory mechanism.
The Company intends to return to the Commission for a resolution of
NUG recovery issues at that time should it appear necessary. To
attempt now to resolve questions about market conditions and economic
conditions 10 years in the future would not be productive and would
serve only to delay the availability of retail access.
(G) The utility assumes certain market, contract and regulatory
risks associated with the payment of energy charges pursuant to the
NUG agreements, since these charges could prove to be above market
prices in certain conditions.
(H) It is also appropriate to consider the phase-in strategy
included in the Staff Report as a mitigation measure. The Staff
recommended, and Consumers Energy agrees, that the transition to full
retail direct access should be phased in over a 6-7 year period.
This greatly assists in mitigating transition costs in a variety of
ways. First, it provides the utility with an opportunity to take the
organizational and management steps necessary to operate in a
deregulated, competitive environment. Second, and as mentioned
previously, an acceleration of direct access would result in an
increase in the transition cost charge described above. In addition,
the phase-in of direct access permits the large expenditures
necessary to accommodate the revised metering, billing and other
computer systems to be spread over a longer period, thereby allowing
those implementation activities to proceed in a more efficient and
cost-effective manner. Electric restructuring in Michigan should not
be allowed to fall victim to the "America ON-Line" syndrome.
(I) Because the PSCR process will be suspended, the utility
assumes the risk of variations in fuel prices, unit performance
factors, availability of third-party supplied power, and other
matters, to the extent they deviate from what is reflected in the
frozen rate.
(J) As stated in the following section, earnings of the
investment trust which exceed what is necessary to make payments to
the NUG's would be distributed to customers, thereby mitigating
transition costs.
(K) The amounts bid during the phase-in period for the ability
to participate in the retail access program will be credited against
other restructuring implementation costs, thereby mitigating those
costs.
(L) The "true-up" procedures for transition costs described
above will, to the extent actual sales growth exceeds what is
projected, serve to reduce transition costs payable by customers.
(M) It is also appropriate to recall that, with respect to the
MCV power purchase agreement, Consumers Energy has previously
incurred write-offs and other losses exceeding $700 million, which
represent savings to customers.
(N) A further potential mitigation element would be any
stranded costs recovered as a result of proceedings at the Federal
Energy Regulatory Commission. Such a proceeding is currently pending
at the FERC concerning the Alma municipalization proposal. See FERC
Docket No. SC97-4-000. Amounts recovered in this manner would serve
to reduce the transition costs otherwise authorized by this
Commission.
<PAGE>
<PAGE> -17-
Question 2: The items the utility would expect to securitize
if authorized to do so, and an analysis regarding
the anticipated financial and rate effects.
Consumers Energy agrees with the Staff Report recommendation
that the securitization of transition charge revenues should be seriously
explored. This approach offers a potentially valuable tool in an electric
utility restructuring package. Securitization would permit the recovery
of transition costs, while doing so in a manner which provides rate
benefits to current customers. This approach can thereby provide
significant benefits to customers and all interested parties. While the
Legislature must ultimately authorize this securitization approach, the
Commission has an essential role to play. Consumers Energy urges the
Commission to explicitly endorse this feature of the Staff Report as an
important element to be included in restructuring legislation and to adopt
the calculations and charges which are set forth in this Response.
While the Company's analysis of the securitization option is
still continuing(4), at this time it expects that the following items and
associated dollar amounts would provide the basis for the revenue stream
to be securitized:(5)
- ---------------------
(4)It should be noted that the Company's presentation in this
Response regarding securitization assumes that the proceeds derived from
the sale of the bonds are not taxable to the utility. If this assumption
proves to be incorrect, the benefits associated with securitization would
not be realized. The Company anticipates that this issue will be resolved
in the near future as the securitization mechanism is implemented in other
states. In the event this issue is resolved adversely, the manner of
transition cost recovery would have to be reconsidered.
(5)It should be noted that, at this time, Consumers Energy does not
propose to securitize any amounts related to employee restructuring or
other implementation costs.<PAGE>
<PAGE> -18-
Table 3--(All figures in $ million)
Additional Amounts
Transition For Customer Total Amount
Costs Rate Reduction To Be Securitized
(A) Nuclear facilities $ 70.3 $ 241.3 $ 311.6
(B) Generation-related 220.1 332.4 552.5
regulatory assets
(C) Ludington/hydro 16.2 8.0 24.2
decommissioning
(D) Contract capacity 1,459.5 1,735.4 3,194.9
costs associated
with NUG
agreements
(E) Transition costs (4.9) (.5) (5.4)
recovered via
Rate DA regulatory
charges approved
by MPSC
_________ _________ _________
Total $1,761.2 $2,316.6 $4,077.8
The revenue requirement associated with the items listed in
Table 3 would be removed from the utility's existing rates, and would be
replaced with a securitization charge. For purposes of calculating the
expected customer benefits from securitization, Consumers Energy has
assumed that the bonds issued have a term of 15 years, an interest rate of
7.4%, and that the amounts collected by the utility for bond debt service
are not taxable for Michigan Single Business Tax purposes. Using these
assumptions, the resulting securitization charge is 1.12 cents per kWh.
When the implementation charge (employee-related restructuring and other
implementation costs) of 0.14 cents per kWh is added, the total
restructuring charge under this approach is 1.26 cents per kWh. See
Attachment 1 for details of this calculation. As noted previously, it
would be essential to periodically "true-up" the collection of these
amounts to reflect actual sales levels.
The customer savings expected from this approach are
substantial. As set forth below in Section III in greater detail,
securitization provides an immediate savings to customers in excess of
$200 million relative to rates that would otherwise be in effect in the
absence of securitization. See Section III.
The issuance of the securitization bonds would generate
substantial funds which would be utilized over a reasonable period of
time, consistent with prudent financial management considerations, in the
following manner:
(A) The proceeds from the securitization of nuclear facilities
and regulatory assets would be used to reduce Consumers Energy's debt
and equity in a proportion similar to that reflected in its current
capital structure.
(B) The proceeds from the securitization of the present value
of the contract capacity charges would be handled as follows:
-- The funds would be deposited in a third party managed
investment trust fund
-- Any earnings of the investment trust in excess of the
amount needed to satisfy the approved amounts payable to the PPA
suppliers will be distributed to customers. A reasonable
estimate of this excess earnings amount ranges from $75 million
to $150 million.
-- Any remaining balance in the investment trust fund at
2007 would also be distributed to customers.
-- Buyouts, buydowns, financial restructuring or
renegotiation of NUG power purchase agreements would be funded
from the investment trust subject to the consent of the trustee.
<PAGE>
<PAGE> -20-
Table 4
Summary of Transition Costs, Securitization Amounts, and Surcharges
(million)
Item
Without With
Securitization Securitization
1. Generation-related $ 70.3 $ 311.6
regulatory assets
2. Nuclear capital costs 220.1 552.5
3. Ludington/hydro 16.2 24.2
decommissioning
4. Power purchase agreement 1,459.5 3,194.9
costs
5. Rate DA charge offset (4.9) (5.4)
_________ _________
6. Total $1,761.2 $ 4077.8
7. Transition Charge 1.31 cents per kWh
8. Securitization Charge 1.12 cents per kWh
9. Employee-related costs $ 50.0 $ 50.0
10. Other implementation $ 150.0 $ 150.0
costs
11. Total implementation 0.14 cents per kWh 0.14 cents per kWh
charge
12. Total charge 1.45 cents per kWh 1.26 cents per kWh
<PAGE>
<PAGE> -21-
Question 3: A description of how the utility would allocate
direct access capacity, including procedures for
bidding and aggregation. The utility should also
indicate any appropriate alternatives to the
phase-in schedule.
A. Allocation
To ensure that all customers have an opportunity to participate
in retail direct access, Consumers Energy would first determine the blocks
of direct access capacity available to residential, secondary and primary
customer class based upon the percentage of annual energy consumption for
each class. This would result in the residential, secondary and primary
customer classes being allocated 49,000 kW, 32,000 kW and 69,000 kW of
each 150 MW block of direct access capacity, respectively. Bidding
procedures would then be followed within each customer class to allocate
the available capacity to individual customers (or aggregators). The
following table sets forth how Consumers Energy would phase in the retail
direct access program:
Table 5
RETAIL DIRECT ACCESS SCHEDULE
(All figures in kW of Demand)
RESIDENTIAL SECONDARY PRIMARY
7/97 49,000 32,000 69,000
1/98 98,000 64,000 138,000
1/99 147,000 96,000 207,000
1/2000 196,000 128,000 276,000
1/01 245,000 160,000 No Limits
1/02 294,000 192,000 No Limits
1/03 343,000* 224,000 No Limits
1/04 No Limits No Limits No Limits
* Based upon an average demand of 4 kW per residential
customer, This equates to approximately 85,750
customers.
<PAGE>
<PAGE> -22-
B. Bidding
To initiate the bidding procedure, the Company would conduct an
auction three months prior to commencement of service. A participant in
the auction process would submit a sealed bid indicating the number of 200
kW blocks of available retail access capacity allowances within each class
it desires to purchase, and the amount it is willing to pay for each such
200 kW block. The highest bidders per block of capacity will be given
first priority to that block. To ensure an adequate number of
participants in the program, no single bidder would be awarded more than
10,000 kW from each of the three classes (i.e., primary, secondary and
residential). The bid amounts would be in addition to all other
applicable charges, and would be payable within thirty days. All fees
collected would be credited to the recovery of other restructuring
implementation costs previously discussed in response to Question 1.
Successful bidders would be able to sell or otherwise transfer their
allowances to other eligible parties.
C. Aggregation
All customers with annual maximum demands of less than 1,000 kW
and whose usage is not measured with demand recording meters would be
required to procure their power through an aggregator. The aggregator
could be any entity, such as a marketer, broker, customer, or distribution
utility, which is certificated by the Michigan Public Service
Commission.(6) The certification process would ensure that aggregators
have the ability to meet their obligations. During the phase-in period,
the aggregator will be able to solicit customers via the bidding process.
Aggregators would be required to contract for a minimum level of
1,000 kW but could not exceed the quantity of load allowances secured in
the bidding process. Aggregators may increase the amount of load they
serve in subsequent bid proceedings by successfully bidding for additional
allowances, or acquiring additional allowances from other parties
participating in the program. Aggregators would be required to
independently schedule deliveries to each customer class of retail direct
access customer (residential, secondary, and primary).
D. Alternatives to the Phase-In Schedule
The Commission noted in a footnote in the February 5 Order
(p. 3) that the Michigan Electric Cooperative Association had claimed that
the 2.5% blocks of capacity may not be feasible for some small utilities.
Consumer Energy believes that some flexibility to address unusual
situations of very small utilities may be appropriate, provided that the
January 1, 2001 and January 1, 2004 dates for full retail direct access
are not extended, and provided that the reciprocity condition is in force.
That is, to the extent that a small utility wishes to sell to a customer
located in another utility's service territory, no claims of special
circumstances on its own system should serve to delay open access.
- ---------------------
(6)Legislation would be appropriate to establish the certification
requirements which would be administered by the Commission.<PAGE>
<PAGE> -24-
Question 4: Tariff sheets for direct access service, with
supporting workpapers and applicable FERC
tariffs.
Attachment 4 to this Response is a set of tariffs that could be
used to initiate the retail direct access program in 1997. While they are
largely self-explanatory, there are several points deserving special
comment:
(1) The rates and charges included in the tariffs assume the
approval by this Commission and by the Federal Energy Regulatory
Commission of the appropriate classification of transmission and
distribution facilities in the manner set forth in Consumers Energy's
application in Case No. U-11283. The Company notes that, on February
28, 1997, the Commission issued an order setting that matter for
hearing.
(2) The cost of supplying electricity can fluctuate
dramatically over the course of a year, month, and day. The price at
which a supplier is willing to sell power could be significantly
different at midnight on an April evening than it will be at 3 PM in
the afternoon of a 100 degree day in July. Current metering and
billing techniques, coupled with standard ratemaking practices,
results in most customers being billed on an average rate basis. The
meter on a house or place of business records only the total amount
of kWh consumed, and not the time of use. Customers are therefore
largely indifferent to time of use pricing considerations because
they pay the same unit price 24 hours a day, 365 days a year. The
implementation of any meaningful retail direct access program,
however, is ultimately dependent upon the availability to the
customer, the generation supplier and the transmission/distribution
utility of instantaneous or real time usage and generation supply
information. The metering and communications technology necessary to
provide such real time information is not presently in place for the
vast majority of utility customers, and it is a formidable task to
undertake the installation of the required technology for 1.4 million
customers. Attachment 3 describes Consumers Energy's plan for the
installation of the necessary technology. In order to allow for the
immediate phase-in of retail direct access for all customer classes,
however, Consumers Energy has developed an interim "approximation"
program that would utilize real time information from a statistically
significant sample of customers. This program assumes that customers
electing retail direct access, but not yet equipped with the
necessary metering technology would have load patterns consistent
with this sample. Please refer to Attachment 4, Rule F5.4.(7) The
reliance on sampling techniques would be reduced and hopefully
eliminated by the year 2004 by the phased installation of new
technology for all customers. Of course, Aggregators or individual
customers who do not wish to be billed based upon the load pattern
sampling technique during the phase-in period may pay to have the
appropriate metering and communications technology installed earlier.
(3) The rates and charges in Attachment 4 are based upon the
transmission and utilization principles imposed by FERC. Certain of
these principles, however, do not easily translate from the wholesale
environment to the retail environment. For example, FERC pricing for
transmission reservation is based on each customer's utilization of
the transmission system during the one system peak hour of the month.
Over 1.4 million of Consumers Energy's customers are not equipped
with the type of metering necessary to determine system utilization
at any single point in time. Thus, FERC pricing practices cannot be
directly applied. Another example of this situation is that the FERC
OATT tariff contains a $3,035 monthly customer charge. Direct
assessment of such a charge in a retail direct access transaction
would obviously adversely affect the economics of many such
transactions. These items are merely examples of the types of issues
which arise as the FERC tariff is used as the basis for retail direct
access transactions. In the attached tariffs, the Company has
attempted to capture as many of the FERC pricing policies and
practices as is reasonably possible, while still recognizing the
differences between wholesale service and retail service.
(4) As the Commission is aware, FERC has directed that rates,
terms and conditions of service for a retail direct access program
would also be filed with the FERC for its review and approval.
Consumers Energy will comply.
- ---------------------
(7)Consumers Energy notes its belief that it is important that all
utilities should offer a comparable program, rather than one more
restrictive.<PAGE>
<PAGE> -26-
Question 5: A description, including tariff sheets, for the
standby service that the utility would provide to
direct access customers.
The direct access service tariff sheets discussed above in
Response to Question 4 include a new Standby Service Tariff for use by
retail direct access customers. See Attachment 4. This incorporates the
provisions on length and availability of service recommended in the MPSC
Staff Report. It must be noted that standby service will, from the outset
of retail direct access, be available from sources other than Consumers
Energy. Thus, customers will be free to choose from multiple sources of
standby service.
In order to assure a minimum available supply of standby service
for an initial two year period, however, as well as a predictable price
for that service during that time, Consumers Energy has accepted the
Staff's recommendation that the utility should provide a regulated standby
service for that period, but not beyond December 31, 2000. As the Staff
explained, this will provide an opportunity for the standby generation
market to further develop, and for parties to construct additional standby
generating capacity. Consumers Energy has set the cost of the proposed
standby service based upon the approximate cost of a new green field gas-
fired peaking generator.
The Company also proposes to close the existing standby tariff
provisions, Rule D-7, Rate B-1 and Rate CG, to new standby business as
part of these proceedings. Existing customers receiving standby service
on these rates would be allowed to continue on these rates until
January 1, 2001 at which time they can purchase standby service from
sources other than the Company or from the Company at market-based rates.
Commencing January 1, 2001, standby service will be provided to all
customers at market-based rates.<PAGE>
<PAGE> -27-
Question 6: A list of any new or additional charges that the
utility does not currently assess that would be
imposed under a direct access program.
The implementation of a retail direct access program in which
all classes of customers are eligible to purchase generation from
alternative suppliers is a dramatic change in the traditional relationship
between utilities and electricity customers. This change will undoubtedly
cause many changes in the types of services offered and charges collected
by the utility, many of which cannot currently be specifically identified.
Consumers Energy believes that there will likely be a continually changing
menu of services offered by distribution utilities and other entities,
depending upon what the market expects and is willing to pay for. As a
general rule, services which are offered by multiple providers should be
priced in accordance with the market demand for those services.
Examples of additional services arising from the implementation
of direct access are: (i) billing services to third parties; (ii)
supplier switching services; (iii) credit and collection services
provided for third parties; (iv) third party performance bonds or
deposits. Undoubtedly additional examples will arise over time.
Revisions to certain utility practices and charges will also
clearly be necessary as part of the transition to a restructured industry.
Some examples of such revisions are the following:
(A) Customer contribution requirements--Since many customers
will no longer purchase generation services from the distribution
utility, the level of investment the utility is willing to make to
extend service to new customers without an offsetting contribution
from the customer will change.
(B) Bill payment schedules--The unbundling of utility charges
and the inclusion of third party charges on bills may necessitate
changes in payment schedules and associated charges.
(C) Late payment and non-payment practices--Inclusion of third
party charges on bills will also require changes in late payment/non-
payment practices and charges.
(D) Miscellaneous billing practices--Additional changes to
existing billing practice rules will undoubtedly be necessary.
Consumers Energy continues to examine these issues.
<PAGE>
<PAGE> -29-
Question 7: A description of any transmission constraints or
limitations on the ability to import power into
the utility's system. This description should
include: (a) the amount of electricity currently
being imported into the system from Michigan
sources and from outside the state; (b) the
nature of the existing imports, e.g., wholesale
transactions; (c) the nature and location of the
constraints; (d) an estimate of the amount of
direct access electricity that could be imported
into the utility's system given existing
constraints; and (e) methods of removing
constraints and their estimated costs and
effects.
A detailed discussion of the matters raised in Question 7 is
contained in Attachment 5. As evidenced by both the Staff discussion of
transmission issues and Consumers Energy's detailed answers, the issue of
transmission constraints and interconnection capacity is highly complex.
It is critical that the issues be both understood and resolved if Michigan
is to advance to a competitive electric industry without causing a
negative impact on the reliability of today's system. Transmission
capacity and interconnection capacity are also critical to assuring a
robust power supply market which is not subject to delivery constraints.
Michigan's unique geography is only partially responsible for
the difficulties in assessing the availability of transmission capacity.
The physical properties of electricity bear the brunt of the
responsibility. The following is a summary of simplified concepts
important to understanding the issues raised in question 7.
1. Transmission is affected by what generators are on line, at
what capacity, and where the load is located.
2. Importing electricity at more than one interconnection at
the same time affects the transmission system differently than
importation at only one interconnection point.
3. The elimination of transmission constraints at one point
does not necessarily eliminate transmission problems as a whole, and
it may create constraints at other points.
4. There is sufficient ATC in the near term (through 2000) to
accommodate the phase-in of retail access in Michigan. Long term
solutions will require additional transformers, extra capacitors, new
substations, and/or new interconnections in Michigan, Indiana, Ohio
and/or Ontario. These possible projects are also detailed in
Attachment 5.
5. Additional generation located within Michigan or the
designation of certain generating facilities as "must run" units
could also be part of the solution for the future.
6. The Staff Report recommends that Consumers Energy and
Detroit Edison be required to provide standby (if requested by the
customer) at regulated rates for two years for any customer, but not
beyond December 31, 2000. Consumers Energy supports this
recommendation since it effectively eliminates concerns about
transmission constraint issues for the near term.
7. As discussed further in response to Question # 8, Consumers
Energy supports the development of an independent system operator.
If properly structured, an ISO will assure that the transmission
system is utilized to its fullest capacity on a fair and open access
basis.
8. Consumers Energy will make good faith efforts to upgrade
its transmission system when required to alleviate transmission
constraints, providing that recovery of such expenditures is assured
in addition to the CPI-1% adjustment mechanism which applies to
energy delivery services.
Consumers Energy recommends that transmission issues be
recognized as issues that should be dealt with throughout the transition
period. The resolution of transmission issues on a long term basis must
be intertwined with the resolution of ISO/market exchange and market power
issues.<PAGE>
<PAGE> -31-
Question 8: The status of any ongoing discussions regarding
the development of an Independent System
Operator.
Transmission related issues encompass not only reliability
issues, but also issues related to the provision of open access by a
transmission owner, when that owner is a vertically integrated utility.
Consumers Energy believes that an Independent System Operator ("ISO") can
help resolve both types of problems.
There is no universal definition of an independent system
operator. This can readily be demonstrated by a comparison of the various
ISO proposals around the country. The Midwest ISO under discussion does
not include generation control responsibilities. The proposed
Pennsylvania-New Jersey-Maryland ("PJM") ISO contemplates the management
of a competitive energy market, whereas the proposed California ISO will
be separate from a power exchange. The Texas ISO will assist control
areas with coordination, whereas the PJM ISO and the California ISO will
operate a single control area. Some ISOs will simply coordinate operating
schedules provided by individual load-serving entities, while others will
perform the schedule and dispatch of generation for their members. The
actual functions of an ISO are up to each ISO to determine, providing the
ISO meets the 11 basic principles set forth by FERC which were described
in the Staff Report.
Consumers Energy is concerned about the ability of transmission
managers to maintain the reliability of the system in light of the rapidly
increasing types and amounts of power transfers that will be taking place
in the future. Today's transmission system was not designed for the
functions it will be asked to perform in a retail access environment.
This problem has become a serious concern for the North American Electric
Reliability Council ("NERC"). NERC is responsible for establishing the
operating and planning standards necessary for the electric utility
industry to maintain the reliability of the power system at its current
high level. Specific NERC activities currently underway are detailed in
Attachment 6.
In light of direction from FERC in Order 888 to revise the
existing Michigan Electric Power Coordinating Center ("MEPCC"), Consumers
Energy and Detroit Edison undertook a series of discussions which
included, among other things, the possible expansion of the MEPCC to a
Michigan ISO. The advantages of a Michigan ISO would be the ability to
utilize the capabilities of the current MEPCC for Consumers Energy-Detroit
Edison transmission business functions, generation control and power
security monitoring. Because these functions are performed by the MEPCC
today, the time required to implement a Michigan ISO would be much shorter
than that required for a regional ISO. If these discussions are resumed,
Consumers recommends that the MPSC Electric Staff play a role in the
formulation of a statewide ISO.
Because of the broad interest in a regional ISO, Consumers
Energy has joined the initiative to form a Midwest ISO. There are
currently 24 members of the Midwest ISO. See Attachment 7. While there
is much work to be done on the Midwest ISO, there is general consensus on
several key elements, including operations, planning and dispute
resolution.
The Midwest ISO would assume responsibility for all transmission
service business currently being conducted by Consumers Energy ( and other
transmission owners). The membership would "buy" all of its transmission
service from the ISO. The revenues obtained for this service would be
allocated back to the transmission owners. The responsibility for system
reliability would also be transferred from Consumers Energy to the ISO.
Control area functions such as automatic generation control and
transaction schedule implementation would not be performed by the ISO, and
would be functions retained by the utility. A dispute resolution
procedure along the lines of that proposed for the ECAR Regional
Transmission Group is a part of the current version of the Midwest ISO
Operating Agreement being considered.
The proposed governance of the Midwest ISO is still under
discussion. Current plans call for a 12 member board with three
representatives from transmission owners. Non-owners would elect the
remaining nine representatives. No more than two members may represent an
identifiable market participant groups. There is ongoing debate about the
necessary procedures to change the Operating Agreement.
The major unresolved issue is transmission pricing. There are
several different proposals under discussion ranging from zonal pricing
(priced at the embedded cost in the buyer's zone) to a single ISO-wide
rate set at the average cost of all transmission in the system. Various
task forces within the ISO are trying to merge the proposals into one
proposal acceptable to all members.
Because Michigan is physically located at a geographic extreme
of the ISO, pricing is extremely important to Consumers Energy. In all
likelihood, the ability or inability to agree on a pricing methodology
will be the deciding factor in whether or not the Midwest ISO becomes a
reality.
To date, the Midwest ISO is comprised only of transmission
owners. In addition to Consumers Energy, Detroit Edison, AEP/Michigan and
the Michigan Public Power Agency are also members from Michigan. The
Midwest ISO continues to have ongoing meetings with various stakeholders,
including customers, marketers, brokers and regulators from the affected
states. Provided that the Midwest ISO can resolve outstanding issues, an
application must be filed, and approved by the FERC. The most optimistic
estimate is that the Midwest ISO could be operational in 2000.<PAGE>
<PAGE> -34-
Question 9: A description of the methods that the utility
would propose to alleviate concerns regarding
market power in a competitive market.
Although the question appears to assume that utilities operating
in Michigan will have market power in an open access environment,
Consumers Energy cautions the Commission against prematurely jumping to
that conclusion. As is evident from proceedings which have been held at
the FERC on the subject of market power, it can be a fairly complex
subject. As will be discussed below, however, Consumers Energy believes a
conclusion can be drawn at this time that, given (i) the phase-in schedule
set forth in the Staff Report, (ii) the availability of power import
capability, (iii) the assurance of a regulated standby service, and (iv)
the number of potential power suppliers, market power is clearly not a
problem for at least the initial several years of the retail access
program under discussion. Additional analyses may prove to be necessary
in the future to determine the extent to which market power will be a
legitimate concern.
It should first be noted that concerns about market power being
possessed by Michigan electric utilities should be largely alleviated by
the fact that, under the Staff plan, the utility will retain the
obligation to provide generation service at frozen rates through
December 31, 2000 for primary customers, and through December 31, 2003 for
secondary customers. See Section III of this Response. Thus, since no
customer will be required to make market-based purchases of generation
prior to those dates, and all customers may, if they wish, continue
receiving generation service from the local utility at prescribed prices,
customers are protected from the exercise of market power, assuming,
arguendo, that some market participants may possess it.
As discussed in response to question 7 regarding transmission
constraints, there is not currently an unlimited amount of import
capability into Michigan or into Consumers Energy's service territory.
Notwithstanding the existing limitations, however, this situation does not
give rise to any material market power concerns because of the retail
access phase-in schedule contained in the Staff Report. Relative to the
amount of import capability that does currently exist, the amount of
customer load eligible for retail access in 1997-2000 is not sufficient to
create any market power concerns. For Consumers Energy, the amount of
customer load eligible for retail access is approximately 150 MW in 1997,
300 MW in 1998, 450 MW in 1999, and 600 MW in the year 2000. These
amounts of customer load that will be able to "shop" for power should be
compared to over 2000 MW of on-peak transmission capacity which is
available to bring power into Consumers Energy's service territory. Thus,
the relative amounts of import capability and customer load shopping for
generation suppliers indicates no material market power problem can exist.
With respect to the limited periods during the year when
transmission constraints may exist, market power concerns are nevertheless
alleviated by the regulated standby obligation recommended in the Staff
Report. That is, the Staff recommends, and Consumers Energy has accepted,
a requirement that the host utility provide a standby generation service
for the first two years of the retail access program. Since this standby
service will be available at a regulated rate, any limitations on import
capability which might exist are resolved. This two year period provides
an adequate opportunity for the generation market to further develop, for
additional transmission capability to be developed, and for additional in-
state generation capacity to be brought into or returned to service.
Finally, the number of potential power suppliers which could
sell to customers in Michigan provides adequate assurance that market
power could not be exercised by individual market participants. There are
numerous potential suppliers of generation services already present in
Michigan, including generation owned by retail customers. Over 30
customers just in Consumers Energy's service territory own varying amounts
of generating capacity. In addition, customers having the ability to
choose power suppliers will be able to reach well beyond the Consumers
Energy service territory and the existing MECS control area. This wide
market area is the result of a strong extra high voltage transmission
network that can physically reach generation sources anywhere in the
eastern interconnection. Thus, direct access customers will have a wide
number of power suppliers available to them, resulting in a very
competitive power market environment.
As evidence of this capability, Consumers Energy has, over the
years, actively purchased power from not only first tier utilities (i.e.,
companies with whom Consumers Energy is directly interconnected), but also
from second tier utilities (i.e., companies with whom Consumers Energy is
one system removed). These include CINergy, Ontario Hydro, Centerior,
Central Illinois Public Service, Louisville Gas and Electric, and
Commonwealth Edison. This past experience gives an indication that, under
most conditions, the market available to direct access customers is quite
broad and diverse.
Notwithstanding transmission constraints which may have existed
at system peak conditions in the past, system operators have been able to
maintain customer service reliability. As the industry is restructured,
customers will have options available to them to maintain their desired
level of service reliability, even at times when transmission constraints
may limit power supply alternatives. It will be important, however, for
customers, (or their aggregators or other representatives), to accept
responsibility for transactions that were previously handled by the local
utility. As discussed in the September 1995 NERC Report, Reliability
Assessment, 1995-2004, customers who choose to be supplied from other
than their local supplier will need to become more knowledgeable about
power supplies and transmission systems, including overall supply
reliability, services and information that were previously bundled in
their local provider's electricity rates. The NERC report states:
"In the new competitive environment:
1. Buyers must assess for themselves the reliability
or 'firmness' of electricity services purchased
from competing suppliers by evaluating the
validity of their claims."
Direct access customers will need to assure their own power supply and
transmission service reliability through the contracts they sign with
power suppliers and transmission providers.
Additional Methods of Mitigating Market Power
As explained above, Consumers Energy does not believe that, in
the initial years of the retail access program envisioned by the Staff,
market power is a material concern. While the situation that will exist
beyond that time is dependent upon many different factors, the following
are some of the options that suppliers, transmission providers and
customers will have available to mitigate future concerns regarding market
power in a competitive environment.
A. Transmission Expansion -- While transmission limitations
may limit the size of the power market in which customers can effectively
shop for firm power, FERC Order No. 888 requires transmission providers to
expand or upgrade their transmission systems to accommodate service
requests, assuming that the requester is willing to compensate the
provider for upgrade costs. Thus, customers and transmission providers can
effectively increase the size of the market through the expansion and
maintenance of reasonable and cost effective transmission capability.
Consumers Energy will continue to plan and operate its transmission
network for the benefit of all customer classes. It will make every effort
to offer cost effective expansion and upgrade alternatives when requested,
and will actively pursue implementation of necessary upgrades.
B. Independent System Operator ("ISO") -- FERC stated in the
Open Access Rule that the creation of organizations such as ISO's will
assist in the mitigation of market power. To this end, Consumers Energy is
participating in the Midwest ISO discussions. See response to Question 8
above. These discussions, which have 24 participants in the ECAR and MAIN
regions of NERC, may lead to an independently managed and operated
regional transmission system that complies with FERC's ISO principles.
Consumers Energy will provide non-discriminatory, comparable transmission
service to all customers, and will continue to pursue a regional or state
ISO, or some similar organization that meets FERC's ISO principles, as an
appropriate means of achieving non-discriminatory, comparable transmission
service to all customers.
C. Interruptible and Direct Controlled Load Management -- An
option available to direct access customers to manage the potential impact
of power supply interruptions or transmission congestion, or as an
alternative to back-up or stand-by service, is for the customer to install
equipment to lower energy use when their primary and/or back-up power
supply is not available. Such devices can be a cost effective alternative
for certain customers. Interruptible and direct controlled load management
services are already available to customers who want them. Indeed,
Consumers Energy expects that it and others will offer such services, as
the market for them develops. Many vendors exist who will work with
customers in developing individual load control programs.
D. Michigan Power Exchange -- The creation of an independent
power exchange where direct access customers could purchase power, could
provide a medium for matching energy users and energy suppliers, thereby
further mitigating any perceived market power. Such a power exchange would
provide yet another supply option for customers. Consumers Energy expects
that such exchanges will develop in a competitive environment.
E. Non-utility Developers -- As noted in the Staff Report,
multiple power suppliers can enter into the market relatively easily and
the resulting competition will work to assure reasonable prices and
adequate supplies for customers. Certainly the activity of non-utility
developers in Michigan over the past 10 years supports this conclusion.
The active involvement of non-utility developers in Michigan has
demonstrated that these suppliers are a viable alternative for future
power supplies.
F. Self-generation Option -- Large customers have the option
of constructing their own generating facility, either for partial service
or full service of their load. A number of customers have found this to be
cost effective, particularly when they can take advantage of co-generation
in a manufacturing process having significant process steam demands. This
ability to install self-generation clearly mitigates any market power
which might be possessed by other generation providers in Michigan.
<PAGE>
<PAGE> -40-
III. SUMMARY OF ESSENTIAL FEATURES OF RESTRUCTURING PLAN
So that there is no doubt about the restructuring plan that
Consumers Energy believes the Commission should endorse, this section of
this Response sets forth, in summary fashion, the essential elements of
the plan the Company is willing to voluntarily implement. This discussion
includes a description of certain elements of the restructuring plan that
were identified in the Staff Report but were not addressed in the
preceding sections.
A. Retail Direct Access Schedule
Retail direct access would be phased-in for Consumers Energy on
the following schedule:
RETAIL DIRECT ACCESS SCHEDULE
(All figures in kW of Demand)
RESIDENTIAL SECONDARY PRIMARY
7/97 49,000 32,000 69,000
1/98 98,000 64,000 138,000
1/99 147,000 96,000 207,000
1/2000 196,000 128,000 276,000
1/01 245,000 160,000 No Limits
1/02 294,000 192,000 No Limits
1/03 343,000* 224,000 No Limits
1/04 No Limits No Limits No Limits
* Based upon an average demand of 4 kW per residential
customer, This equates to approximately 85,750
customers.
Retail direct access for other Michigan utilities would be
phased in on a comparable schedule, as described in the Staff Report.
B. Allocation and Bidding
The available retail direct access load would be made available
to customer classes and individual customers as described previously in
this Response. In summary, the capacity would be distributed among
primary customers, secondary customers and residential customers based
upon the current ratio of class usage to total system usage. Bidding
programs would then be conducted to allocate the available capacity among
individual customers and aggregators.
C. Transition Cost Recovery
Consistent with the Staff's recommendations, the Commission
should conclude that Consumers Energy's transition costs are as set forth
in the Response to Question 1. This approach permits recovery of the
generation-related portion of regulatory assets, the net book value of
nuclear facilities, Ludington/hydro decommissioning costs, and a portion
of the contract charges associated with purchases from non-utility
generators. As explained above, this approach results in a 1.31 cents per
kWh transition charge, which would only be applicable to those customers
electing retail direct access, and only for the 1997-2007 time period. To
the extent the securitization option is available in the manner described
above, the revenue requirement associated with the securitized assets
would be removed from the Company's bundled rates, and a securitization
charge of 1.12 cents per kWh would be applicable to all customers for the
15 year term of the securitization bonds.
The Commission should also find that the recovery of costs
associated with the implementation of industry restructuring should be
accomplished in the manner described above in response to Questions 1 and
2. Thus, the costs of employee-related restructuring activities, revised
metering and billing systems and equipment, and the associated
infrastructure, and implementation of an independent system operator
should also be recovered from customers as part of transition costs.
Based upon the best information available at this time, Consumers Energy
estimates that these costs will add 0.14 cents per kWh to both the
transition charge and the securitization charge indicated above.
D. Rates, Terms and Conditions of Retail Direct Access
Service
Rates, terms and conditions for retail direct access service,
including standby service for direct access customers, and reflecting the
assumptions made herein, are set forth in Attachment 4. Recognition of
the jurisdictional role claimed by the FERC is necessary in connection
with these tariffs.
E. Rate Freeze
The Staff Report indicates that the implementation of retail
direct access should be accompanied by a freeze on base electric rates
(i.e., the non-PSCR component of rates), subject to certain exceptions.
This freeze would be effective until January 1, 2001 for commercial and
industrial customers taking service at primary voltage levels (the date on
which such customers are all eligible for retail direct access), and until
January 1, 2004 for all other customers (when all other customers are
eligible for retail direct access).
The Staff also indicated that certain exceptions to this freeze
would be appropriate. Consumers Energy believes that these should include
the following: (a) increases resulting from the operation of the
performance-based rate mechanism for transmission and distribution rates
(see below); (b) increases resulting from changes in accounting
requirements, state or federal laws or regulations which affect the cost
of providing service by at least $2 million annually; (c) increases
resulting from transmission system upgrades or expansions required to
alleviate transmission constraints; (d) changes in projected nuclear
decommissioning costs; and (e) miscellaneous changes in rules and non-
price related rate provisions such as extension policies, billing
practices, late payment provisions, and other such policies.
F. PSCR Suspension
The Staff report also indicates that the power supply cost
recovery ("PSCR") clause should be suspended during the transition period
(and ultimately eliminated entirely). This recommendation should be
implemented for Consumers Energy by adjusting for the levelized phased-in
capacity charge increases for NUG purchases which have previously been
approved by the Commission, and an adjustment to reflect the normalization
of generating plant outage schedules. In addition, there are two PSCR
reconciliation cases pending at the Commission for Consumers Energy for
1994 and 1995, which reflect under-recoveries of $15.3 million and $13.7
million, respectively. In addition, the 1996 reconciliation and the
projected 1997 reconciliation amounts should also be reflected.
The impact of these PSCR-related items is to increase customers
rates by 0.32 cents per kWh. The system average rate would increase from
7.02 cents per kWh to 7.34 cents per kWh. See Attachment 8. It should
be noted that this calculation does not reflect the significant impact a
dissolution of the Michigan Electric Coordinated Systems ("MECS")
arrangement between Consumers Energy and Detroit Edison could have on PSCR
costs. Therefore, a further adjustment may also be necessary for this
reason.(8)
If the securitization approach becomes an available option in
the manner described previously in this Response, this PSCR-related
increase could be more than offset by the benefits associated with
securitization. The immediate annual customer savings associated with
securitization are approximately $226 million, as shown on Attachment 8.
This reflects a reduction in the 7.34 cents per kWh average rate to 6.68
cents per kWh, or approximately a 9% rate reduction. Consumers Energy
believes these savings should be used first to correct cross-subsidization
issues within and between customer rate classes, with any remaining amount
spread to all customer classes.
- ---------------------
(8)A dispute between the two companies concerning the future of MECS
is currently under review by the FERC. FERC Docket Nos. OA97-258-000 and
ER97-1168-000, and OA97-472-000 and ER97-1023-000. Detroit Edison is
seeking dissolution of MECS, effective as early as April 30, 1997.<PAGE>
<PAGE> -44-
G. Performance-Based Ratemaking Mechanism
The Staff Report contains an excellent discussion of a
performance-based approach to the regulation of transmission and
distribution services. Because of the importance of maintaining reliable,
high quality service, it will clearly be necessary to make substantial
expenditures to continue to operate and maintain the Company's
transmission and distribution system. The indexing approach recommended
in the Staff Report recognizes that such expenditures will be necessary
and that it would be desirable to develop non-traditional incentives which
will encourage the utility to deliver high quality service at a reasonable
cost.
As part of its endorsement of the Staff Report, the Commission
should explicitly approve performance-based ratemaking proposals which:
(a) apply to non-generation rates, (b) provide adequate incentives for the
maintenance of transmission/distribution service quality and reliability,
and (c) provide for annual increases in non-generation rates which do not
exceed the percentage increase in the Consumers Price Index ("CPI"), less
one percent.
H. Obligation To Serve
The restructuring of the electric industry requires that the
electric utility's obligation to provide service be substantially
redefined. The Commission should adopt the following principles:
(1) Except as otherwise stated below, the generation of
electricity will no longer be regulated as a public utility function
or service. The provision of electric generation service will be a
matter of contract between a retail customer and a generation
supplier (or aggregator).
(2) A company supplying transmission and distribution services
will, subject to technical and operational constraints, have an
obligation to provide transmission and<PAGE>
<PAGE> -45
distribution services to all retail customers within its service territory
at rates and on terms and conditions authorized by the appropriate
regulatory authority.(9)
(3) Through December 31, 2000 for retail customers served at
primary voltage levels, and through December 31, 2003 for retail
customers served at secondary voltage levels, existing electric
public utilities will have the obligation to provide generation
service.
(4) After the dates stated in paragraph 3, a company supplying
transmission and distribution services will have the obligation to
procure generation services, to the extent sufficient generation
supplies are available, for retail customers who fail to make
alternative arrangements for generation service and who request the
company to procure such generation supply. This obligation does not,
however, require the company to build generating capacity or to enter
into long term power purchase agreements. The pricing for such
service will be market-based (i.e., current market price plus an
appropriate adder).
(5) Through December 31, 2000, a company supplying transmission
and distribution services will have an obligation to provide standby
generation service to retail direct access customers. As of
January 1, 2001, this obligation is terminated, and the provision of
standby service will be a matter of contract between a retail
customer and a generation supplier.
I. Reciprocity
Reciprocity is another critical element of the Staff
restructuring plan. Without strong reciprocity requirements, there can be
no fair, competitive generation market, and, as noted previously,
stranded/transition costs would be dramatically increased. Because the
arguments in favor of reciprocity have been put before the Commission in
other proceedings, Consumers Energy will not repeat those arguments in
this Response. The Commission should, however, endorse the following
principles:
(1) No electric utility operating in Michigan should be
permitted to utilize the transmission and distribution system of
another Michigan utility to make retail sales unless the utility
wishing to make the sale provides comparable direct access to retail
customers located within its service territory.
- ---------------------
(9)To the extent transmission system expansions or upgrades are
necessary, prompt and reasonable rate recognition of the associated
investment is critical.<PAGE>
<PAGE> -46-
(2) No generation supplier that also provides retail
distribution services, or that has an affiliate that provides retail
distribution services, should be permitted to utilize the
transmission and distribution system of a Michigan utility to make
retail sales unless the supplier or its affiliate provides a
comparable retail direct access service. If the transaction involves
an intermediary (such as a marketer or broker), the reciprocity
obligation could be satisfied by either the regional
transmission/distribution affiliate of the intermediary, or by the
owner of the generation source or its regional
transmission/distribution affiliate.
(3) A "comparable" retail direct access service is one which
(i) provides for retail direct access in an amount of retail customer
load which is equivalent to that provided by the transmission and
distribution company, (ii) specifies rates, terms and conditions that
are equivalent to those offered by the transmission and distribution
company, and that have been approved by all applicable regulatory
authorities for use in retail direct access transactions.
(4) "Sham" transactions should not be permitted to avoid the
reciprocity condition.
J. Creation of an Independent System Operator
Consumers Energy and other Michigan transmission-owning
utilities should proceed with the development of an ISO.
IV. CONCLUSION
As noted in Consumers Energy's January 21 Comments, the Company
believes that the industry restructuring framework set forth in the Staff
Report is a reasoned approach which is fair to all stakeholders. The
additional information provided in this Response should provide the
Commission with the necessary data to satisfy itself that the
recommendations contained in the Staff Report are indeed in the public
interest. Consumers Energy encourages the Commission to take the steps
necessary to allow these recommendations to be implemented.
Contrary to the apparent contentions of other parties(10),
Consumers Energy does not believe that throwing this process into further
hearings is likely to prove to be a satisfactory
- ---------------------
(10)See e.g., the Joint Request For Contested Case Hearings filed by
the Attorney General, ABATE and the Residential Ratepayer Consortium on
February 21, 1997.<PAGE>
<PAGE> -47-
means of implementing industry restructuring. The Commission has properly
been proceeding thus far in a manner which allows all parties to comment
upon each aspect of the restructuring proposal, and to that end, has
already held public hearings and received written comments on the Staff
Report. Following the filing of this Response, the Commission has
scheduled additional public hearings and has provided an additional
opportunity for written comments on the information contained in this
Response. As of April 7, 1997 (when the written comments of other
interested persons are due), no one will be able to credibly complain that
they have not had a fair opportunity to express their views on the issues
raised by the Staff Report.
To allow this process to become bogged down in potentially
extraordinarily extended additional hearings at this time would, in the
opinion of Consumers Energy, be a significant mistake. It would make it
virtually impossible for the Commission to influence or be of any
assistance to the Legislature in 1997 as it begins its consideration of
utility restructuring. Indeed, during (and because of) the pendency of
the requested contested case hearings, the Commission's ability to
influence the public debate over utility restructuring at all would be
minimal. Commencing hearings would also postpone any possibility of
implementing any portion of the Staff plan in 1997, and probably for an
extended period thereafter. The Commission should be very reluctant to
initiate hearings that are sure to be lengthy, contentious, and in the
end, unlikely to produce materially different information than the
Commission already possesses.
As stated in the Introduction of this Response, Consumers Energy
believes that the Commission can and should take strong, productive action
in response to the information provided in this Response and by other
interested parties. Upon completing its analysis of the information it
has solicited, Consumers Energy believes the Commission should (i) issue
an order endorsing the restructuring plan set forth in the Staff Report,
as that plan has been further developed in this Response, (ii) include in
that order a recommendation to the Legislature that it enact legislation
which is consistent with that plan, and (iii) accept the Company's offer
of voluntary implementation.
Consumers Energy stands ready to proceed with the initial
implementation of the MPSC Staff restructuring plan, subject to the
Commission taking the steps outlined above, and subject to the Commission
approving the entirety of the implementation plan which is described in
this Response. In addition, because of the importance of gaining
legislative authorization of the restructuring plan, the Company's
willingness to voluntarily implement this plan would cease as of December
31, 1997, unless satisfactory utility restructuring legislation has been
enacted by that date. While there may well be alternative routes to
achieving utility industry restructuring besides what is described in the
Staff Report and in this Response, Consumers Energy doubts that there are
any that offer as great a likelihood of successful and expeditious
implementation.
Respectfully submitted,
CONSUMERS ENERGY COMPANY
Dated: March 7, 1997 By /s/ David W. Joos
----------------------------------
David W. Joos
Executive Vice President and
Chief Operating Officer - Electric
/s/ Jon Robinson
- -------------------------------
David A. Mikelonis
Jon R. Robinson
212 West Michigan Avenue
Jackson, MI 49201
Attorneys for Consumers Energy
Company
<PAGE>
