FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares outstanding of each of the issuer's classes of common stock
at July 31, 1998:
CMS Energy Corporation:
CMS Energy Common Stock, $.01 par value 101,838,224
CMS Energy Class G Common Stock, no par value 8,355,817
Consumers Energy Company, $10 par value, privately
held by CMS Energy 84,108,789
<PAGE>
CMS Energy Corporation
and
Consumers Energy Company
Quarterly reports on Form 10-Q to the Securities and Exchange
Commission
for the Quarter Ended June 30, 1998
This combined Form 10-Q 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
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis . . . . . . . . . . . . . . . 8
Consolidated Statements of Income. . . . . . . . . . . . . . . . . 23
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . 27
Consolidated Statements of Common Stockholders' Equity . . . . . . 28
Condensed Notes to Consolidated Financial Statements . . . . . . . 29
Report of Independent Public Accountants . . . . . . . . . . . . . 47
Consumers Energy Company
Management's Discussion and Analysis . . . . . . . . . . . . . . . 48
Consolidated Statements of Income. . . . . . . . . . . . . . . . . 57
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . 58
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . 59
Consolidated Statements of Common Stockholder's Equity . . . . . . 61
Condensed Notes to Consolidated Financial Statements . . . . . . . 62
Report of Independent Public Accountants . . . . . . . . . . . . . 72
Quantitative and Qualitative Disclosures about Market Risk . . . . . 73
PART II:
Item 1.. . . . . . . . . . . . . . . . . . . . . . Legal Proceedings 73
Item 6.. . . . . . . . . . . . . . .Exhibits and Reports on Form 8-K 74
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
<PAGE> 3
GLOSSARY
Certain terms used in the text and financial statements are
defined below.
ABATE. . . . . . . . . . . . . . Association of Businesses Advocating
Tariff Equity
ALJ. . . . . . . . . . . . . . . Administrative Law Judge
Ames . . . . . . . . . . . . . . Crescent and Ames gas gathering systems
and processing plant in Oklahoma
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
CFLCL. . . . . . . . . . . . . . Companhia Forcia e Luz Cataguazes-Leopoldina,
a Brazilian utility
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
CMS Electric and Gas . . . . . . CMS Electric and Gas 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, 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
Detroit Edison . . . . . . . . . The Detroit Edison Company
DOE. . . . . . . . . . . . . . . U.S. Department of Energy
Dow. . . . . . . . . . . . . . . The Dow Chemical Company
DSM. . . . . . . . . . . . . . . Demand-side management
Enterprises. . . . . . . . . . . CMS Enterprises Company, a subsidiary of
CMS Energy
EPA. . . . . . . . . . . . . . . Environmental Protection Agency
EPS. . . . . . . . . . . . . . . Earning per share
FASB . . . . . . . . . . . . . . Financial Accounting Standards Board
FERC . . . . . . . . . . . . . . Federal Energy Regulatory Commission
FMLP . . . . . . . . . . . . . . First Midland Limited Partnership
GCR. . . . . . . . . . . . . . . Gas cost recovery
Grand Lacs partnership . . . . . Grand Lacs Limited Partnership, a marketing
center for natural gas
GTNs . . . . . . . . . . . . . . CMS Energy General Term Notes , $250
million Series A, $125 million Series B,
$150 million Series C and $200 million
Series D
Huron . . . . . . . . . . . . . Huron Hydrocarbons, Inc., a subsidiary
of Consumers
Jorf Lasfar. . . . . . . . . . . A 1,320 MW coal-fueled power plant in
Morocco, Africa, jointly owned by CMS
Generation and ABB Energy Venture, Inc.
kWh. . . . . . . . . . . . . . . Kilowatt-hour
LIHEAP . . . . . . . . . . . . . Low Income Home Energy Assistance
Program
Loy Yang . . . . . . . . . . . . The 2,000 MW brown coal fueled Loy Yang
A power plant and an associated coal
mine in Victoria, Australia, in which
CMS Generation holds a 50 percent
ownership interest
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 in which Consumers has a 49
percent interest through CMS Midland
MD&A . . . . . . . . . . . . . . Management's Discussion and Analysis
MichCon. . . . . . . . . . . . . Michigan Consolidated Gas Company
Michigan Gas Storage . . . . . . Michigan Gas Storage Company, a
subsidiary of Consumers
Mbbls. . . . . . . . . . . . . . Thousand barrels
MMbbls . . . . . . . . . . . . . Million barrels
MMBtu. . . . . . . . . . . . . . Million British thermal unit
MMcf . . . . . . . . . . . . . . Million cubic feet
Moss Bluff . . . . . . . . . . . Moss Bluff Gas Storage Systems, a
partnership that owns a gas storage
facility
MPSC . . . . . . . . . . . . . . Michigan Public Service Commission
MW . . . . . . . . . . . . . . . Megawatts
Natural Gas Act. . . . . . . . . Federal Natural Gas Act
NGL. . . . . . . . . . . . . . . Natural gas liquids
Nitrotec . . . . . . . . . . . . Nitrotec Corporation, a propriety gas
technology company in which CMS Gas
Transmission owns an equity interest
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
PCBs . . . . . . . . . . . . . . Poly chlorinated 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
Qualifying Facility. . . . . . . A facility that produces electricity or
steam and electricity and meets the
ownership and technical requirements of
PURPA
Retained Interest Shares . . . . Authorized but unissued shares of Class
G Common Stock not held by holders of
the Outstanding Shares and attributable
to the Retained Interest
SEC. . . . . . . . . . . . . . . Securities and Exchange Commission
Securitization . . . . . . . . . A financing authorized by statute in
which the statutorily assured flow of
revenues from a portion of the rates
charged by a utility to its customers is
set aside and pledged as security for
the repayment of rate reduction bonds
issued by a special purpose entity
affiliated with such utility
SERP . . . . . . . . . . . . . . Supplemental Executive Retirement Plan
Senior Credit Facilities . . . . $1.125 billion senior credit facilities
consisting of a $400 million 364-day
revolving credit facility, a $600
million three-year revolving credit
facility and a five-year $125 million
term loan facility
SFAS . . . . . . . . . . . . . . Statement of Financial Accounting
Standards
Superfund. . . . . . . . . . . . Comprehensive Environmental Response,
Compensation and Liability Act
TGN. . . . . . . . . . . . . . . Transportadora de Gas del Norte S. A., a
natural gas pipeline located in
Argentina
Transition Costs . . . . . . . . Costs incurred by utilities in order to
serve their customers in a regulated
monopoly environment, but which may not
be recoverable in a competitive
environment because of customers leaving
their systems and ceasing to pay for
their costs. These costs could include
owned and purchased generation,
regulatory assets, and costs incurred in
the transition to competition.
Trust Preferred Securities . . . Undivided beneficial interest in the
assets of statutory business trusts,
these interests have a preference with
respect to certain trust distributions
over the interests of either CMS Energy
or Consumers, as applicable, as owner of
the common beneficial interests of the
trusts
Union. . . . . . . . . . . . . . Utility Workers of America, AFL-CIO
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
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<PAGE> 8
CMS Energy Corporation
Management's Discussion and Analysis
The MD&A of this Form 10-Q should be read along with the MD&A and
other parts of CMS Energy's 1997 Form 10-K and the restated
financial information in a Form 8-K dated July 30, 1998. This MD&A
also refers to, and in some sections specifically incorporates by
reference from, CMS Energy's Condensed Notes to Consolidated
Financial Statements and should be read in conjunction with such
Statements and Notes. This report contains forward-looking
statements, as defined by the Private Securities Litigation Reform
Act of 1995, that include without limitation, discussions as to
expectations, beliefs, plans, objectives and future financial
performance, or assumptions underlying or concerning matters
discussed in this report. Refer to the Forward-Looking Information
section of this MD&A for 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 is a combination electric and gas utility
company serving the Lower Peninsula of Michigan and 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: acquisition,
development and operation of independent power production
facilities; oil and gas exploration and production; storage,
transmission and processing of natural gas; energy marketing,
services and trading; and international energy distribution.
RESULTS OF OPERATIONS
CMS Energy Consolidated Earnings
In Millions, Except Per Share Amounts
June 30 1998 1997(b) Change
------- ------ -------
Three months ended
Consolidated Net Income $ 65 $ 47 $ 18
Net Income Attributable
to Common Stocks:
CMS Energy 64 45 19
Class G 1 2 (1)
Earnings Per Average Common Share:
CMS Energy
Basic .63 .48 .15
Diluted .62 .48 .14
Class G
Basic and Diluted .12 .16 (.04)
Six months ended (a)
Consolidated Net Income $153 $125 $ 28
Net Income Attributable to
Common Stocks:
CMS Energy 143 114 29
Class G 10 11 (1)
Earnings Per Average Common Share:
CMS Energy
Basic 1.42 1.21 .21
Diluted 1.39 1.20 .19
Class G
Basic and Diluted 1.20 1.34 (.14)
Twelve months ended (a)
Consolidated Net Income $272 $218 $ 54
Net Income Attributable to
Common Stocks:
CMS Energy 258 206 52
Class G 14 12 2
Earnings Per Average Common Share:
CMS Energy
Basic 2.60 2.19 .41
Diluted 2.57 2.18 .39
Class G
Basic and Diluted 1.71 1.52 .19
====== ===== =====
(a) Includes the cumulative effect of an accounting change for
property taxes which increased net income attributable to CMS
Energy Common Stock $43 million ($.40 per share - basic and
diluted) and Class G Common Stock $12 million ($.36 per share -
basic and diluted). Refer to the discussion below for further
information.
(b) Restated as a result of change in method of accounting for
investments in oil and gas properties. Refer to the discussion
below and Note 1 for further information.
The combined effects of the changes in accounting for oil and gas
investments resulted in decreases to net income of $7 million ($.07
per share), $13 million ($.13 per share) and $22 million ($.24 per
share) for the three months, six months and twelve months ended
June 30, 1997, respectively. The following discussion of earnings
variations compares the results of this year's periods to the
restated results of last year's periods.
CMS Energy's earnings for the second quarter of 1998 increased from
the comparable period in 1997 as a result of (1) an increase in
earnings from international independent power production plant
operations and from the MCV Partnership and a gain on the sale of
a biomass project power purchase agreement, and (2) lower operating
expenses, higher oil volumes and gas prices, partially offset by
lower oil prices in the oil and gas exploration and production
business. Partially offsetting these increases were (1) lower
earnings from the international energy distribution business due to
losses incurred in new project investments and higher operating
expenses and (2) increased interest on long-term debt due to higher
amounts of debt outstanding.
CMS Energy's earnings for the six months ended June 30, 1998
increased from the comparable period in 1997 as a result of (1)
Consumers' one-time change in accounting for the recognition of
property tax expense from a calendar-year basis to a fiscal-year
basis which resulted in a benefit of $66 million ($43 million
after-tax), (2) Consumers' increased electric sales partially
offset by increased operating and maintenance expenses, (3) a gain
on the sale of Petal Gas Storage Company by the gas transmission,
storage and processing business, (4) increased income from the
international independent power production business and from the
MCV Partnership, and a gain on the sale of a biomass project power
purchase agreement, and (5) lower oil and gas exploration and
production operating expenses. Partially offsetting these
increases were (1) Consumers' decreased gas deliveries due to
record warm 1998 temperatures, (2) an increased provision for
underrecoveries under the PPA of $37 million ($24 million after-tax)
due to higher than expected plant availability of the MCV
Facility, (3) lower earnings from international energy distribution
businesses and (4) increased interest on long-term debt due to
higher amounts of debt outstanding. For further information on
past and future underrecoveries under the PPA, see Power Purchases
from the MCV Partnership in Note 2.
The increase in consolidated net income for the twelve months ended
June 30, 1998 compared to the same period in 1997 reflects (1)
Consumers' change in accounting for property taxes as discussed
above and a $9 million adjustment of Consumers' prior years'
income taxes associated with non-taxable earnings on nuclear
decommissioning trust funds, (2) Consumers' increased electric
sales partially offset by increased operating and maintenance
expenses, (3) an increase in international plants earnings and
operating fees from the independent power production business,
increased earnings from the MCV Partnership, and a gain on the
sale of a biomass project power purchase agreement, (4) a gain on
the sale of Petal Gas Storage Company and a gain on the sale of
Australian gas reserves in the gas transmission, storage and
processing business and (5) an increase in oil production and
recognition of a gain on the sale of CMS NOMECO's entire interest
in oil and gas properties in Yemen. Partially offsetting these
increases were the (1) recognition of Consumers' after-tax loss
associated with the underrecovery of power costs under the PPA as
discussed above, (2) Consumers' decreased gas deliveries due to
warmer weather during the first half of 1998 (3) lower oil prices
in the oil and gas exploration and production business, (4) a
scheduled decrease in the industry expertise service fee income
earned in connection with Loy Yang and (5) increased interest on
long-term debt due to higher amounts of debt outstanding.
For further information, see the individual results of operations
for each CMS Energy business segment in this MD&A.
Consumers' Electric Business Unit Results of Operations
Electric Pretax Operating Income:
In Millions
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997 1998 vs 1997
----------- -------------- ------------
Sales (including special
contract discounts) $ 5 $ 12 $ 12
Other non-commodity revenue 1 (1) -
Operations and maintenance 1 10 35
General taxes and depreciation (4) (5) (18)
----- ----- -----
Total change $ 3 $ 16 $ 29
===== ===== =====
Electric Deliveries: Total electric deliveries increased 8.0
percent for the three months ended June 30, 1998 over the same
period in 1997. The increase includes a 2.9 percent increase in
deliveries to ultimate customers, primarily within the commercial
and industrial classes, and a 5.1 percent increase in intersystem
and wholesale customer deliveries. For the six months ended
June 30, 1998, total electric deliveries increased 7.2 percent over
the comparable 1997 period. Deliveries to ultimate customers were
up 2.1 percent, mainly from increased deliveries to commercial and
industrial classes, with the remaining 5.1 percent attributable to
an increase in sales between utility systems and wholesale
deliveries. For the twelve months ended June 30, 1998, total
electric deliveries increased 5.3 percent over the comparable 1997
period. The increase is primarily attributable to an increase in
intersystem deliveries and a 1.3 percent increase in deliveries to
ultimate customers, primarily within the industrial class.
Power Costs:
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 312 $ 270 $ 42
Six months ended 583 552 31
Twelve months ended 1,170 1,119 51
===== ===== =====
Power costs increased for all the reported periods ended June 30,
1998 compared to 1997. Both internal generation and power
purchases from outside sources increased during these periods to
meet increased sales demand.
Uncertainties: CMS Energy's financial position may be affected by
a number of trends or uncertainties that have had, or CMS Energy
reasonably expects will have a materially favorable or unfavorable
impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties are: 1) environmental liabilities
arising from compliance with various federal, state and local
environmental laws and regulations, including potential liability
or expenses relating to the Michigan Natural Resources and
Environmental Protection Act and Superfund; 2) capital expenditures
for compliance with the Clean Air Act; 3) suits by various parties
relating to the effect of so-called stray voltage on certain
livestock; 4) suits by two independent power producers alleging
antitrust violations and economic losses due to special electric
contracts signed by Consumers; 5) cost recovery relating to the MCV
Facility, nuclear plant investments and an experimental direct-access
program; 6) electric industry restructuring; 7) after-tax
cash underrecoveries associated with power purchases from the MCV
Partnership; and 8) Big Rock decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life
of Palisades. For detailed information about these trends or
uncertainties see Note 2, "Consumers' Electric Business Unit
Contingencies-Electric Environmental Matters", "Consumers' Electric
Business Unit Contingencies-Stray Voltage", "Consumers' Electric
Business Unit Contingencies-Anti-Trust", "Other Consumers' Electric
Business Unit Uncertainties-Power Purchases from the MCV
Partnership", "Consumers' Electric Business Unit Rate Matters-
Electric Restructuring", "Consumers' Electric Business Unit Rate
Matters-Electric Proceedings" and " Other Consumers' Electric
Business Unit Uncertainties-Nuclear Matters", incorporated by
reference herein.
For information about Consumers' electricity option contracts, see
Note 5, "Risk Management Activities and Derivatives Transactions-Commodity
Price Hedges", incorporated by reference herein.
Consumers Gas Group Results of Operation
In Millions
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997 1998 vs 1997
------------- ----------- -----------
Sales $ (5) $(18) $(21)
Gas wholesale and
retail service activities - (3) (6)
Operations and maintenance (1) (9) 6
General taxes, depreciation
and other 4 4 5
----- ----- -----
Total change $ (2) $(26) $(16)
===== ===== =====
Gas Deliveries: System deliveries for the three month period ended
June 30, 1998, including miscellaneous transportation, totaled 61
bcf, a decrease of 15 bcf or 19 percent compared to the three month
period ended June 30, 1997. Deliveries for the six month period
ended June 30, 1998, including miscellaneous transportation,
totaled 208 bcf, a decrease of 37 bcf or 15 percent compared to the
six month period ended June 30, 1997. For the twelve month period
ended June 30, 1998, deliveries including miscellaneous
transportation, totaled 383 bcf, a decrease of 41 bcf or 10 percent
compared to the twelve month period ended June 30, 1997. The
decreased deliveries for three month, six month and twelve month
periods ended reflect warmer temperatures primarily for the first
quarter of 1998.
Cost of Gas Sold:
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 74 $118 $ (44)
Six Months ended 338 432 (94)
Twelve months ended 600 729 (129)
===== ===== =====
The cost decreases for the three month, six month and twelve month
periods ended June 30, 1998 were the result of decreased sales and
lower gas costs reflecting warmer temperatures during the winter
heating seasons.
Uncertainties: CMS Energy's financial position may be affected by
a number of trends or uncertainties that have had, or CMS Energy
reasonably expects will have, a materially favorable or unfavorable
impact on net sales or revenues or income from continuing gas
operations. Such uncertainties are: 1) potential environmental
costs at a number of sites including sites formerly housing
manufactured gas plant facilities; 2) ongoing litigation relating
to a pricing dispute with gas producers; and 3) a statewide
experimental gas transportation pilot program. For detailed
information about these uncertainties see Note 2, "Consumers' Gas
Group Contingencies-Gas Environmental Matters", "Consumers' Gas
Group Matters-GCR Matters", and "Consumers' Gas Group Matters-Gas
Restructuring", incorporated by reference herein.
For information about Consumers' gas forward contracts, see Note 5,
"Risk Management Activities and Derivatives Transactions-Commodity
Price Hedges", incorporated by reference herein.
Independent Power Production Results of Operations
Pretax Operating Income: Pretax operating income for the three
months ended June 30, 1998 increased $25 million (100 percent) over
the comparable period in 1997. This increase primarily reflects
increased operating income from international plants earnings and
fees, increased earnings from the MCV Partnership, lower net
operating expenses and a $12 million gain on the sale of a biomass
project power purchase agreement. Pretax operating income for the
six months ended June 30, 1998 increased $31 million (89 percent)
over the comparable period in 1997, primarily reflecting an
increase in international plants earnings and operating fees,
increased earnings from the MCV Partnership and a $12 million gain
on the sale of a biomass project power purchase agreement. Pretax
operating income for the twelve months ended June 30, 1998
increased $57 million (81 percent) from the comparable period in
1997, primarily reflecting increased operating income resulting
from increased international earnings, construction management fees
earned in connection with Jorf Lasfar, increased earnings from the
MCV Partnership and a $12 million gain on the sale of a biomass
project power purchase agreement, partially offset by lower
industry expertise service fee income earned in connection with Loy
Yang.
Oil and Gas Exploration and Production Results of Operations
Pretax Operating Income: Pretax operating income for the three
months ended June 30, 1998 increased $4 million (133 percent) from
the comparable period in 1997. This increase is the result of
higher oil production, higher gas prices and decreased exploration
expenses, partially offset by sharply lower oil prices. Pretax
operating income for the six months ended June 30, 1998 increased
$6 million (200 percent) over the comparable period in 1997 due to
lower exploration expenses, increased oil production and higher gas
prices, partially offset by reduced oil prices. Pretax operating
income for the twelve months ended June 30,1998 increased $14
million (78 percent) from the comparable period in 1997, primarily
due to increased oil production, lower exploration expenses and a
gain on the sale of CMS NOMECO's entire interest in oil and gas
properties in Yemen, partially offset by sharply lower oil prices
and decreased gas production.
CMS NOMECO changed its method of accounting effective January 1,
1998 for oil and gas operations from the full cost method to the
successful efforts method. CMS NOMECO believes that the successful
efforts method will minimize asset write-offs caused by periodic
price swings, which may not be representive of overall or long-term
markets, and will allow its results of operations to be more easily
compared to other oil and gas companies. Nitrotec Corporation, in
which CMS Gas Transmission has an equity investment, also elected
to convert effective January 1, 1998 from the full cost method of
accounting to the successful efforts method of accounting. All
prior period financial statements have been restated to conform
with successful efforts accounting. The effect, after tax, of the
change in accounting method as of December 31, 1997, was a
reduction to retained earnings of $175 million for CMS NOMECO and
$15 million for CMS Gas Transmission, primarily attributable to a
decrease in net plant and property and deferred tax liability of
$270 million and $95 million, respectively, for CMS NOMECO and a
$15 million decrease in CMS Gas Transmission's equity investment in
Nitrotec Corporation. The combined effects of the changes in
accounting method resulted in an increase in net income of $5
million ($.06 per share) for the three months ended March 31, 1998,
and a decrease of $6 million ($.06 per share) for the three months
ended March 31, 1997; see Note 6.
Natural Gas Transmission, Storage and Processing Results of Operations
Pretax Operating Income: Pretax operating income for the three
months ended June 30, 1998 increased $2 million (29 percent) over
the comparable period in 1997, primarily as a result of a gain on
the sale of Australian gas reserves, lower operating expenses and
higher earnings from domestic and international operations. Pretax
operating income for the six months ended June 30, 1998 increased
$6 million (38 percent) over the comparable 1997 period primarily
reflecting a gain in the first quarter of 1998 on the sale of Petal
Gas Storage Company, a gain on the sale of Australian gas reserves,
and lower operating expenses, partially offset by a gain in the
first quarter of 1997 on the sale of a portion of the Ames gas
gathering system. Pretax operating income for the twelve months
ended June 30, 1998 increased $9 million (38 percent) over the
comparable period in 1997, reflecting a gain on the sale of Petal
Gas Storage Company, a gain on the sale of Australian gas reserves,
and increased earnings attributable to domestic and international
operations.
Marketing, Services and Trading Results of Operations
Pretax Operating Income: CMS MST's 1998 results compared to prior
year reflect management's substantial and continued commitment of
resources to develop and capture the opening of the electric and
energy management markets.
Wholesale electric marketing volumes reached 3,384,000 MW for the
six months ended June 30, 1998 compared to none for the comparable
period in 1997. Pretax operating income for the twelve months
ended June 30, 1998 decreased $8 million from the comparable period
in 1997, primarily reflecting lower gas margins and higher costs
reflecting management's continuing commitment to future electric
and energy management growth. Gas marketed for end users totaled
156 bcf and 79 bcf for the six months ended June 30, 1998 and 1997,
respectively. Energy management service revenues for the six
months ended June 30, 1998 increased 80 percent over the comparable
1997 period.
Market Risk Information
CMS Energy is exposed to market risk including, but not limited to,
changes in interest rates, currency exchange rates, and certain
commodity and equity prices. Derivative instruments including, but
not limited to, futures contracts, swaps, options and forward
contracts may be used to manage these exposures. Derivatives are
principally used as hedges and not for trading purposes. During the
second quarter of 1998, trading activities were immaterial. In the
case of hedges, management believes that any losses incurred on
derivative instruments used as a hedge would be offset by the
opposite movement of the underlying hedged item.
Management uses commodity futures contracts, options and swaps
(which require a net cash payment for the difference between a
fixed and variable price) and oil swaps to manage commodity price
risk. They also use forward exchange contracts to hedge certain
receivables, payables and long-term debt relating to foreign
investments. Management also uses equity investments in which
CMS Energy or its subsidiaries hold less than a 20 percent
interest. These commodity, financial and equity instruments do not
expose CMS Energy to material market risk.
Interest Rate Risk: Management uses a combination of fixed-rate
and variable-rate debt to reduce interest rate exposure. Interest
rate swaps and rate locks may be used to adjust exposure when
deemed appropriate, based upon market conditions. These strategies
attempt to provide and maintain the lowest cost of capital. The
carrying amount of long-term debt (including current maturities)
was $4.4 billion at June 30, 1998 with a fair value (including
current maturities) of $4.4 billion. The fair value of
CMS Energy's financial derivative instruments at June 30, 1998,
with a notional amount of $803 million, was $2 million,
representing the amount that CMS Energy would have paid to
terminate these agreements on June 30, 1998. In accordance with SEC
disclosure requirements, CMS Energy performed a sensitivity
analysis. The analysis assesses the potential loss in fair value,
cash flows and earnings based upon hypothetical increases and
decreases in market interest rates. A hypothetical 10 percent
adverse shift in market rates in the near term would not have a
material impact on CMS Energy's consolidated financial position,
results of operations or cash flows as of June 30, 1998.
Limitations of the Sensitivity Model: Management does not believe
that a sensitivity analysis alone provides an accurate or reliable
method for monitoring and controlling risk. Therefore, CMS Energy
and its subsidiaries rely on the experience and judgement of senior
management and traders to revise strategies and adjust positions as
they deem necessary. Losses in excess of the amounts determined
could occur if market rates or prices exceed the 10 percent shift
used for the analysis. The model assumes that the maximum exposure
associated with purchased options is limited to premiums paid. The
model assumes that the Trust Preferred Securities are not converted
into CMS Energy Common Stock. If the conversion occurred, the $173
million of Trust Preferred Securities would be discharged through
the issuance of 4.2 million shares of CMS Energy Common Stock. The
model also does not quantify short-term exposure to hypothetically
adverse price fluctuations in inventories.
For a discussion of accounting policies related to derivative
transactions, see Note 5.
CAPITAL RESOURCES AND LIQUIDITY
Cash Position, Investing and Financing
CMS Energy's primary ongoing source of operating cash is dividends
from subsidiaries. In the second quarter of 1998, Consumers paid
a $50 million common dividend to CMS Energy. In July 1998,
Consumers declared a $44 million common dividend to be paid in
August 1998. In the first quarter of 1998, Enterprises paid
common dividends and other distributions of $34 million to
CMS Energy. CMS Energy's consolidated operating cash requirements
are further met by its operating and financing activities.
Operating Activities: CMS Energy's consolidated net cash provided
by operating activities is derived mainly from the sale and
transportation of natural gas by Consumers; the generation,
transmission, and sale of electricity by Consumers; the sale of oil
and natural gas by CMS NOMECO; the transportation, storage and
processing of natural gas by CMS Gas Transmission; and the
production and sale of electricity by other affiliates.
Consolidated cash from operations totaled $309 million and $358
million for the first six months of 1998 and 1997, respectively.
The $49 million decrease resulted primarily from a decrease of $47
million in Consumers' sale of accounts receivable and a $29 million
net decrease reflecting the cumulative effect of the accounting
change for property taxes and an increased provision for
underrecoveries under the PPA, both of which are noncash items.
These decreases were partially offset by increases in consolidated
net income and deferred income taxes. CMS Energy uses its
operating cash primarily to expand its international businesses, to
maintain and expand electric and gas systems of Consumers, to
retire portions of its long-term debt and to pay dividends.
Investing Activities: CMS Energy's consolidated net cash used in
investing activities totaled $467 million and $912 million for the
first six months of 1998 and 1997, respectively. The decrease of
$445 million primarily reflects decreased investments in
international projects. CMS Energy's 1998 expenditures for its
utility and international businesses were $181 million and $292
million, respectively, compared to $171 million and $711 million,
respectively, during 1997.
Financing Activities: CMS Energy's consolidated net cash provided
by financing activities totaled $319 million and $549 million for
the first six months of 1998 and 1997, respectively. The decrease
of $230 million in net cash provided by financing activities
resulted from an $800 million increase in the issuance of new
securities (see table below), offset by increases in the retirement
of bonds and other long-term debt ($427 million) and the repayment
of bank loans ($552 million).
In Millions
Distribution/ Principal
Month Issued Maturity Interest Rate Amount Use of Proceeds
------------ --------- ------------ ------- ---------------
CMS Energy
GTNs
Series D (1) (1) 6.8% (1) $ 104 General corporate
purposes
Extendible Tenor
Rate Adjusted
Securities January 2005 7.0% 180 Pay down
borrowings
--------
$284
Consumers
Senior Notes (2) February 2008 6.375% $250 Pay down
First
Mortgage
Bonds
Senior Notes (2) March 2018 6.875% 225 Pay down
First
Mortgage
Bonds
Senior Notes (2) May 2008 6.2%(3) 250 Pay down
First
Mortgage
Bonds and
Long-Term
Bank Debt
Senior Notes (2) June 2018 6.5%(4) 200 Pay down
First
Mortgage
Bonds and
general
corporate
purposes
Long-Term Bank Debt May 2001-2003 6.05%(5) 225 Pay down
Long-Term
Bank Debt
------------
Total through June 30, 1998 $1,434
(1) GTNs are issued from time to time with various maturities.
The rate shown herein is a weighted average interest rate.
(2) The Senior Notes are secured by Consumers' First Mortgage Bonds
issued contemporaneously in a similar amount.
(3) The interest rate may be reset in May 2003.
(4) The interest rate will be reset in June 2005.
(5) The interest rate is variable; weighted average interest rate
upon original issuance was 6.05 percent.
As of June 30, 1998, CMS Energy had an aggregate $302 million in
securities registered for future issuance and sale. CMS Energy
also has Senior Credit Facilities, unsecured lines of credit and
letters of credit as sources of funds needed to fulfill, in whole
or in part, material commitments for capital expenditures. For
detailed information, see "Short-Term and Long-Term Financing, and
Capitalization-CMS Energy" in Note 3, incorporated by reference
herein.
Consumers has FERC authorization to issue securities and
guarantees. Consumers has a credit facility, lines of credit and
a trade receivable sale program in place as anticipated sources of
funds needed to fulfill, in whole or in part, material commitments
for capital expenditures as of June 30, 1998. For detailed
information, see "Short-Term and Long-Term Financings, and
Capitalization-Consumers" in Note 3, incorporated by reference
herein.
In February and May 1998, CMS Energy declared and paid $61 million
in cash dividends to holders of CMS Energy Common Stock and $5
million in cash dividends to holders of Class G Common Stock. In
July 1998, the Board of Directors declared quarterly dividends of
$.33 per share on CMS Energy Common Stock and $.325 per share on
Class G Common Stock, payable in August 1998. This represents an
increase in the annualized dividend on CMS Energy Stock to $1.32
per share from the previous amount of $1.20 per share (a 10 percent
increase), and an increase in the annualized dividend on Class G
Common Stock to $1.30 per share from the previous dividend of $1.24
per share (a 4.8 percent increase).
Other Investing and Financing Matters: At June 30, 1998, the book
value per share of CMS Energy Common Stock and Class G Common Stock
was $17.57 and $10.92, respectively.
CMS Energy has a bank commitment through December 1998 to enter
into a $600 million credit agreement to fund investments in power
projects.
CMS Energy's $400 million, 364-day revolving credit facility
expired June 30, 1998, and was not renewed.
On August 3, 1998, CMS Energy announced the execution of a merger
agreement with Continental Natural Gas, Inc. ("CNGL"), a $185
million (assets) energy company engaged in gathering, processing,
purchasing and marketing natural gas and natural gas liquids in
Oklahoma and Texas. Approximately $65 million of CMS Energy Common
Stock will be issued to acquire 100 percent of CNGL's common stock
and approximately $90 million of CNGL debt will be assumed in the
transaction, which is intended to be accounted for as a pooling of
interests. The merger agreement is subject to ratification by the
holders of a majority of CNGL's common stock and certain regulatory
filings. The transaction is expected to close in the fourth
quarter of 1998.
The following discussions contain forward-looking statements. See
the Forward-Looking Information section of this MD&A for some
important factors that could cause actual results or outcomes to
differ materially from those discussed herein.
Capital Expenditures
Looking forward, CMS Energy estimates that capital expenditures,
including new lease commitments and investments in partnerships and
unconsolidated subsidiaries, will total $3.8 billion over the next
three years. Cash generated by operations is expected to satisfy
a substantial portion of these capital expenditures. Nevertheless,
CMS Energy will continue to evaluate capital markets in 1998 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 1998 1999 2000
----- ----- -----
Consumers electric operations (a) (b) $ 320 $ 265 $ 255
Consumers gas operations (a) 115 115 115
Independent power production 398 469 400
Oil and gas exploration and production 110 160 175
Natural gas transmission and storage 241 61 100
International energy distribution 141 125 100
Marketing, services and trading 50 25 30
----- ----- -----
$1,375 $1,220 $1,175
===== ===== =====
(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.
(b) These amounts do not include preliminary estimates for capital
expenditures possibly required to comply with recently revised
national air quality standards under the Clean Air Act. For
further information see Note 2.
CMS Energy currently plans investments from 1998 to 2000: (1) for
oil and gas exploration and production operations, primarily in
North and South America, offshore West Africa and North Africa; (2)
for independent power production operations to pursue acquisitions
and development of electric generating plants in the United States,
Latin America, Asia, Australia, the Pacific Rim region, North
Africa and the Middle East; (3) to continue development of non-utility
natural gas storage, gathering and pipeline operations of
CMS Gas Transmission, both domestic and international; (4) to
acquire, develop and expand international energy distribution
businesses; and (5) to 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.
OUTLOOK
As the deregulation and privatization of the energy industry takes
place in the United States and internationally, CMS Energy has
positioned itself to be a leading international energy
infrastructure company developing and operating energy facilities
and providing energy services in major world growth markets.
CMS Energy provides a complete range of international energy
expertise from energy production to consumption. Beyond 1998 it
intends to continue to grow its businesses by finding opportunities
to invest in additional energy infrastructures and to capitalize on
being a major, full-service energy company. CMS Energy will seek
to increase its involvement in energy projects by pursuing
opportunities in oil and gas exploration and production projects,
natural gas pipelines, storage and processing facilities, power
generation, and electric and gas distribution systems around the
world. In addition, CMS Energy will focus more on marketing energy
services and trading to take advantage of continued growth
opportunities in both the domestic and international markets.
International Operations Outlook
CMS Energy will continue to grow internationally by investing in
multiple projects in several countries
as well as by developing synergistic projects across its lines of
business. CMS Energy believes these integrated projects will
create more opportunities and greater value than individual
investments. Also, CMS Energy will achieve this growth through
strategic partnering where appropriate.
To improve the focus of its international energy businesses,
CMS Energy has separated its development efforts from the
operations of its assets. CMS Energy conducts its development
efforts from offices in four regions of the world: Dearborn,
Michigan for The Americas - Northern Hemisphere; Buenos Aires for
The Americas - Southern Hemisphere; London for Africa and the
Middle East; and Singapore for Asia.
CMS Energy's development efforts will focus on countries where
there are multiple investment opportunities across its businesses,
high energy growth expectations, defined legal and regulatory
structures, and economic policies that support private investment.
CMS Energy will continue to create value by using the extensive
knowledge and experience it has gained in the United States over
the past century, to gain competitive positions in these countries.
CMS Energy structures its investments to minimize operational and
financial risks. These risks are mitigated when operating
internationally by working with local partners, utilizing multi-lateral
financing institutions, procuring political risk insurance
and hedging foreign currency exposure where appropriate.
Consumers' Electric Business Unit Outlook
Growth: Consumers expects average annual growth of two and one-half
percent per year in electric system deliveries over the next
five years, absent the impact of restructuring on the industry and
its regulation in Michigan. Abnormal weather, changing economic
conditions, or the developing competitive market for electricity
may affect actual electric sales in future periods.
Electric Restructuring: Consumers' electric retail service is
affected by competition. To meet the challenge of competition,
Consumers entered into multi-year contracts with some of its
largest industrial customers to serve certain facilities. The MPSC
has approved these contracts as part of its phased introduction to
competition. Certain customers have the option of terminating
their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide
direct access to the interstate transmission grid for wholesale
transactions. Consumers and Detroit Edison disagree on the effect
of the orders on the Michigan Electric Power Coordination Center
pool. Consumers proposes to maintain the benefits of the pool,
through at least December 2000, while Detroit Edison contends that
the pool agreement should be terminated immediately. Among
Consumers' alternatives in the event of the pool being terminated
would be joining an independent system operator. FERC has
indicated this preference for structuring the operations of the
electric transmission grid.
As discussed in the Form 10-K, several orders were issued and
numerous appeals are pending at the Court of Appeals relating to
the restructuring of the electric utility industry since June 1997.
Consumers cannot predict the outcome or timing of these matters.
For material changes relating to the restructuring of the electric
utility industry see "Electric Business Unit Rate Matters -
Electric Restructuring" in Note 2, incorporated by reference
herein.
Electric Application of SFAS 71: Consumers 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 the generation, transmission and
distribution operations of its business in its financial
statements. Consumers believes that the generation segment of its
business is still subject to rate regulation based upon its present
obligation to continue providing generation service to its
customers, and the lack of definitive deregulation orders. 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 the generation segment of
Consumers' business. According to Emerging Issues Task Force Issue
97-4, Deregulation of the Pricing of Electricity - Issues Related
to the Application of FASB Statements No. 71 and 101, Consumers can
continue to carry its generation-related regulatory assets or
liabilities for the part of the business being deregulated if
deregulatory legislation or an MPSC rate order allows the
collection of cash flows from its regulated transmission and
distribution customers to recover these specific costs or settle
obligations. Because the February 1998 MPSC order allows Consumers
to fully recover its transition costs, Consumers believes that even
if it was to discontinue application of SFAS 71 for the generation
segment of its business, its regulatory assets, including those
related to generation, are probable of future recovery from the
regulated portion of the business. At June 30, 1998, Consumers had
$261 million of generation-related net regulatory assets recorded
on its balance sheet, and a net investment in generation facilities
of $1.3 billion included in electric plant and property. For
further information regarding electric restructuring, see
"Restructuring" above.
Consumers' Gas Group Outlook
Growth: Consumers currently anticipates gas deliveries, including
gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average annual
rate of between one and two percent over the next five years based
primarily on a steadily growing customer base. Abnormal weather,
alternative energy prices, changes in competitive conditions, and
the level of natural gas consumption may affect actual gas
deliveries in future periods. Consumers is also offering a variety
of energy-related services to its customers focused upon appliance
maintenance, home safety and home security.
In 1997, LIHEAP provided approximately $64 million in heating
assistance to about 312,000 Michigan households, with approximately
13 percent of the funds going to Consumers' customers. Congress
provided approximately $54 million in funding for Michigan for
1998. In June 1998, the House Labor, Health and Human Services
Appropriations Subcommittee voted to propose elimination of LIHEAP
for fiscal year 1999. In July 1998, the full Committee accepted
the subcommittee proposal (which eliminates LIHEAP). The full
House of Representatives is expected to vote on this bill before
October 1, 1998. Many interested parties, including the Senate
Labor and Human Resources Committee, are working to restore funding
for the program; however, Consumers cannot predict the legislative
outcome of funding for this program.
Gas Application of SFAS 71: Based on a regulated utility
accounting standard, SFAS 71, Consumers may defer certain costs to
the future and record regulatory assets, based on the
recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas
business, and believes that sufficient regulatory assurance exists
to provide for the recovery of these deferred costs.
OTHER MATTERS
New Accounting Standards
In 1998, the FASB issued SFAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This standard requires
expanded disclosure effective for 1998. Also in 1998, the American
Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which will be effective for
1999. CMS Energy does not expect the application of these
standards to materially affect its financial position, liquidity or
results of operations. In addition, in 1998, the FASB issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities,
which requires that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 is effective for fiscal years beginning after
June 15, 1999. CMS Energy has not yet quantified the impacts of
adopting SFAS 133 on its financial statements and has not
determined the timing of or method of adoption of SFAS 133.
However, SFAS 133 could increase volatility in earnings and other
comprehensive income.
Computer Modifications For Year 2000
CMS Energy uses software and related technologies throughout its
businesses that the year 2000 date change will affect and, if
uncorrected, could cause CMS Energy to, among other things, issue
inaccurate bills, report inaccurate data, or incur generating plant
outages. In 1995, CMS Energy began modifying its own computer
software systems by dividing programs requiring modification
between critical and noncritical programs. All essential program
modifications are expected to be completed by the year 2000. CMS
Energy devoted significant internal and external resources to these
modifications. It will expense anticipated spending for these
modifications as incurred, while capitalizing and amortizing the
costs for new software over the software's useful life. CMS Energy
does not expect that the cost of these modifications will
materially affect its financial position, liquidity or results of
operations. There can be no guarantee, however, that these costs,
plans or time estimates will be achieved, and actual results could
differ materially. Specific factors that may cause such material
differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and correct
all relevant computer code, and the year 2000 readiness of CMS
Energy's vendors, large customers and other third parties with whom
it does business.
Because of the integrated nature of CMS Energy's business with
other energy companies, utilities, jointly owned facilities
operated by other entities, and business conducted with suppliers
and large customers, CMS Energy may be indirectly affected by year
2000 compliance complications. At this time, CMS Energy is unable
to anticipate the magnitude of the operational or financial impact
on CMS Energy of year 2000 issues.
Foreign Currency Translation
CMS Energy adjusts common stockholders' equity to reflect foreign
currency translation adjustments for the operation of long-term
investments in foreign countries. As of June 30, 1998 the
cumulative foreign currency translation adjustment was $123 million
relating primarily to the U.S. and Australian dollar exchange rate
fluctuations related to Loy Yang. Although management currently
believes that the Australian economy is stable and does not expect
currency exchange rate fluctuations over the long term to
materially adversely affect CMS Energy's financial position,
liquidity or results of operations, CMS Energy has hedged its
exposure to the Australian dollar. CMS Energy uses forward
exchange contracts and collared options to hedge certain
receivables, payables, long-term debt and equity value relating to
foreign investments. The notional amount of the outstanding
foreign exchange contracts was $595 million at June 30, 1998, which
includes $550 million for Australian foreign exchange contracts.
Forward-Looking Information
Forward-looking information is included throughout this report.
This report also describes material contingencies in the Notes to
the Consolidated Financial Statements and should be read
accordingly.
Some important factors that could cause actual results or outcomes
to differ are set forth in CMS Energy's 1997 Form 10-K,
"Management's Discussion and Analysis, Forward-Looking
Information."
<PAGE>
(This page intentionally left blank)
<PAGE> 23
<TABLE>
CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997* 1998 1997* 1998 1997*
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Electric utility $ 649 $ 598 $1,261 $1,218 $2,558 $2,492
Gas utility 170 220 599 718 1,085 1,242
Independent power production 75 42 119 71 216 105
Natural gas transmission, storage and processing 22 26 49 52 93 82
Oil and gas exploration and production 19 20 31 37 87 147
Marketing, services and trading 196 114 443 213 922 339
Other 1 2 4 8 9 18
------ ------ ------ ------ ------ ------
1,132 1,022 2,506 2,317 4,970 4,425
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Fuel for electric generation 85 75 164 149 334 311
Purchased power - related parties 144 146 290 297 592 600
Purchased and interchange power 88 53 142 115 270 226
Cost of gas sold 182 223 645 621 1,335 1,042
Other 248 172 460 348 853 747
------ ------ ------ ------ ------ ------
747 669 1,701 1,530 3,384 2,926
Maintenance 42 41 79 82 171 182
Depreciation, depletion and amortization 107 106 235 234 468 446
General taxes 48 48 106 109 208 206
------ ------ ------ ------ ------ ------
944 864 2,121 1,955 4,231 3,760
------ ------ ------ ------ ------ ------
Pretax Operating Income (Loss)
Electric utility 107 104 226 210 448 419
Gas utility 21 23 75 101 127 143
Independent power production 50 25 66 35 127 70
Natural gas transmission, storage and processing 9 7 22 16 33 24
Oil and gas exploration and production 7 3 9 3 32 18
Marketing, services and trading 1 - - 1 (7) 1
Other (7) (4) (13) (4) (21) (10)
------ ------ ------ ------ ------ ------
188 158 385 362 739 665
------ ------ ------ ------ ------ ------
Other Income (Deductions)
Loss on MCV power purchases - - (37) - (37) -
Accretion income 1 2 3 4 7 9
Accretion expense (4) (4) (8) (9) (17) (17)
Other, net 3 1 6 2 2 -
------ ------ ------ ------ ------ ------
- (1) (36) (3) (45) (8)
------ ------ ------ ------ ------ ------
Fixed Charges
Interest on long-term debt 78 67 154 127 300 241
Other interest 13 12 25 22 52 46
Capitalized interest (7) (4) (11) (6) (18) (9)
Preferred dividends 5 7 10 14 21 28
Preferred securities distributions 8 3 16 5 29 9
------ ------ ------ ------ ------ ------
97 85 194 162 384 315
------ ------ ------ ------ ------ ------
Income Before Income Taxes 91 72 155 197 310 342
Income Taxes 26 25 45 72 81 124
------ ------ ------ ------ ------ ------
Consolidated Net Income before cumulative
effect of change in accounting principle 65 47 110 125 229 218
Cumulative effect of change in accounting
for property taxes, net of $23 tax (Note 1) - - 43 - 43 -
------ ------ ------ ------ ------ ------
Consolidated Net Income $ 65 $ 47 $ 153 $ 125 $ 272 $ 218
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997* 1998 1997* 1998 1997*
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
Net Income Attributable to Common Stocks
CMS Energy $ 64 $ 45 $ 143 $ 114 $ 258 $ 206
Class G $ 1 $ 2 $ 10 $ 11 $ 14 $ 12
------ ------ ------ ------ ------ ------
Average Common Shares Outstanding
CMS Energy 101 95 101 95 99 94
Class G 8 8 8 8 8 8
------ ------ ------ ------ ------ ------
Basic Earnings Per Average Common Share
Before Change in Accounting Principle
CMS Energy $ .63 $ .48 $ 1.02 $ 1.21 $ 2.20 $ 2.19
Class G $ .12 $ .16 $ .84 $ 1.34 $ 1.35 $ 1.52
------ ------ ------ ------ ------ ------
Cumulative Effect of Change in Accounting
Principle, Net of Tax, Per Average
Common Share
CMS Energy $ - $ - $ .40 $ - $ .40 $ -
Class G $ - $ - $ .36 $ - $ .36 $ -
------ ------ ------ ------ ------ ------
Basic Earnings Per Average Common Share
CMS Energy $ .63 $ .48 $ 1.42 $ 1.21 $ 2.60 $ 2.19
Class G $ .12 $ .16 $ 1.20 $ 1.34 $ 1.71 $ 1.52
------ ------ ------ ------ ------ ------
Diluted Earnings Per Average Common Share
CMS Energy $ .62 $ .48 $ 1.39 $ 1.20 $ 2.57 $ 2.18
Class G $ .12 $ .16 $ 1.20 $ 1.34 $ 1.71 $ 1.52
------ ------ ------ ------ ------ ------
Dividends Declared Per Common Share
CMS Energy $ .30 $ .27 $ .60 $ .54 $ 1.20 $ 1.08
Class G $ .31 $ .295 $ .62 $ .59 $ 1.24 $ 1.18
------ ------ ------ ------ ------ ------
<FN>
* Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 25
<TABLE>
CMS Energy Corporation
Consolidated Balance Sheets
<CAPTION>
ASSETS June 30 June 30
1998 December 31 1997*
(Unaudited) 1997* (Unaudited)
In Millions
<S> <C> <C> <C>
Plant and Property (At Cost)
Electric $ 6,579 $ 6,491 $ 6,467
Gas 2,478 2,528 2,467
Oil and gas properties (successful efforts method) 1,280 1,237 1,179
Other 171 168 99
------- ------- -------
10,508 10,424 10,212
Less accumulated depreciation, depletion and amortization 5,667 5,541 5,381
------- ------- -------
4,841 4,883 4,831
Construction work-in-progress 307 261 281
------- ------- -------
5,148 5,144 5,112
------- ------- -------
Investments
Independent power production 890 792 846
Natural gas transmission, storage and processing 305 241 224
International energy distribution 259 255 65
First Midland Limited Partnership (Note 2) 247 242 237
Midland Cogeneration Venture Limited Partnership (Note 2) 189 171 148
Other 36 45 23
------- ------- -------
1,926 1,746 1,543
------- ------- -------
Current Assets
Cash and temporary cash investments at cost, which approximates market 230 69 53
Accounts receivable and accrued revenue, less allowances
of $7, $7 and $9, respectively (Note 3) 509 495 353
Inventories at average cost
Gas in underground storage 178 197 125
Materials and supplies 89 87 95
Generating plant fuel stock 35 35 28
Deferred income taxes 2 38 28
Prepayments and other 214 235 133
------- ------- -------
1,257 1,156 815
------- ------- -------
Non-current Assets
Nuclear decommissioning trust funds 521 486 443
Postretirement benefits 389 404 419
Abandoned Midland Project 83 93 103
Other 534 479 429
------- ------- -------
1,527 1,462 1,394
------- ------- -------
Total Assets $ 9,858 $ 9,508 $ 8,864
======= ======= =======
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES June 30 June 30
1998 December 31 1997*
(Unaudited) 1997* (Unaudited)
In Millions
<S> <C> <C> <C>
Capitalization
Common stockholders' equity $ 1,877 $ 1,787 $ 1,635
Preferred stock of subsidiary 238 238 356
Company-obligated mandatorily redeemable Trust Preferred Securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 -
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (b) 173 173 173
Long-term debt 4,294 3,272 3,077
Non-current portion of capital leases 78 75 89
------- ------- -------
6,880 5,765 5,430
------- ------- -------
Current Liabilities
Current portion of long-term debt and capital leases 126 643 690
Notes payable 255 382 246
Accounts payable 302 398 286
Accrued taxes 160 272 191
Accounts payable - related parties 114 80 65
Accrued interest 56 51 50
Power purchases (Note 2) 47 47 47
Accrued refunds 11 12 7
Other 178 190 171
------- ------- -------
1,249 2,075 1,753
------- ------- -------
Non-current Liabilities
Deferred income taxes 693 648 599
Postretirement benefits 504 514 524
Power purchases (Note 2) 146 133 157
Deferred investment tax credit 146 151 156
Regulatory liabilities for income taxes, net 59 54 81
Other 181 168 164
------- ------- -------
1,729 1,668 1,681
------- ------- -------
Commitments and Contingencies (Note 2)
Total Stockholders' Investment and Liabilities $ 9,858 $ 9,508 $ 8,864
======= ======= =======
<FN>
(a) The primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36 percent
subordinated deferrable interest notes due 2015 from Consumers. The primary asset of Consumers Energy Company
Financing II is $124 million principal amount of 8.20 percent subordinated deferrable interest notes due 2027 from
Consumers.
(b) The primary asset of CMS Energy Trust I is $178 million principal amount of 7.75 percent convertible subordinated
debentures due 2027 from CMS Energy.
* Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 27
<TABLE>
CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended Twelve Months Ended
June 30 1998 1997* 1998 1997*
In Millions
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Consolidated net income $ 153 $ 125 $ 272 $ 218
Adjustments to reconcile net income
to net cash provided by
operating activities
Depreciation, depletion and
amortization (includes nuclear
decommissioning of $25, $24,
$50 and $49, respectively) 235 234 468 446
Deferred income taxes and
investment tax credit 84 16 92 43
Loss on MCV power purchases 37 - 37 -
Capital lease and debt discount
amortization 29 22 51 41
Accretion expense 8 9 17 17
Accretion income - abandoned
Midland project (3) (4) (7) (9)
Cumulative effect of accounting
change for property taxes (66) - (66) -
Undistributed earnings of related
parties (34) (20) (72) (40)
Power purchases (32) (30) (64) (66)
Other 3 (6) (1) 16
Changes in other assets and
liabilities (105) 12 (152) (138)
------ ------ ------ ------
Net cash provided by operating
activities 309 358 575 528
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets
placed under capital lease) (289) (342) (625) (745)
Investments in partnerships and
unconsolidated subsidiaries (162) (534) (458) (564)
Cost to retire property, net (44) (11) (61) (31)
Investments in nuclear decommissioning
trust funds (25) (24) (50) (49)
Other (42) (14) (43) (4)
Proceeds from sale of property 68 13 104 77
Proceeds from nuclear decommissioning
trust funds 27 - 27 -
------ ------ ------ ------
Net cash used in investing
activities (467) (912) (1,106) (1,316)
------ ------ ------ ------
Cash Flows from Financing Activities
Proceeds from bank loans, notes
and bonds 1,554 581 2,187 629
Issuance of common stock 30 30 224 109
Repayment of bank loans (574) (22) (581) (31)
Retirement of bonds and other
long-term debt (476) (49) (948) (86)
Increase (decrease) in notes payable, net (127) (87) 9 138
Payment of common stock dividends (66) (56) (129) (111)
Payment of capital lease obligations (22) (21) (45) (39)
Proceeds from preferred securities - 173 113 173
Retirement of common stock - - (2) (1)
Retirement of preferred stock - - (120) -
----- ------ ------ ------
Net cash provided by financing
activities 319 549 708 781
------ ------ ------ ------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 161 (5) 177 (7)
Cash and Temporary Cash Investments,
Beginning of Period 69 58 53 60
------ ------ ------ ------
Cash and Temporary Cash Investments,
End of Period $ 230 $ 53 $ 230 $ 53
====== ====== ====== ======
Other cash flow activities and non-cash
investing and financing activities were:
Cash transactions
Interest paid (net of amounts
capitalized) $ 160 $ 135 $ 318 $ 267
Income taxes paid (net of refunds) 31 46 52 83
Non-cash transactions
Nuclear fuel placed under capital lease $ 15 $ 3 $ 16 $ 31
Other assets placed under capital leases 7 3 10 5
====== ====== ====== ======
<FN>
All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
*Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 28
<TABLE>
CMS Energy Corporation
Consolidated Statements of Common Stockholders' Equity
(Unaudited)
<CAPTION>
Three Months EndedSix Months EndedTwelve Months Ended
June 30 1998 1997* 1998 1997* 1998 1997*
In Millions
<S> <C> <C> <C> <C> <C> <C>
Common Stock
At beginning and end
of period $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
------ ------ ------ ------ ------ ------
Other Paid-in Capital
At beginning of period 2,287 2,062 2,267 2,045 2,075 1,967
Common stock reacquired - - - - (2) (1)
Common stock issued:
CMS Energy 9 12 27 28 216 104
Class G 1 1 3 2 8 5
------ ------ ------ ------ ------ ------
At end of period 2,297 2,075 2,297 2,075 2,297 2,075
------ ------ ------ ------ ------ ------
Revaluation Capital
At beginning of period (3) (6) (6) (6) (6) (8)
Change in unrealized
investment-gain
(loss) (a) (3) - - - - 2
------ ------ ------ ------- ----- ------
At end of period (6) (6) (6) (6) (6) (6)
------ ------ ------ ------- ----- ------
Foreign Currency Translation
At beginning of period (94) - (96) - - -
Change in foreign currency
translation (a) (29) - (27) - (123) -
------ ------ ------ ------ ------ ------
At end of period (123) - (123) - (123) -
------ ------ ------ ------ ------ ------
Retained Earnings (Deficit)
At beginning of period (324) (454) (379) (504) (435) (542)
Consolidated net income 65 47 153 125 272 218
Common stock dividends declared:
CMS Energy (31) (26) (61) (52) (118) (102)
Class G (2) (2) (5) (4) (11) (9)
------ ------ ------ ------- ----- ------
At end of period (292) (435) (292) (435) (292) (435)
------ ------ ------ ------- ----- ------
Total Common Stockholders'
Equity $1,877 $1,635 $1,877 $1,635 $1,877 $1,635
====== ====== ====== ===== ====== ======
(a) Disclosure of Comprehensive Income:
Revaluation capital
Unrealized investment-
gain(loss), net of tax
$2, $-, $-,$-, $- and
$(1), respectively $ (3) $ - $ - $ - $ - $ 2
Foreign currency
translation (29) - (27) - (123) -
Consolidated net income 65 47 153 125 272 218
------ ------ ------ ------ ----- ------
Total Consolidated
Comprehensive Income $ 33 $ 47 $ 126 $ 125 $ 149 $ 220
====== ====== ====== ======= ===== ======
<FN>
* Restated, see Note 1.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 29
CMS Energy Corporation
Condensed Notes to Consolidated Financial Statements
These Consolidated Financial Statements and their related Condensed Notes
should be read along with the Consolidated Financial Statements and Notes
contained in the 1997 Form 10-K and the restated financial information
in a Form 8-K dated July 30, 1998 of CMS Energy Corporation, which
include the Reports of Independent Public Accountants. Certain prior
year amounts have been reclassified to conform with the presentation in
the current year. In the opinion of management, the unaudited
information herein reflects all adjustments necessary to assure the fair
presentation of financial position, results of operations and cash flows
for the periods presented.
1: Corporate Structure, Basis of Presentation And Changes of
Significant Accounting Policies
Corporate Structure and Basis of Presentation
CMS Energy is the parent holding company of Consumers and
Enterprises. Consumers is a combination electric and gas utility
company serving the Lower Peninsula of Michigan and 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:
acquisition, development and operation of independent power
production facilities; oil and gas exploration and production;
transmission, storage, and processing of natural gas; energy
marketing, services and trading; and international energy
distribution.
CMS Energy uses the equity method of accounting for investments in
companies and partnerships where it has more than a 20 percent but
less than a majority ownership interest and includes these results
in operating income. For the three, six and twelve month periods
ended June 30, 1998, undistributed equity earnings were $17
million, $34 million and $72 million, respectively, and $9 million,
$20 million and $40 million for the three, six and twelve month
periods ended June 30, 1997.
Foreign currency translation adjustments relating to the operation
of CMS Energy's long-term investments in foreign countries are
included in common stockholders' equity. As of June 30, 1998 the
cumulative foreign currency translation adjustment was $123 million
relating primarily to the U.S. and Australian dollar exchange rate
fluctuations related to Loy Yang.
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income.
This statement, which is effective for 1998 financial statement
reporting, establishes standards for reporting and display of
comprehensive income and its components. Equity adjustments
related to unrealized investment gains and losses (net of tax) and
foreign currency translation, along with consolidated net income,
comprise comprehensive income.
Change in Method of Accounting for Property Taxes
During the first quarter of 1998, Consumers implemented a change in
the method of accounting for property taxes so that such taxes are
recognized during the fiscal period of the taxing authority for
which the taxes are levied. This change provides a better matching
of property tax expense with the services provided by the taxing
authorities, and is considered the most acceptable basis of
recording property taxes. Prior to 1998, Consumers recorded
property taxes monthly during the year following the assessment
date (December 31). The cumulative effect of this one-time change
in accounting increased other income by $66 million, and earnings,
net of tax, by $43 million or $.40 per share. The pro forma effect
on prior years' consolidated net income of retroactively recording
property taxes as if the new method of accounting had been in
effect for all periods presented is not material.
Change in Method of Accounting For Investments in Oil and Gas Properties
CMS NOMECO elected to convert effective January 1, 1998 from the
full cost method to the successful efforts method of accounting for
its investments in oil and gas properties. CMS NOMECO believes
this accounting change will more accurately present the results of
its exploration and development activities and minimize asset
write-offs caused by periodic price swings, which may not be
representative of overall or long-term markets. In addition, the
FASB has stated a preference for the use of successful efforts
accounting. Nitrotec Corporation, in which CMS Gas Transmission
has an equity investment, also elected to convert effective January
1, 1998 from the full cost method of accounting to the successful
efforts method of accounting. Accordingly, all prior period
financial statements have been restated to conform with successful
efforts accounting. The effect, after tax, of the change in
accounting method as of December 31, 1997, was a reduction to
retained earnings of $175 million for CMS NOMECO and $15 million
for CMS Gas Transmission, primarily attributable to a decrease in
net plant and property and deferred tax liability of $270 million
and $95 million, respectively, for CMS NOMECO and a $15 million
decrease in CMS Gas Transmission's equity investment in Nitrotec
Corporation. The combined effects of the changes in accounting
method resulted in an increase in net income of $5 million ($.06
per share) for the three months ended March 31, 1998, and a
decrease in net income of $6 million ($.06 per share) for the three
months ended March 31,1997; see Note 6. For the three, six and
twelve months ended June 30, 1997, the combined effects of the
changes in accounting method resulted in decreases to net income of
$7 million ($.07 per share), $13 million ($.13 per share), and $22
million ($.24 per share), respectively.
Oil and Gas Properties
CMS NOMECO utilizes the successful efforts method of accounting for
its investments in oil and gas properties. CMS NOMECO capitalizes
the costs of property acquisitions, successful exploratory wells,
all development costs, and support equipment and facilities when
incurred. It expenses unsuccessful exploratory wells when they are
determined to be non-productive. CMS NOMECO also charges to
expense production costs, overhead, and all exploration costs other
than exploratory drilling as incurred. Depreciation, depletion and
amortization of proved oil and gas properties is determined on a
field-by-field basis using the unit-of-production method over the
life of the remaining proved reserves.
2: Uncertainties
Consumers' Electric Business Unit Contingencies
Electric Environmental Matters: The Clean Air Act limits emissions
of sulfur dioxide and nitrogen oxides and requires 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.
During the past few years, in order to comply with the Act,
Consumers incurred capital expenditures totaling $46 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and proposed modifications at
other coal-fueled units to be an additional $26 million by the year
2000. Management believes that these expenditures will not
materially affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements
and meets current emission limits. The Act requires the EPA to
review, periodically, the effectiveness of the national air quality
standards in preventing adverse health affects. The EPA recently
revised these standards. The revisions may further limit small
particulate and ozone related emissions. Consumers supports the
bipartisan effort in the U.S. Congress to delay implementation of
the revised standards until the relationship between the new
standards and health improvements is established scientifically.
In October 1997, following completion of the Ozone Transport
Assessment Group process and requests by several Northeastern
states, the EPA proposed that the State of Michigan impose
additional nitrogen oxide limits on fossil-fueled emitters, such as
Consumers' generating units. The limits would reduce nitrogen
oxide emissions, as early as 2002, to only 32 percent of levels
allowed for the year 2000 under current regulations. The EPA is
expected to issue final regulations in the fall of 1999. The State
of Michigan will have one year after final regulations are issued
to implement the requirements. It is unlikely that the State of
Michigan will establish Consumers' nitrogen oxide emissions
reduction target until mid-to-late 1999. Until this target is
established, the estimated cost of compliance is subject to
significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide
related emissions for Consumers' fossil-fueled generating units is
approximately $210 million, plus an additional amount totaling $10
million per year for operation and maintenance costs. Consumers
may need an equivalent amount to comply with the new small
particulate standards. The State of Michigan has objected to the
extent of the proposed EPA emission reductions. If the State of
Michigan's position were to be adopted by the EPA, costs could be
less than the current estimated amounts.
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. Nevertheless, it
believes that these costs are properly recoverable in rates under
current ratemaking policies.
Consumers is a so-called potentially responsible party at several
contaminated sites administered under Superfund. Superfund
liability is joint and several; along with Consumers, many other
creditworthy, potentially responsible parties with substantial
assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $3 million
and $9 million. At June 30, 1998, Consumers has accrued $3 million
for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of
the plant have coatings that contain both metals and PCBs.
Consumers does not believe that any facility in the United States
currently accepts the radioactive portion of that waste. The cost
of removal and disposal is currently unknown. These costs would
constitute part of the cost to decommission the plant, and will be
paid from the decommissioning fund. Consumers is studying the
extent of the contamination and reviewing options.
Stray Voltage: Various parties have sued 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. It also has an ongoing
mitigation program to modify the service of all customers with
livestock.
In December 1997, the Michigan Supreme Court remanded for further
proceedings a 1994 Michigan trial court decision that refused to
allow the claims of over 200 named plaintiffs to be joined in a
single action. The trial court dismissed all of the plaintiffs
except the first-named plaintiff, allowing the others to re-file
separate actions. Of the original plaintiffs, only 49 re-filed
separate cases. All of those 49 cases have been resolved. The
Michigan Supreme Court remanded the matter, finding that the proper
remedy for misjoinder was not dismissal, but to automatically allow
each case to go forward separately. Consumers filed a motion for
reconsideration with the Michigan Supreme Court, which was denied.
As a result, 21 individual plaintiffs have re-filed their claims
with the trial court. Consumers intends to vigorously defend these
cases, but is unable to predict the outcome. As of June 30, 1998,
Consumers had 5 individual stray voltage lawsuits awaiting trial
court action, unrelated to the cases above. At year end 1997,
Consumers had 12 such lawsuits awaiting trial court action.
Anti-Trust: In October 1997, two independent power producers sued
Consumers and CMS Energy in a federal court. The suit alleges
antitrust violations relating to contracts which Consumers entered
into with some of its customers and claims relating to power
facilities. The plaintiffs claim damages of $100 million (which a
court can treble in antitrust cases as provided by law). The
parties are awaiting the court's decision on Consumers' and CMS
Energy's motion for summary judgment and/or dismissal of the
complaint. Consumers believes the lawsuit is without merit and
will vigorously defend against it, but cannot predict the outcome
of this matter.
Consumers' Electric Business Unit Rate Matters
Electric Proceedings: In 1996, the MPSC issued a final order that
authorized Consumers to recover costs associated with the purchase
of the additional 325 MW of MCV Facility capacity (see "Power
Purchases from the MCV Partnership" in this Note) and recover its
nuclear plant investment by increasing prospective annual nuclear
plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense.
It also established an experimental 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 and Consumers would transmit the power for a fee.
The program is limited to 650 MW of load, of which 100 MW is
available solely to direct-access customers for at least 18 months.
The Commission's order allowed existing special contracts to fill
410 MW of the load. Although the issue is still subject to MPSC
review, it is Consumers' position that the remaining 140 MW of the
650 MW load could be filled by either special contracts or direct
access loads. The load was filled by new special contracts signed
subsequent to the order. According to the MPSC order, Consumers
held a lottery in April 1997 to select the customers to purchase
100 MW by direct access. Direct access for a portion of this 100
MW began in late 1997. Consumers expects the remaining amount of
direct access to begin in 1998.
In January 1998, the Court of Appeals affirmed an MPSC conclusion
that the MPSC has statutory authority to authorize an experimental
electric retail wheeling program. By its terms, no retail wheeling
has yet occurred pursuant to that program. Consumers filed with
the Michigan Supreme Court seeking leave to appeal that ruling.
For information on other orders, see the Electric Restructuring
section below.
Electric Restructuring: As part of ongoing proceedings relating to
the restructuring of the electric utility industry in Michigan, in
June 1997 the MPSC issued an order proposing that beginning January
1, 1998 Consumers transmit and distribute energy on behalf of
competing power suppliers to serve retail customers. Subsequent to
the June 1997 order, the MPSC issued further restructuring orders
in October 1997 and in January and February 1998. These orders
provide for: 1) the recovery of estimated Transition Costs of
$1.755 billion through a charge to all direct-access customers
until the end of the transition period in 2007, subject to an
adjustment through a true-up mechanism; 2) the commencement of the
phase-in of direct access in 1998; 3) the suspension of the power
supply cost recovery clause; and 4) all customers to be free to
choose power suppliers on January 1, 2002. See "Other Electric
Uncertainties" below for further information regarding the effect
of the PSCR suspension on the recovery of MCV Facility capacity
charges. The orders also confirm the MPSC's belief that
Securitization may be a beneficial mechanism for recovery of
Transition Costs while recognizing that Securitization requires
state legislation to occur. Consumers believes that the Transition
Cost surcharge will apply to all customers beginning in 2002. The
recovery of prudent costs of implementing a direct-access program,
estimated at an additional $200 million, would be reviewed for
prudence and recovered via a charge approved by the MPSC. Nuclear
decommissioning costs will also continue to be collected through a
separate surcharge to all customers. Consumers expects Michigan
legislative consideration of the entire subject of electric
industry restructuring in 1998. To be acceptable to Consumers, the
legislation would have to provide for full recovery of Transition
Costs. Consumers expects the legislature to review all of the
policy choices made by the MPSC during the restructuring
proceedings to assure that they are in accord with those that the
legislature believes should be paramount.
There are numerous appeals pending at the Court of Appeals relating
to the MPSC's restructuring orders, including appeals by Consumers
and Detroit Edison. Consumers believes that the MPSC lacks
statutory authority to mandate industry restructuring, and its
appeal is limited to this jurisdictional issue.
As a result of an informal process involving consultations with
MPSC staff and other interested parties, as directed in the MPSC's
February 1998 order, Consumers submitted to the MPSC in June 1998
its plan for implementing direct access. The primary issues
addressed in the plan are: 1) the implementation schedule; 2) the
direct access service options available to customers and suppliers;
3) the process and requirements for customers and others to obtain
direct access service; and 4) the roles and responsibilities for
Consumers, customers and suppliers. Under the schedule in the
plan, Consumers will, over the 1998-2001 period, phase-in 750 MW of
electric capacity for direct access to customers. In 1998, 300 MW
of direct access for bidding will be open, and an additional 150 MW
will open for each year from 1999 to 2001. This plan is consistent
with the previous orders regarding the phase-in process. Due to
the time required for the MPSC to review the plan, Consumers does
not believe direct access will commence prior to the fourth quarter
of 1998. For further information regarding the effects of the
restructuring on accounting methods, see Consumers' Electric
Business Unit Outlook - Electric Application of SFAS 71 in the
MD&A. CMS Energy cannot predict the outcome or timing of electric
restructuring on CMS Energy's financial position, liquidity, or
results of operations.
Other Consumers' Electric Business Unit Uncertainties
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 FMLP, a 35 percent lessor interest in
the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
- ----------------------------------------------------------------
Three Months Six Months Twelve Months
Ended Ended Ended
- ---------------------------------------------------- -----------
June 30 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------
Pretax operating
income $13 $10 $23 $18 $51 $46
Income taxes and
other 4 3 7 5 16 14
- ----------------------------------------------------------------
Net income $ 9 $ 7 $16 $13 $35 $32
================================================================
Power Purchases from the MCV Partnership- After September 2007,
pursuant to the terms of the PPA and related undertakings,
Consumers will only be required to pay the MCV Partnership the
capacity charge and energy charge amounts authorized for recovery
from electric customers by the MPSC. Currently, Consumers' annual
obligation to purchase 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 has, since January 1,
1993, permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the
fixed and variable energy charges. Beginning January 1, 1996, the
MPSC has also permitted Consumers to recover capacity charges for
the remaining 325 MW of MCV Facility contract capacity. The order
approving such recovery indicated that the recoverable capacity
charge for the 325 MW would gradually increase from an initial
average charge of 2.86 cents per kWh to an average charge of 3.62
cents per kWh over the 1996-2004 time period. Because the MPSC
allowed Consumers to suspend the PSCR process as part of the
electric industry restructuring order (see "Electric Restructuring"
in this Note), Consumers expects to recover a portion of the future
increases in approved capacity charges through an adjustment to the
frozen PSCR charge.
Consumers recognized a loss in 1992 for the present value of the
estimated future underrecoveries of power costs under the PPA. At
June 30, 1998 and December 31,1997, the after-tax present value of
the PPA liability totaled $126 million and $117 million,
respectively. The increase in the liability since December 31,
1997 reflects an additional $37 million accrual ($24 million after-tax)
for higher than anticipated MCV Facility availability levels
experienced in prior periods and an after-tax accretion expense of
$5 million, partially offset by after-tax cash underrecoveries of
$20 million. The undiscounted after-tax amount associated with the
liability totaled $176 million at June 30, 1998. The after-tax
cash underrecoveries are currently based on the assumption that the
MCV Facility will be available to generate electricity 91.5 percent
of the time over its expected life. For the first six months of
1998 the MCV Facility was available 99 percent of the time,
resulting in $11 million over anticipated after-tax cash
underrecoveries. Consumers believes it will continue to experience
after-tax cash underrecoveries associated with the PPA in amounts
as those shown below.
In Millions
1998 1999 2000 2001 2002
- ----------------------------------------------------------------
Estimated cash under-
recoveries, net of tax $34 $22 $21 $20 $19
================================================================
Consumers bases the above estimated underrecoveries, in part, on an
estimate 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, Consumers will need to recognize losses
for future underrecoveries larger than amounts previously recorded.
Therefore, Consumers would experience larger amounts of cash
underrecoveries than originally anticipated. Management will
continue to evaluate the adequacy of the accrued liability
considering actual MCV Facility operations.
In February 1998, the MCV Partnership filed a claim of appeal from
the January 1998 and February 1998 MPSC orders in the electric
utility industry restructuring. At the same time, the MCV
Partnership filed suit in the U.S. District Court seeking a
declaration that the MPSC's failure to provide Consumers and the
MCV Partnership a certain source of recovery of capacity payments
after 2007 deprived the MCV Partnership of its rights under the
Public Utilities Regulatory Policies Act of 1978. The MCV
Partnership is seeking to prohibit the MPSC from implementing
portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership-
As part of a 1995 decision in the 1993 PSCR reconciliation case,
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 an earlier 1993 settlement order and
appealed. The MCV Partnership and ABATE also filed separate
appeals of this order. In November 1996, the Court of Appeals
affirmed the MPSC's 1995 decision. The MCV Partnership filed an
application for leave to appeal with the Michigan Supreme Court
which was denied in January 1998. This matter is now closed.
Nuclear Matters: Consumers filed updated decommissioning
information with the MPSC in 1995 that 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.
On March 31, 1998, Consumers filed with the MPSC a new
decommissioning cost estimate for Big Rock and Palisades of $294
million and $518 million (in 1997 dollars) respectively. The
estimated decommissioning costs decreased from previous estimates
primarily due to a decrease in offsite burial costs. Consumers
recommended a reallocation of its existing surcharge between the
two plants on January 1, 1999 to provide additional funds to
decommission Big Rock. Consumers filed a revision to its Post
Shutdown Activities Report (formerly decommissioning report) with
the NRC to reflect the shutdown of Big Rock.
Big Rock is being decommissioned. It was closed permanently on
August 29, 1997 because management determined that it would be
uneconomical to operate in an increasingly competitive environment.
Consumers originally scheduled the plant to close May 31, 2000, at
the end of the plant's operating license. Plant decommissioning
began in September 1997 and may take five to ten years to return
the site to its original condition.
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.
Palisades' temporary on-site storage pool for spent nuclear fuel is
at capacity. Consequently, Consumers is using NRC-approved steel
and concrete vaults, commonly known as "dry casks", for temporary
on-site storage.
As of June 30, 1998 Consumers had loaded 13 dry storage casks with
spent nuclear fuel at Palisades. Consumers plans to load five
additional casks at Palisades in 1999 pending approval by the NRC.
In June 1997, the NRC approved Consumers' process for unloading
spent fuel from a cask at Palisades previously discovered to have
minor weld flaws. Consumers intends to transfer the spent fuel to
a new transportable cask when one is available.
A planned outage for refueling and maintenance at Palisades was
completed June 7, 1998. Consumers replaced 60 nuclear fuel
assemblies in the plant's reactor during the outage.
The NRC requires Consumers to make certain calculations and report
to it on the continuing ability of the Palisades reactor vessel to
withstand postulated pressurized thermal shock events during its
remaining license life, considering the embrittlement of reactor
vessel materials over time due to operation in a radioactive
environment. Based on continuing analysis of data 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, it can operate
Palisades to the end of its license life in the year 2007 without
annealing the reactor vessel. Nevertheless, Consumers will
continue to monitor the matter.
Consumers Gas Group Contingencies
Gas Environmental Matters: 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 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a
partial or no current ownership interest. In 1998 Consumers plans
to study indoor air issues at residences on some sites and ground
water impacts or surface soil impacts at other sites. On sites
where Consumers has received site-wide study plan approvals, it
will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed.
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 1998 costs. As
of June 30,1998, 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
techniques, nature and extent of contamination, and legal and
regulatory requirements, could affect the estimate of remedial
action costs for the sites. According to an MPSC rate order issued
in 1996, Consumers will defer and amortize, over a period of ten
years, environmental clean-up costs above the amount currently
being recovered in rates. 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, or has
initiated a lawsuit against, certain insurance companies regarding
coverage for some or all of the costs that it may incur for these
sites.
Consumers Gas Group Matters
GCR Matters: In 1995, the MPSC issued an order regarding a $44
million (excluding interest) gas supply contract pricing dispute
between Consumers and certain gas producers. The order stated that
Consumers was not obligated to seek prior approval of market-based
pricing changes that Consumers implemented under the contracts in
question. The Court of Appeals upheld the MPSC order. The
producers sought leave to appeal with the Michigan Supreme Court.
Their request is still pending. 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.
Gas Restructuring: In December 1997, the MPSC approved Consumers'
application to implement a statewide experimental gas
transportation pilot program. Consumers' expanded experimental
program will extend over a three-year period, eventually allowing
300,000 residential, commercial and industrial retail gas sales
customers to choose their gas supplier. The program is voluntary
for natural gas customers. Participating customers are being
selected on a first-come, first-served basis, up to a limit of
100,000 customers beginning April 1, 1998. As of July 23, 1998
approximately 21,800 customers chose alternative gas suppliers,
representing approximately 13 bcf of gas load. Of these
alternative gas suppliers, one was a CMS Energy affiliate. Up to
100,000 more customers may be added beginning April 1 of each of
the next two years. Customers choosing to remain as sales
customers of Consumers will not see a rate change in their natural
gas rates. The order allowing the implementation of this program:
1) suspends Consumers' gas cost recovery clause, effective April 1,
1998 for a three-year period, establishing a gas commodity cost at
a fixed rate of $2.84 per mcf; 2) establishes an earnings sharing
mechanism that will provide for refunds to customers if Consumers'
earnings during the three year term of the program exceed certain
pre-determined levels; and 3) establishes a gas transportation code
of conduct that addresses concerns about the relationship between
Consumers and marketers, including its affiliated marketers. This
experimental program will allow competing gas suppliers, including
marketers and brokers, to market natural gas to a large number of
retail customers in direct competition with Consumers. In January
1998, the Attorney General, ABATE and other parties filed claims of
appeal regarding the program with the Court of Appeals. For
further information regarding the effects of the restructuring on
accounting methods, see Consumers' Gas Group Outlook - Application
of SFAS 71 in the MD&A.
Other Uncertainities
CMS Generation Environmental Matters: CMS Generation does not
currently expect to incur significant capital costs, if any, at its
power facilities to comply with current environmental regulatory
standards.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $1.375 billion for 1998, $1.220 billion for 1999,
and $1.175 million for 2000. For further information, see the
Capital Resources and Liquidity-Capital Expenditures in the MD&A.
Other: As of June 30, 1998, CMS Energy and Enterprises have
guaranteed up to $700 million in contingent obligations of
unconsolidated affiliates and related parties.
In addition to the matters disclosed in this note, 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.
These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal
and state taxes, rates, licensing and other matters.
CMS Energy has accrued estimated losses for certain contingencies
discussed in this Note. Resolution of these contingencies is not
expected to have a material adverse impact on CMS Energy's
financial position, liquidity, or results of operations.
3: Short-Term and Long-Term Financings, and Capitalization
CMS Energy: CMS Energy's Senior Credit Facilities consist of a
$600 million three-year revolving credit facility and a five-year
$125 million term loan facility. Additionally, CMS Energy has
unsecured lines of credit and letters of credit in an aggregate
amount of $163 million. At June 30, 1998, the total amount
utilized under the Senior Credit Facilities was $317 million,
including $47 million of contingent obligations, and under the
unsecured lines of credit and letters of credit was $8 million.
At June 30, 1998 CMS Energy has $130 million of Series A GTNs, $125
million of Series B GTNs, $150 million of Series C GTNs, and $182
million of Series D GTNs issued and outstanding with weighted
average interest rates of 7.8 percent, 7.9 percent, 7.7 percent,
and 7.0 percent, respectively.
In January 1998, a Delaware statutory business trust established by
CMS Energy sold $180 million of certificates due January 15, 2005
in a public offering. In exchange for those proceeds, CMS Energy
sold to the trust $180 million aggregate principal amount of 7
percent Extendible Tenor Rate Adjusted Securities due January 15,
2005. Net proceeds to CMS Energy from the sale totaled $176
million.
In March 1998, CMS Energy and an affiliated business trust filed a
shelf registration statement with the SEC pursuant to Rule 415 of
the Securities Act, for the issuance and the sale of an additional
$200 million of CMS Energy Common Stock, Class G Common Stock,
subordinated debentures, stock purchase contracts, stock purchase
units, and Trust Preferred Securities.
The primary asset of CMS Energy Trust I is $178 million principal
amount of 7.75 percent convertible subordinated debentures due 2027
from CMS Energy.
Consumers: At July 1, 1998, Consumers had remaining FERC
authorization to: 1) issue or guarantee up to $900 million of
short-term securities outstanding at any one time, through June
2000; 2) guarantee, through 1999, up to $25 million in loans made
by others to residents of Michigan for making energy-related home
improvements; and 3) issue long-term securities with maturities up
to 30 years, through June 2000, up to $950 million and $200 million
for refinancing purposes and for general corporate purposes,
respectively.
Consumers has an unsecured $425 million credit facility and
unsecured lines of credit aggregating $120 million. These
facilities are available to finance seasonal working capital
requirements and to pay for capital expenditures between long-term
financings. At June 30, 1998, a total of $255 million was
outstanding at a weighted average interest rate of 6.0 percent,
compared with $241 million outstanding at June 30, 1997, at a
weighted average interest rate of 6.2 percent. In January 1998,
Consumers entered into interest rate swaps totaling $300 million.
These swap arrangements have had an immaterial effect on interest
expense.
Consumers also has in place a $500 million trade receivables sale
program. At June 30, 1998 and 1997, receivables sold under the
program totaled $236 million and $266 million, respectively.
Accounts receivable and accrued revenue in the Consolidated Balance
Sheets have been reduced to reflect receivables sold.
The primary asset of Consumers Power Company Financing I is $103
million principal amount of 8.36 percent subordinated deferrable
interest notes due 2015 from Consumers. The primary asset of
Consumers Energy Company Financing II is $124 million principal
amount of 8.20 percent subordinated deferrable interest notes due
2027 from Consumers.
The following table describes the new issuances of long-term
financings which have occurred during 1998 through early August
1998.
In Millions
Month Interest Principal Use of
Issued Maturity Rate (%) Amount Proceeds
- ---------------------------------------------------------------------
Senior
Notes (a) February 2008 6.375 $ 250 Pay down
First
Mortgage
Bonds
Senior
Notes (a) March 2018 6.875 225 Pay down
First
Mortgage
Bonds
Senior
Notes (a) May 2008 6.2 (b) 250 Pay down
First
Mortgage
Bonds
and Long-
Term Bank
Debt
Senior
Notes (a) June 2018 6.5 (c) 200 Pay down
First
Mortgage
Bonds and
general
corporate
purposes
Long-Term
Bank Debt May 2001-2003 6.05 (d) 225 Pay down
Long-Term
Bank Debt
and general
corporate
purposes
- -------------------------------------------------------------------------
Total $1,150
=========================================================================
(a) The Senior Notes are secured by Consumers First Mortgage Bonds
issued contemporaneously in a similar amount.
(b) The interest rate may be reset in 2003.
(c) The interest rate will be reset in June 2005.
(d) The interest rate is variable; weighted average interest rate
upon original issuance was 6.05 percent.
The following table describes the retirements of long-term
financings which have occurred during 1998 through early August
1998.
In Millions
Month Interest Principal
Retired Maturity Rate (%) Amount
- --------------------------------------------------------------------
First Mortgage
Bonds February 1998 8.75 $248
Long-Term Bank
Debt February 1998 6.4 (a) 50
First Mortgage
Bonds March 2001-2002 7.5 119
First Mortgage
Bonds April 2023 7.375 36
First Mortgage
Bonds May 1998 6.875 43
Long-Term Bank
Debt May 1998-1999 6.3 (b) 350
First Mortgage
Bonds July 1999 8.875 136
- ------------------------------------------------------------------
Total $982
==================================================================
(a) The interest rate was variable; weighted average interest rate
at December 31, 1997 was 6.4 percent.
(b) The interest rate was variable; weighted average interest rate
at March 31, 1998 was 6.3 percent.
Consumers had unsecured, variable rate long-term bank debt with an
outstanding balance at June 30, 1998 and 1997 of $225 million and
$400 million, respectively. At June 30, 1998 and 1997 the debt
carried weighted average interest rates of 6.1 percent and 6.2
percent, respectively. In February 1998, Consumers retired $50
million of its $400 million unsecured long-term bank debt. In May
1998, Consumers refinanced the remaining $350 million unsecured
long-term bank debt, in part with $225 million unsecured long-term
bank debt. To cover the remaining $125 million of bank debt
refinancing, in May 1998 Consumers issued $250 million of senior
notes due 2008, at an interest rate of 6.2 percent. The $125
million balance of senior notes due 2008 will be used for refunding
or repurchasing various First Mortgage Bonds or for general
corporate purposes.
Under the provisions of its Articles of Incorporation at June 30,
1998, Consumers had $312 million of unrestricted retained earnings
available to pay common dividends. In July 1998, Consumers
declared a $44 million common dividend to be paid in August 1998.
4: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock for the three, six
and twelve month periods ended June 30, 1998 reflect the
performance of the Consumers Gas Group. The Class G Common Stock
has participated in earnings and dividends from its original issue
date in July 1995. The allocation of earnings 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 attributable to the Outstanding Shares are equal to
Consumers Gas Group 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 three months ended June 30, 1998 and 1997
are based on 25.27 percent and 24.30 percent, respectively, of the
income of Consumers Gas Group.
Computation of Earnings Per Share:
In Millions, Except Per Share Amounts
- -----------------------------------------------------------------
Three Months Six Months Twelve Months
Ended Ended Ended
June 30 June 30 June 30
1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------
(b) (a) (b) (a) (b)
Net Income
Applicable
to Basic and
Diluted EPS
Consolidated Net
Income $ 65 $ 47 $153 $125 $272 $218
` ================================================
Net Income
Attributable to
Common Stocks:
CMS Energy -
Basic EPS $ 64 $ 45 $143 $114 $258 $206
Add conversion
of 7.75% Trust
Preferred
Securities
(net of tax) 2 - 4 - 9 -
------------------------------------------------
CMS Energy -
Diluted EPS $ 66 $ 45 $147 $114 $267 $206
================================================
Class G:
Basic and
Diluted EPS $ 1 $ 2 $ 10 $ 11 $ 14 $ 12
=================================================
Average Common
Shares Outstanding
Applicable to
Basic and
Diluted EPS
CMS Energy:
Average Shares -
Basic 101 95 101 95 99 94
Add conversion
of 7.75% Trust
Preferred
Securities 4 - 4 - 4 -
Options-Treasury
Shares 1 1 1 1 1 2
-----------------------------------------------
Average Shares
- Diluted 106 96 106 96 104 96
===============================================
Class G:
Average Shares
Basic and
Diluted 8 8 8 8 8 8
==============================================
Earnings Per
Average Common
Share
CMS Energy:
Basic $.63 $.48 $1.42 $1.21 $2.60 $2.19
Diluted $.62 $.48 $1.39 $1.20 $2.57 $2.18
Class G:
Basic
and Diluted $.12 $.16 $1.20 $1.34 $1.71 $1.52
=================================================================
(a) Includes the cumulative effect of an accounting change in the
first quarter of 1998 which increased net income attributible to
CMS Energy Common Stock $43 million ($.40 per share - basic and
diluted) and Class G Common Stock $12 million ($.36 per share -
basic and diluted).
(b) Restated; see Note 1.
In February and May 1998, CMS Energy declared and paid dividends of
$.30 per share on CMS Energy Common Stock and $.31 per share on
Class G Common Stock. In July 1998, the Board of Directors
declared a quarterly dividend of $.33 per share on CMS Energy
Common Stock and $.325 per share on Class G Common Stock to be paid
in August 1998.
5: Risk Management Activities and Derivatives Transactions
CMS Energy and its subsidiaries use a variety of derivative
instruments (derivatives), including futures contracts, swaps,
options and forward contracts, to manage exposure to fluctuations
in commodity prices, interest rates and foreign exchange rates. To
qualify for hedge accounting, derivatives must meet the following
criteria: (1) the item to be hedged exposes the enterprise to
price, interest or exchange rate risk; and (2) the derivative
reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counter parties,
including financial institutions and energy marketers, fail to
perform under the agreements. CMS Energy minimizes such risk by
performing financial credit reviews using, among other things,
publicly available credit ratings of such counter parties. The
risk of nonperformance by the counter parties is considered remote.
Commodity Price Hedges: CMS Energy accounts for its commodity
price derivatives as hedges, as defined above, and as such, defers
any changes in market value and gains and losses resulting from
settlements until the hedged transaction is complete. 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.
Consumers uses gas forward contracts and electricity option
contracts to limit its risk associated with gas and electricity
price increases. In both the gas forward contracts and the
electricity option contracts, it is management's intent to take
physical delivery of the commodities. For gas forward contracts,
Consumers is obligated to take physical delivery of the gas and
would incur a significant penalty for nonperformance. At June 30,
1998, Consumers had an exposure to gas price increases if the cost
was to exceed $2.84 per mcf for the following volumes: 5 percent
of its 1998 requirements; 40 percent of its 1999 requirements; and
65 percent of its 2000 requirements. Additional forward coverage
is currently under review. The gas forward contracts currently in
place were consummated at prices less than $2.84 per mcf. The
contracts are being used to protect against gas price increases in
a three-year experimental gas program where Consumers is recovering
from its customers $2.84 per mcf of gas delivered.
As of June 30, 1998, Consumers had recorded an asset of $4 million
to recognize its option contracts to purchase electricity from July
through September of 1998. These option contracts were entered
into to insure a reliable source of capacity to meet Consumers
customers' electricity requirements. Consumers continuously
evaluates its daily capacity needs and would sell these option
contracts, if marketable, when it has excess daily capacity. If
Consumers did not exercise these option contracts because the
additional capacity was not needed, and Consumers was unable to
sell the option contracts, Consumers' maximum exposure associated
with an adverse price change is limited to premiums paid.
CMS NOMECO has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas to the MCV for the years 2001
through 2006 by purchasing the economic equivalent of 10,000 MMBtu
per day at a fixed price, escalating at 8 percent per year
thereafter, 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 million 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 June 30, 1998, no letter of credit was posted by either party to
the agreement. As of June 30, 1998, the fair value of this
contract reflected payment due from CMS NOMECO of $12 million.
CMS MST uses natural gas and oil futures contracts, options and
swaps (which require a net cash payment for the difference between
a fixed and variable price).
Interest Rates Hedges: CMS Energy and some of its subsidiaries
enter into interest rate swap agreements to exchange variable rate
interest payment obligations to fixed rate obligations without
exchanging the underlying notional amounts. These agreements
convert variable rate debt to fixed rate debt to reduce the impact
of interest rate fluctuations. The notional amounts parallel the
underlying debt levels and are used to measure interest to be paid
or received and do not represent the exposure to credit loss. The
notional amount of CMS Energy's and its subsidiaries' interest rate
swaps was $803 million at June 30, 1998. The difference between
the amounts paid and received under the swaps is accrued and
recorded as an adjustment to interest expense over the life of the
hedged agreement.
Foreign Exchange Hedges: CMS Energy uses forward exchange
contracts and collared options to hedge certain receivables,
payables, long-term debt and equity value relating to foreign
investments. The purpose of CMS Energy's foreign currency hedging
activities is to protect the company from the risk that U.S. dollar
net cash flows resulting from sales to foreign customers and
purchases from foreign suppliers and the repayment of non-U.S.
dollar borrowings as well as equity reported on the company's
balance sheet, may be adversely affected by changes in exchange
rates. These contracts do not subject CMS Energy to risk from
exchange rate movements because gains and losses on such contracts
offset losses and gains, respectively, on assets and liabilities
being hedged. The notional amount of the outstanding foreign
exchange contracts was $595 million at June 30, 1998, which
includes $550 million for Australian foreign exchange contracts.
6: Restated Financial Statements - First Quarter 1998
(Unaudited)
As a result of the change in the method of accounting for
investments in oil and gas properties as discussed in Note 1,
certain financial information from the three and twelve months
ended March 31, 1998 and 1997 has been restated as detailed below.
Income Statement Data (Unaudited)
Three Months Ended Twelve Months Ended
March 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------
As As As As
Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- -------- -------
Operating
Revenue $1,374 $1,374 $1,295 $1,295 $4,866 $4,860 $4,345 $4,339
Operating
Expenses 1,187 1,177 1,082 1,091 4,146 4,151 3,660 3,675
------- --------- -------- -------- --------- ------- ------- ------
Pretax
Operating
Income 187 197 213 204 720 709 685 664
Other Income
(Deductions)(36) (36) (2) (2) (46) (46) (11) (11)
Fixed Charges 96 97 77 77 368 372 303 306
Income Taxes 15 19 50 47 82 80 135 129
------ ------ -------- -------- -------- -------- ------ ------
Consolidated
Net Income
before
cumulative
effect
of change in
accounting
principle 40 45 84 78 224 211 236 218
Consolidated
Net Income $83 $88 $84 $78 $267 $254 $236 $218
Basic Earnings
Per Average
Common Share
CMS Energy $.73 $.79 $.79 $.73 $2.57 $2.45 $2.41 $2.21
Class G $1.09 $1.09 $1.18 $1.18 $1.76 $1.76 $1.53 $1.53
Diluted Earnings Per
Average Common
Share CMS
Energy $.72 $.77 $.78 $.72 $2.55 $2.44 $ 2.39 $2.21
Class G $1.09 $1.09 $1.18 $1.18 $1.76 $1.76 $1.53 $1.53
Balance Sheet Data (Unaudited)
March 31 1998 1997
- -------------------------------------------------------------------
As As
Reported Restated Reported Restated
--------- --------- -------- --------
Assets
Current Assets $1,028 $1,023 $ 768 $ 770
Plant and
Property,net 5,379 5,114 5,279 5,022
Investments 1,894 1,879 1,023 1,013
Non-current Asset 1,480 1,489 1.332 1,335
--------------------------------------------------
Total Assets $9,781 $9,505 $8,402 $8,140
====== ====== ====== ======
Liabilities and
Equity
Current
Liabilities $1,506 $1,506 $1,662 $1,662
Non-current
Liabilities 1,763 1,672 1,781 1,692
Capitalization 6,512 6,327 4,959 4,786
--------------------------------------------------
Total
Liabilities
and Equity $9,781 $9,505 $8,402 $8,140
==================================================
<PAGE> 47
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance
sheets of CMS ENERGY CORPORATION (a Michigan corporation)
and subsidiaries as of June 30, 1998 and 1997, the related
consolidated statements of income and common stockholders'
equity for the three-month, six-month, and twelve-month
periods then ended, and the related consolidated statements
of cash flows for the six-month and twelve-month periods
then ended. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial
statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
and consolidated statement of preferred stock of CMS Energy
Corporation and subsidiaries as of December 31, 1997, and
the related consolidated statements of income, common
stockholders' equity and cash flows for the year then ended
(not presented herein), and, in our report dated July 27,
1998, we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December
31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has
been derived.
Arthur Andersen LLP
Detroit, Michigan,
August 11, 1998.
<PAGE> 48
Consumers Energy Company
Management's Discussion and Analysis
The MD&A of this Form 10-Q should be read along with the MD&A and
other parts of Consumers' 1997 Form 10-K. This MD&A also refers
to, and in some sections specifically incorporates by reference,
Consumers' Condensed Notes to Consolidated Financial Statements and
should be read in conjunction with such Statements and Notes. This
report contains forward-looking statements, as defined by the
Private Securities Litigation Reform Act of 1995, that include
without limitation, discussions as to expectations, beliefs, plans,
objectives and future financial performance, or assumptions
underlying or concerning matters discussed in this report. Refer
to the Forward-Looking Information section of this MD&A for some
important factors that could cause actual results or outcomes to
differ materially from those addressed in the forward-looking
discussions.
Consumers is a combination electric and gas utility company serving
the Lower Peninsula of Michigan and is the principal subsidiary of
CMS Energy, 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.
Results of Operations
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 60 $ 54 $
Six months ended 162 141 21
Twelve months ended 305 258 47
===== ===== =====
The increase in earnings for the second quarter of 1998 compared
with the same 1997 period reflects increased electric sales and
improved operating results from the MCV Facility. These earnings
were offset by decreased gas deliveries due to warmer 1998
temperatures. The first six months of 1998 were the third warmest
since 1864. Net income available to common stockholders after the
cumulative effect of a change in accounting for property taxes was
$162 million for the first half of 1998 compared with $141 million
for the same 1997 period. The increase in earnings for the first
half of 1998 reflects revised accounting to recognize property tax
expense on the fiscal year basis of the taxing units instead of on
a calendar year basis. This one-time change in accounting for
property taxes resulted in a benefit of $66 million ($43 million
after-tax). Earnings for the first half of 1998 also reflect the
recognition of a $37 million dollar loss ($24 million after tax)
for the underrecovery of power costs under the PPA. The increase
in earnings for the twelve months ended June 30, 1998 compared with
the same 1997 period reflects the change in accounting for property
taxes implemented during the first half of 1998 as discussed above
and the one-time recognition of interest income of $7 million ($5
million after-tax) from a related party property sale. In
addition, the improved net income for the twelve months ended
June 30, 1998 reflects an adjustment of prior years' income taxes
associated with non-taxable earnings on nuclear decommissioning
trust funds of $9 million. Partially offsetting these increases
were the recognition, in the first half of 1998, of the loss
associated with the underrecovery of power costs under the PPA as
discussed above, and decreased gas deliveries due to warmer weather
during the first half of 1998. For further information concerning
results of operations, see the Electric and Gas Utility Results of
Operations sections of this MD&A and Power Purchases from the MCV
Partnership in Note 2.
ELECTRIC UTILITY RESULTS OF OPERATIONS
Electric Pretax Operating Income:
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 107 $ 104 $ 3
Six months ended 226 210 16
Twelve months ended 448 419 29
===== ===== =====
Electric pretax operating income for all the above periods ended
June 30, 1998 benefitted from increased sales and control of
operation and maintenance costs compared to the same periods in
1997. These increases were partly offset by increased general
taxes and depreciation. The following table quantifies these
impacts on Pretax Operating Income.
In Millions
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997 1998 vs 1997
--------- --------- --------
Sales (including special
contract discounts) $ 5 $ 12 $ 12
Other non-commodity revenue 1 (1) -
Operations and maintenance 1 10 35
General taxes and depreciation (4) (5) (18)
----- ----- -----
Total change $ 3 $ 16 $ 29
===== ===== =====
Electric Deliveries: Total electric deliveries increased 8.0
percent for the three months ended June 30, 1998 over the same
period in 1997. The increase includes a 2.9 percent increase in
deliveries to ultimate customers, primarily within the commercial
and industrial classes, and a 5.1 percent increase in sales between
utility systems and wholesale customer deliveries. For the six
months ended June 30, 1998, total electric deliveries increased 7.2
percent over the comparable 1997 period. Deliveries to ultimate
customers were up 2.1 percent, mainly from increased deliveries to
commercial and industrial classes, with the remaining 5.1 percent
attributable to an increase in sales between utility systems and
wholesale deliveries. For the twelve months ended June 30, 1998,
total electric deliveries increased 5.3 percent over the comparable
1997 period. The increase is primarily attributable to an increase
in sales between utility systems deliveries and a 1.3 percent
increase in deliveries to ultimate customers, primarily within the
industrial class.
Power Costs:
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 312 $ 270 $ 42
Six months ended 583 552 31
Twelve months ended 1,170 1,119 51
===== ===== =====
Power costs increased for all the reported periods ended June 30,
1998 compared to 1997. Both internal generation and power
purchases from outside sources increased during these periods to
meet increased sales demand.
Uncertainties: Consumers' financial position may be affected by a
number of trends or uncertainties that have had, or Consumers
reasonably expects will have, a materially favorable or unfavorable
impact on net sales, revenues, or income from continuing electric
operations. Such uncertainties are: 1) environmental liabilities
arising from compliance with various federal, state and local
environmental laws and regulations, including potential liability
or expenses relating to the Michigan Natural Resources and
Environmental Protection Act and Superfund; 2) capital expenditures
for compliance with the Clean Air Act; 3) suits by various parties
relating to the effect of so-called stray voltage on certain
livestock; 4) suits by two independent power producers alleging
antitrust violations and economic losses due to special electric
contracts signed by Consumers; 5) cost recovery relating to the MCV
Facility and nuclear plant investments and an experimental direct-access
program; 6) electric industry restructuring; 7) after-tax
cash underrecoveries associated with power purchases from the MCV
Partnership; and 8) Big Rock decommissioning issues and ongoing
issues relating to the storage of spent fuel and the operating life
of Palisades. For detailed information about these trends or
uncertainties see Note 2, Uncertainties, "Electric Contingencies-Electric
Environmental Matters," "Electric Contingencies-Stray
Voltage," "Electric Contingencies-Anti-Trust," "Electric Rate
Matters-Electric Proceedings," "Electric Rate Matters-Electric
Restructuring," "Other Electric Uncertainties-The Midland
Cogeneration Venture-Power Purchases from the MCV Partnership," and
"Other Electric Uncertainties-Nuclear Matters," incorporated by
reference herein.
Consumers uses electricity option contracts to limit its risk
associated with electricity price increases. It is management's
intent to take physical delivery of the commodity. As of June 30,
1998, Consumers has recorded an asset of $4 million to recognize
its option contracts to purchase electricity from July through
September of 1998. These option contracts were entered into to
insure a reliable source of capacity to meet Consumers customers'
electricity requirements. Consumers continuously evaluates its
daily capacity needs and would sell these option contracts, if
marketable, when it has excess daily capacity. If Consumers did
not exercise these option contracts because the additional capacity
was not needed and Consumers was unable to sell the option
contracts, Consumers' maximum exposure associated with an adverse
price change is limited to premiums paid.
GAS UTILITY RESULTS OF OPERATIONS
Gas Pretax Operating Income:
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 21 $ 23 $ (2)
Six months ended 75 101 (26)
Twelve months ended 127 143 (16)
===== ===== =====
Gas pretax operating income decreased in the three month, six month
and twelve month periods ended June 30, 1998, as a result of
reduced gas deliveries due to warmer temperatures during the winter
heating seasons. Revenues for wholesale services were also down
for the six and twelve month periods ended June 30, 1998 due to the
warmer temperature and the elimination of surcharges related to
past conservation programs. The decreased gas pretax operating
income for the three month and six month periods ended June 30,
1998 reflects higher operations expense related to growth in retail
services programs and the absence of 1997 non-recurring expense
reductions for uncollectible accounts and injuries and damages
reserves. Gas pretax operating income for the twelve month period
ended June 30, 1998 benefited from controlling operations and
maintenance expenses. The benefit to gas pretax operating income
from reduced costs in general taxes and depreciation for the three
month, six month and twelve month periods ended June 30, 1998 is
primarily a timing issue related to sales volumes. The following
table quantifies these impacts on Pretax Operating Income.
In Millions
Three Months Six Months Twelve Months
Ended June 30 Ended June 30 Ended June 30
Change Compared to Prior Year 1998 vs 1997 1998 vs 1997 1998 vs 1997
------- ------- -------
Sales $ (5) $(18) $(21)
Gas wholesale and retail
service activities - (3) (6)
Operations and maintenance (1) (9) 6
General taxes, depreciation
and other 4 4 5
----- ----- -----
Total change $ (2) $(26) $(16)
===== ===== =====
Gas Deliveries: System deliveries for the three month period ended
June 30, 1998, including miscellaneous transportation, totaled 61
bcf, a decrease of 15 bcf or 19 percent compared to the three month
period ended June 30, 1997. Deliveries for the six month period
ended June 30, 1998, including miscellaneous transportation,
totaled 208 bcf, a decrease of 37 bcf or 15 percent compared to the
six month period ended June 30, 1997. For the twelve month period
ended June 30, 1998, deliveries including miscellaneous
transportation, totaled 383 bcf, a decrease of 41 bcf or 10 percent
compared to the twelve month period ended June 30, 1997. The
decreased deliveries for three month, six month and twelve month
periods ended reflect warmer temperatures primarily for the first
quarter of 1998.
Cost of Gas Sold:
In Millions
June 30 1998 1997 Change
----- ----- -----
Three months ended $ 74 $118 $ (44)
Six Months ended 338 432 (94)
Twelve months ended 600 729 (129)
===== ===== =====
The cost decreases for the three month, six month and twelve month
periods ended June 30, 1998 were the result of decreased sales and
lower gas costs reflecting warmer temperatures during the winter
heating seasons.
Uncertainties: Consumers' financial position may be affected by a
number of trends or uncertainties that have had, or Consumers
reasonably expects will have, a materially favorable or unfavorable
impact on net sales or revenues or income from continuing gas
operations. Such uncertainties are: 1) potential environmental
costs at a number of sites including sites formerly housing
manufactured gas plant facilities; 2) ongoing litigation relating
to a pricing dispute with gas producers; and 3) a statewide
experimental gas transportation pilot program. For detailed
information about these uncertainties see Note 2, Uncertainties,
"Gas Contingencies-Gas Environmental Matters," "Gas Rate Matters-GCR
Matters," and "Gas Rate Matters-Gas Restructuring,"
incorporated by reference herein.
Consumers uses gas forward contracts to limit its risk associated
with gas price increases. It is management's intent to take
physical delivery of the commodity. For gas forward contracts,
Consumers is obligated to take physical delivery of the gas and
would incur a significant penalty for nonperformance. At June 30,
1998, Consumers had an exposure to gas price increases if the cost
was to exceed $2.84 per mcf for the following volumes: 5 percent
of its 1998 requirements; 40 percent of its 1999 requirements; and
65 percent of its 2000 requirements. Additional forward coverage
is currently under review. The gas forward contracts currently in
place were consummated at prices less than $2.84 per mcf. The
contracts are being used to protect against gas price increases in
a three-year experimental gas program where Consumers is recovering
from its customers $2.84 per mcf of gas delivered.
Capital Resources and Liquidity
CASH POSITION, INVESTING AND FINANCING
Operating Activities: Consumers derives cash from the sale and
transportation of natural gas and the generation, transmission and
sale of electricity. Cash from operations totaled $322 million and
$413 million for the first six months of 1998 and 1997,
respectively. The $91 million decrease resulted primarily from a
decrease of $47 million in the sale of accounts receivable and to
higher summer gas inventory balances because of lower sales
resulting from warmer weather. Other items included in income but
which had no effect on cash flow were a one-time change in
accounting for property taxes resulting in a $66 million ($43
million after-tax) gain and the recognition of a $37 million loss
($24 million after-tax) for the underrecovery of power costs under
the PPA. Consumers uses operating cash primarily to maintain and
expand electric and gas systems, to retire portions of long-term
debt, and to pay dividends.
Investing Activities: Cash used in investing activities totaled
$(171) million and $(205) million for the first six months of 1998
and 1997, respectively. The change of $34 million was primarily
the result of receiving cash of $27 million from the sale of the
Marysville Fractionation Partnership and $27 million from the
nuclear decommissioning trust funds previously collected from
electric customers for decommissioning Big Rock, offset by the
payment of $33 million in cost of plant retired. Consumers used
the cash primarily for capital expenditures,
Financing Activities: Cash provided by financing activities
totaled zero for the first six months of 1998 compared to $(201)
million used in the first six months of 1997. The change of $201
million is primarily the result of a net increase in cash of $266
million due to refinancing and issuance of Consumers' debt, offset
by a $59 million increase in the payment of common stock dividends.
Consumers issued $250 million in senior notes in May 1998 and $200
million in senior notes in June 1998. For additional information
about these offerings see "Long-Term Financings" in Note 3,
incorporated by reference herein.
Consumers has FERC authorization to issue securities and
guarantees. Consumers has a credit facility, lines of credit and
a trade receivable sale program in place as anticipated sources of
funds needed to fulfill, in whole or in part, material commitments
for capital expenditures. For detailed information about these
source of funds, see "Authorization" and "Short-Term Financings" in
Note 3.
Outlook
The following discussions contain forward-looking statements. See
the Forward-Looking Information section of this MD&A for some
important factors that could cause actual results or outcomes to
differ materially from those discussed herein.
CAPITAL EXPENDITURES OUTLOOK
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 1998 1999 2000
----- ----- -----
Consumers
Construction $367 $358 $350
Nuclear fuel lease 54 - 1
Capital leases other
than nuclear fuel 11 19 16
Michigan Gas Storage 3 3 3
----- ----- -----
$435 $380 $370
===== ===== =====
Electric utility operations (a)(b) $320 $265 $255
Gas utility operations (a) 115 115 115
----- ----- -----
$435 $380 $370
===== ===== =====
(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.
(b) These amounts do not include preliminary estimates for capital
expenditures possibly required to comply with recently revised
national air quality standards under the Clean Air Act. For
further information see Note 2.
ELECTRIC BUSINESS OUTLOOK
Growth: Consumers expects average annual growth of two and one-half
percent per year in electric system deliveries over the next
five years, absent the impact of restructuring on the industry and
its regulation in Michigan. Abnormal weather, changing economic
conditions, or the developing competitive market for electricity
may affect actual electric sales in future periods.
Restructuring: Consumers' electric retail service is affected by
competition. To meet the challenge of competition, Consumers
entered into multi-year contracts with some of its largest
industrial customers to serve certain facilities. The MPSC has
approved these contracts as part of its phased introduction to
competition. Certain customers have the option of terminating
their contracts early.
FERC Orders 888 and 889, as amended, require utilities to provide
direct-access to the interstate transmission grid for wholesale
transactions. Consumers and Detroit Edison disagree on the effect
of the orders on the Michigan Electric Power Coordination Center
pool. Consumers proposes to maintain the benefits of the pool,
through at least December 2000, while Detroit Edison contends that
the pool agreement should be terminated immediately. Among
Consumers' alternatives in the event of the pool being terminated
would be joining an independent system operator. FERC has
indicated this preference for structuring the operations of the
electric transmission grid.
As discussed in the Form 10-K, several orders were issued and
numerous appeals are pending at the Court of Appeals relating to
the restructuring of the electric utility industry since June 1997.
Consumers cannot predict the outcome or timing of these matters.
For material changes relating to the restructuring of the electric
utility industry see "Electric Rate Matters - Electric
Restructuring" in Note 2, incorporated by reference herein.
Electric Application of SFAS 71: Consumers 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 the generation, transmission and
distribution operations of its business in its financial
statements. Consumers believes that the generation segment of its
business is still subject to rate regulation based upon its present
obligation to continue providing generation service to its
customers, and the lack of definitive deregulation orders. 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 the generation segment of
Consumers' business. According to Emerging Issues Task Force Issue
97-4, Deregulation of the Pricing of Electricity - Issues Related
to the Application of FASB Statements No. 71 and 101, Consumers can
continue to carry its generation-related regulatory assets or
liabilities for the part of the business being deregulated if
deregulatory legislation or an MPSC rate order allows the
collection of cash flows from its regulated transmission and
distribution customers to recover these specific costs or settle
obligations. Because the February 1998 MPSC order allows Consumers
to fully recover its transition costs, Consumers believes that even
if it was to discontinue application of SFAS 71 for the generation
segment of its business, its regulatory assets, including those
related to generation, are probable of future recovery from the
regulated portion of the business. At June 30, 1998, Consumers had
$261 million of generation-related net regulatory assets recorded
on its balance sheet, and a net investment in generation facilities
of $1.3 billion included in electric plant and property. For
further information regarding electric restructuring, see
"Restructuring" above.
GAS BUSINESS OUTLOOK
Growth: Consumers currently anticipates gas deliveries, including
gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average annual
rate of between one and two percent over the next five years based
primarily on a steadily growing customer base. Abnormal weather,
alternative energy prices, changes in competitive conditions, and
the level of natural gas consumption may affect actual gas
deliveries in future periods. Consumers is also offering a variety
of energy-related services to its customers focused upon appliance
maintenance, home safety and home security.
In 1997, LIHEAP provided approximately $64 million in heating
assistance to about 312,000 Michigan households, with approximately
13 percent of the funds going to Consumers' customers. Congress
provided approximately $54 million in funding for Michigan for
1998. In June 1998, the House Labor, Health and Human Services
Appropriations Subcommittee voted to propose elimination of LIHEAP
for fiscal year 1999. In July 1998, the full Committee accepted
the subcommittee proposal (which eliminates LIHEAP). The full
House of Representatives is expected to vote on this bill before
October 1, 1998. Many interested parties, including the Senate
Labor and Human Resources Committee, are working to restore funding
for the program; however, Consumers cannot predict the legislative
outcome of funding for this program.
Gas Application of SFAS 71: Based on a regulated utility
accounting standard, SFAS 71, Consumers may defer certain costs to
the future and record regulatory assets, based on the
recoverability of those costs through the MPSC's approval.
Consumers has evaluated its regulatory assets related to its gas
business, and believes that sufficient regulatory assurance exists
to provide for the recovery of these deferred costs.
Other Matters
NEW ACCOUNTING STANDARDS
In 1998, the FASB issued SFAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This standard requires
expanded disclosure effective for 1998. Also in 1998, the American
Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which will be effective for
1999. Consumers does not expect the application of these standards
to materially affect its financial position, liquidity or results
of operations. In addition, in 1998, the FASB issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which
requires that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 is effective for fiscal years beginning after
June 15, 1999. Consumers has not yet quantified the impacts of
adopting SFAS 133 on its financial statements and has not
determined the timing of or method of adoption.
COMPUTER MODIFICATIONS FOR YEAR 2000
Consumers uses software and related technologies throughout its
businesses that the year 2000 date change will affect and, if
uncorrected, could cause Consumers to, among other things, issue
inaccurate bills, report inaccurate data, or incur generating plant
outages. In 1995, Consumers began modifying its own computer
software systems by dividing programs requiring modification
between critical and noncritical programs. All essential program
modifications are expected to be completed by the year 2000.
Consumers devoted significant internal and external resources to
these modifications. It will expense anticipated spending for
these modifications as incurred, while capitalizing and amortizing
the costs for new software over the software's useful life.
Consumers does not expect that the cost of these modifications will
materially affect its financial position, liquidity or results of
operations. There can be no guarantee, however, that these costs,
plans or time estimates will be achieved, and actual results could
differ materially. Specific factors that may cause such material
differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and correct
all relevant computer code, and the year 2000 readiness of
Consumers' vendors, large customers and other third parties with
whom it does business.
Because of the integrated nature of Consumers' business with other
energy companies, utilities, jointly owned facilities operated by
other entities, and business conducted with suppliers and large
customers, Consumers may be indirectly affected by year 2000
compliance complications. At this time, Consumers is unable to
anticipate the magnitude of the operational or financial impact on
Consumers of year 2000 issues.
Forward-Looking Information
Forward-looking information is included throughout this report.
This report also describes material contingencies in the Notes to
the Consolidated Financial Statements and should be read
accordingly.
Some important factors that could cause actual results or outcomes
to differ are set forth in Consumers' 1997 Form 10-K,
"Management's Discussion and Analysis, Forward-Looking
Information."
(This page intentionally left blank)
<PAGE> 57
<TABLE>
Consumers Energy Company
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997 1998 1997
In Millions
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Electric $ 649 $ 598 $1,261 $1,218 $2,558 $2,492
Gas 170 220 599 718 1,085 1,242
Other 13 11 23 20 53 50
------ ------ ------ ------ ------ ------
832 829 1,883 1,956 3,696 3,784
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Fuel for electric generation 80 71 151 140 308 293
Purchased power - related parties 144 146 290 297 592 600
Purchased and interchange power 88 53 142 115 270 226
Cost of gas sold 74 118 338 432 600 729
Other 130 131 262 260 544 573
------ ------ ------ ------ ------ ------
516 519 1,183 1,244 2,314 2,421
Maintenance 42 41 78 80 168 178
Depreciation, depletion and
amortization 88 87 198 199 390 379
General taxes 45 45 100 103 197 196
------ ------ ------ ------ ------ ------
691 692 1,559 1,626 3,069 3,174
------ ------ ------ ------ ------ ------
Pretax Operating Income
Electric 107 104 226 210 448 419
Gas 21 23 75 101 127 143
Other 13 10 23 19 52 48
------ ------ ------ ------ ------ ------
141 137 324 330 627 610
------ ------ ------ ------ ------ ------
Other Income (Deductions)
Loss on MCV power purchases - - (37) - (37) -
Dividends and interest from affiliates 4 4 8 9 22 17
Accretion income 1 2 3 4 7 9
Accretion expense (4) (4) (8) (9) (17) (17)
Other, net - - 2 - 1 (4)
------ ------ ------ ------ ------ ------
1 2 (32) 4 (24) 5
------ ------ ------ ------ ------ ------
Interest Charges
Interest on long-term debt 35 35 68 69 137 139
Other interest 8 7 19 16 39 32
Capitalized interest - - - - (1) (1)
------ ------ ------ ------ ------ ------
43 42 87 85 175 170
------ ------ ------ ------ ------ ------
Net Income Before Income Taxes 99 97 205 249 428 445
Income Taxes 30 34 67 90 129 151
------ ------ ------ ------ ------ ------
Net Income before cumulative
effect of change
in accounting principle 69 63 138 159 299 294
Cumulative effect of change
in accounting for
property taxes, net
of $23 tax (Note 1) - - 43 - 43 -
------ ------ ------ ------ ------ ------
Net Income 69 63 181 159 342 294
Preferred Stock Dividends 5 7 10 14 21 28
Preferred Securities Distributions 4 2 9 4 16 8
------ ------ ------ ------ ------ ------
Net Income Available to Common Stockholder $ 60 $ 54 $ 162 $ 141 $ 305 $ 258
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 58
<TABLE>
Consumers Energy Company
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997
------ ------ ------ ------
In Millions
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 181 $ 159 $ 342 $ 294
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation, depletion and amortization
(includes nuclear decommissioning of
$25, $24,$50 and $49, respectively) 198 199 390 379
Loss on MCV power purchases 37 - 37 -
Capital lease and other amortization 21 21 44 40
Deferred income taxes and investment
tax credit 27 16 24 39
Accretion expense 8 9 17 17
Accretion income - abandoned
Midland project (3) (4) (7) (9)
Undistributed earnings of related parties (24) (20) (50) (50)
Cumulative effect of accounting change (66) - (66) -
MCV power purchases (32) (30) (64) (66)
Changes in other assets and liabilities (25) 63 - (12)
------ ------ ------ ------
Net cash provided by operating
activities 322 413 667 632
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets
placed under capital lease) (159) (165) (355) (391)
Cost to retire property, net (44) (11) (61) (31)
Investments in nuclear decommissioning trust funds (25) (24) (50) (49)
Proceeds from nuclear decommissioning trust funds 27 - 27 -
Proceeds from the sale of Marysville
Fractionation Partnership 27 - 27 -
Other 3 (5) 54 (6)
------ ------ ------ ------
Net cash used in investing activities (171) (205) (358) (477)
------ ------ ------ ------
Cash Flows from Financing Activities
Proceeds from senior notes 914 - 914 -
Retirement of bonds and other long-term debt (622) - (673) (37)
Payment of common stock dividends (129) (70) (278) (195)
Increase (decrease) in notes payable, net (122) (92) 14 133
Payment of capital lease obligations (22) (21) (46) (39)
Payment of preferred stock dividends (10) (14) (25) (28)
Preferred securities distributions (9) (4) (16) (8)
Retirement of preferred stock - - (118) -
Proceeds from preferred securities - - 116 -
Contribution from stockholder - - (50) -
Proceeds from bank loans - - - 23
------ ------ ------ ------
Net cash provided by (used in)
financing activities - (201) (162) (151)
------ ------ ------ ------
Net Increase in Cash and Temporary Cash Investments 151 7 147 4
Cash and Temporary Cash Investments, Beginning of Period 7 4 11 7
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 158 $ 11 $ 158 $ 11
====== ====== ====== ======
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 83 $ 82 $ 166 $ 127
Income taxes paid (net of refunds) 79 82 113 167
Non-cash transactions
Nuclear fuel placed under capital lease $ 15 $ 3 $ 16 $ 31
Other assets placed under capital leases 7 3 10 5
====== ====== ====== ======
<FN>
All highly liquid investments with an original maturity of three months or less are
considered cash equivalents.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE> 59
<TABLE>
Consumers Energy Company
Consolidated Balance Sheets
<CAPTION>
ASSETS June 30 June 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
<S> <C> <C> <C>
Plant (At original cost)
Electric $6,579 $6,491 $6,467
Gas 2,307 2,322 2,270
Other 23 24 25
------ ------ ------
8,909 8,837 8,762
Less accumulated depreciation, depletion
and amortization 4,707 4,603 4,490
------ ------ ------
4,202 4,234 4,272
Construction work-in-progress 166 145 119
------ ------ ------
4,368 4,379 4,391
------ ------ ------
Investments
Stock of affiliates 278 278 302
First Midland Limited Partnership (Note 2) 247 242 237
Midland Cogeneration Venture Limited
Partnership (Note 2) 189 171 148
Other - 7 10
------ ------ ------
714 698 697
------ ------ ------
Current Assets
Cash and temporary cash investments at cost,
which approximates market 158 7 11
Accounts receivable and accrued revenue,
less allowances of $5, $6 and $8,
respectively (Note 3) 76 82 80
Accounts receivable - related parties 71 62 87
Inventories at average cost
Gas in underground storage 178 197 125
Materials and supplies 63 63 75
Generating plant fuel stock 35 35 28
Postretirement benefits 25 25 25
Deferred income taxes - 22 14
Prepayments and other 148 161 78
------ ------ ------
754 654 523
------ ------ ------
Non-current Assets
Nuclear decommissioning trust funds 521 486 443
Postretirement benefits 388 404 419
Abandoned Midland Project 83 93 103
Other 248 235 240
------ ------ ------
1,240 1,218 1,205
------ ------ ------
Total Assets $7,076 $6,949 $6,816
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES June 30 June 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
<S> <C> <C> <C>
Capitalization
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 452 452 504
Revaluation capital 59 58 41
Retained earnings since December 31, 1992 396 363 368
------ ------ ------
1,748 1,714 1,754
Preferred stock 238 238 356
Company-obligated mandatorily redeemable
preferred securities of:
Consumers Power Company Financing I (a) 100 100 100
Consumers Energy Company Financing II (a) 120 120 -
Long-term debt 2,159 1,369 1,612
Non-current portion of capital leases 77 74 88
------ ------ ------
4,442 3,615 3,910
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 94 579 390
Notes payable 255 377 241
Accrued taxes 154 244 154
Accounts payable 150 171 149
Accounts payable - related parties 76 79 70
Power purchases (Note 2) 47 47 47
Accrued interest 31 32 32
Deferred income taxes 12 - -
Accrued refunds 11 12 7
Other 139 136 131
------ ------ ------
969 1,677 1,221
------ ------ ------
Non-current Liabilities
Deferred income taxes 680 688 642
Postretirement benefits 474 489 501
Power purchases (Note 2) 146 133 157
Deferred investment tax credit 144 149 154
Regulatory liabilities for income taxes, net 59 54 81
Other 162 144 150
------ ------ ------
1,665 1,657 1,685
------ ------ ------
Commitments and Contingencies (Notes 2)
Total Stockholders' Investment and Liabilities $7,076 $6,949 $6,816
====== ====== ======
<FN>
(a) The primary asset of Consumers Power Company Financing I is $103 million principal amount of 8.36% subordinated
deferrable interest notes due 2015 from Consumers. The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20% subordinated deferrable interest notes due 2027 from Consumers.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 61
<TABLE>
Consumers Energy Company
Consolidated Statements of Common Stockholder's Equity
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997 1998 1997
In Millions
<S> <C> <C> <C> <C> <C> <C>
Common Stock
At beginning and end of period $ 841 $ 841 $ 841 $ 841 $ 841 $ 841
------ ------ ------ ------ ------ ------
Other Paid-in Capital
At beginning of period 452 504 452 504 504 504
Preferred stock reacquired - - - - (2) -
Return of stockholder's
contribution - - - - (50) -
------ ------ ------ ------ ------ ------
At end of period 452 504 452 504 452 504
------ ------ ------ ------ ------ ------
Revaluation Capital
At beginning of period 65 36 58 37 41 31
Change in unrealized investment -
gain (loss) (a) (6) 5 1 4 18 10
------ ------ ------ ------ ------ ------
At end of period 59 41 59 41 59 41
------ ------ ------ ------ ------ ------
Retained Earnings
At beginning of period 385 384 363 297 368 305
Net income (a) 69 63 181 159 342 294
Common stock dividends declared (49) (70) (129) (70) (277) (195)
Preferred stock dividends declared (5) (7) (10(10) (14) (21) (28)
Preferred securities distributions (4) (2) (9) (4) (16) (8)
------ ------ ------ ------ ------ ------
At end of period 396 368 396 368 396 368
------ ------ ------ ------ ------ ------
Total Common Stockholder's Equity $1,748 $1,754 $1,748 $1,754 $1,748 $1,754
====== ====== ====== ====== ====== ======
(a) Disclosure of Comprehensive
Income:
Revaluation capital
Unrealized investment -
gain (loss), net of tax of
$(3), $3, $-, $2, $10
and $5, respectively $ (6) $ 5 $ 1 $ 4 $ 18 $ 10
Net income 69 63 181 159 342 294
------ ------ ------ ------ ------ ------
Total Comprehensive Income $ 63 $ 68 $ 182 $ 163 $ 360 $ 304
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 62
Consumers Energy Company
Condensed Notes to Consolidated Financial Statements
These Consolidated Financial Statements and their related Condensed
Notes should be read along with the Consolidated Financial
Statements and Notes contained in Consumers' 1997 Form 10-K that
includes the Report of Independent Public Accountants. In the
opinion of management, the unaudited information herein reflects
all adjustments necessary to assure the fair presentation of
financial position, results of operations and cash flows for the
periods presented.
1: Corporate Structure and Change of Significant Accounting
Policies
CORPORATE STRUCTURE
Consumers is a combination electric and gas utility company serving
the Lower Peninsula of Michigan and is the principal subsidiary of
CMS Energy, 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.
IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In 1997, the FASB issued SFAS 130, Reporting Comprehensive Income.
This statement, which is effective for 1998 financial statement
reporting, establishes standards for reporting and display of
comprehensive income and its components. Equity adjustments
related to unrealized investment gains and losses (net of tax),
along with consolidated net income, comprise comprehensive income.
CHANGE IN METHOD OF ACCOUNTING FOR PROPERTY TAXES
During the first quarter of 1998, Consumers implemented a change in
the method of accounting for property taxes so that such taxes are
recognized during the fiscal period of the taxing authority for
which the taxes are levied. This change provides a better matching
of property tax expense with the services provided by the taxing
authorities, and is considered the most acceptable basis of
recording property taxes. Prior to 1998, Consumers recorded
property taxes monthly during the year following the assessment
date (December 31). The cumulative effect of this one-time change
in accounting increased other income by $66 million, and earnings,
net of tax, by $43 million. The pro forma effect on prior years'
consolidated net income of retroactively recording property taxes
as if the new method of accounting had been in effect for all
periods presented is not material.
2: Uncertainties
ELECTRIC CONTINGENCIES
Electric Environmental Matters: The Clean Air Act limits emissions
of sulfur dioxide and nitrogen oxides and requires 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.
During the past few years, in order to comply with the Act,
Consumers incurred capital expenditures totaling $46 million to
install equipment at certain generating units. Consumers estimates
capital expenditures for in-process and proposed modifications at
other coal-fueled units to be an additional $26 million by the year
2000. Management believes that these expenditures will not
materially affect Consumers' annual operating costs.
Consumers currently operates within all Clean Air Act requirements
and meets current emission limits. The Act requires the EPA to
review, periodically, the effectiveness of the national air quality
standards in preventing adverse health affects. The EPA recently
revised these standards. The revisions may further limit small
particulate and ozone related emissions. Consumers supports the
bipartisan effort in the U.S. Congress to delay implementation of
the revised standards until the relationship between the new
standards and health improvements is established scientifically.
In October 1997, following completion of the Ozone Transport
Assessment Group process and requests by several Northeastern
states, the EPA proposed that the State of Michigan impose
additional nitrogen oxide limits on fossil-fueled emitters, such as
Consumers' generating units. The limits would reduce nitrogen
oxide emissions, as early as 2002, to only 32 percent of levels
allowed for the year 2000 under current regulations. The EPA is
expected to issue final regulations in the fall of 1999. The State
of Michigan will have one year after final regulations are issued
to implement the requirements. It is unlikely that the State of
Michigan will establish Consumers' nitrogen oxide emissions
reduction target until mid-to-late 1999. Until this target is
established, the estimated cost of compliance is subject to
significant revision.
The preliminary estimate of capital costs to reduce nitrogen oxide
related emissions for Consumers' fossil-fueled generating units is
approximately $210 million, plus an additional amount totaling $10
million per year for operation and maintenance costs. Consumers
may need an equivalent amount to comply with the new small
particulate standards. The State of Michigan has objected to the
extent of the proposed EPA emission reductions. If the State of
Michigan's position were to be adopted by the EPA, costs could be
less than the current estimated amounts.
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. Nevertheless, it
believes that these costs are properly recoverable in rates under
current ratemaking policies.
Consumers is a so-called potentially responsible party at several
contaminated sites administered under Superfund. Superfund
liability is joint and several; along with Consumers, many other
creditworthy, potentially responsible parties with substantial
assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total
liability for the known Superfund sites will be between $3 million
and $9 million. At June 30, 1998, Consumers has accrued $3 million
for its estimated Superfund liability.
While decommissioning Big Rock, Consumers found that some areas of
the plant have coatings that contain both metals and PCBs.
Consumers does not believe that any facility in the United States
currently accepts the radioactive portion of that waste. The cost
of removal and disposal is currently unknown. These costs would
constitute part of the cost to decommission the plant, and will be
paid from the decommissioning fund. Consumers is studying the
extent of the contamination and reviewing options.
Stray Voltage: Various parties have sued 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. It also has an ongoing
mitigation program to modify the service of all customers with
livestock.
In December 1997, the Michigan Supreme Court remanded for further
proceedings a 1994 Michigan trial court decision that refused to
allow the claims of over 200 named plaintiffs to be joined in a
single action. The trial court dismissed all of the plaintiffs
except the first-named plaintiff, allowing the others to re-file
separate actions. Of the original plaintiffs, only 49 re-filed
separate cases. All of those 49 cases have been resolved. The
Michigan Supreme Court remanded the matter, finding that the proper
remedy for misjoinder was not dismissal, but to automatically allow
each case to go forward separately. Consumers filed a motion for
reconsideration with the Michigan Supreme Court, which was denied.
As a result, 21 individual plaintiffs have re-filed their claims
with the trial court. Consumers intends to vigorously defend these
cases, but is unable to predict the outcome. As of June 30, 1998,
Consumers had 5 individual stray voltage lawsuits awaiting trial
court action, unrelated to the cases above. At year end 1997,
Consumers had 12 such lawsuits awaiting trial court action.
Anti-Trust: In October 1997, two independent power producers sued
Consumers and CMS Energy in a federal court. The suit alleges
antitrust violations relating to contracts which Consumers entered
into with some of its customers and claims relating to power
facilities. The plaintiffs claim damages of $100 million (which a
court can treble in antitrust cases as provided by law). The
parties are awaiting the court's decision on Consumers' and CMS
Energy's motion for summary judgment and/or dismissal of the
complaint. Consumers believes the lawsuit is without merit and
will vigorously defend against it, but cannot predict the outcome
of this matter.
ELECTRIC RATE MATTERS
Electric Proceedings: In 1996, the MPSC issued a final order that
authorized Consumers to recover costs associated with the purchase
of the additional 325 MW of MCV Facility capacity (see "Power
Purchases from the MCV Partnership" in this Note) and recover its
nuclear plant investment by increasing prospective annual nuclear
plant depreciation expense by $18 million, with a corresponding
decrease in fossil-fueled generating plant depreciation expense.
It also established an experimental 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 and Consumers would transmit the power for a fee.
The program is limited to 650 MW of load, of which 100 MW is
available solely to direct-access customers for at least 18 months.
The Commission's order allowed existing special contracts to fill
410 MW of the load. Although the issue is still subject to MPSC
review, it is Consumers' position that the remaining 140 MW of the
650 MW load could be filled by either special contracts or direct-
access loads. The load was filled by new special contracts signed
subsequent to the order. According to the MPSC order, Consumers
held a lottery in April 1997 to select the customers to purchase
100 MW by direct-access. Direct-access for a portion of this 100
MW began in late 1997. Consumers expects the remaining amount of
direct-access to begin in 1998.
In January 1998, the Court of Appeals affirmed an MPSC conclusion
that the MPSC has statutory authority to authorize an experimental
electric retail wheeling program. By its terms, no retail wheeling
has yet occurred pursuant to that program. Consumers filed with
the Michigan Supreme Court seeking leave to appeal that ruling.
For information on other orders, see the Electric Restructuring
section below.
Electric Restructuring: As part of ongoing proceedings relating to
the restructuring of the electric utility industry in Michigan, in
June 1997 the MPSC issued an order proposing that beginning January
1, 1998 Consumers transmit and distribute energy on behalf of
competing power suppliers to serve retail customers.
Subsequent to the June 1997 order, the MPSC issued further
restructuring orders in October 1997 and in January and February
1998. These orders provide for: 1) the recovery of estimated
Transition Costs of $1.755 billion through a charge to all direct-
access customers until the end of the transition period in 2007,
subject to an adjustment through a true-up mechanism; 2) the
commencement of the phase-in of direct-access in 1998; 3) the
suspension of the power supply cost recovery clause; and 4) all
customers to be free to choose power suppliers on January 1, 2002.
See "Other Electric Uncertainties" below for further information
regarding the effect of the PSCR suspension on the recovery of MCV
Facility capacity charges. The orders also confirm the MPSC's
belief that Securitization may be a beneficial mechanism for
recovery of Transition Costs while recognizing that Securitization
requires state legislation to occur. Consumers believes that the
Transition Cost surcharge will apply to all customers beginning in
2002. The recovery of prudent costs of implementing a
direct-access program, estimated at an additional $200 million,
would be reviewed for prudence and recovered via a charge approved
by the MPSC. Nuclear decommissioning costs will also continue to
be collected through a separate surcharge to all customers.
Consumers expects Michigan legislative consideration of the entire
subject of electric industry restructuring in 1998. To be
acceptable to Consumers, the legislation would have to provide for
full recovery of Transition Costs. Consumers expects the
legislature to review all of the policy choices made by the MPSC
during the restructuring proceedings to assure that they are in
accord with those that the legislature believes should be
paramount.
There are numerous appeals pending at the Court of Appeals relating
to the MPSC's restructuring orders, including appeals by Consumers
and Detroit Edison. Consumers believes that the MPSC lacks
statutory authority to mandate industry restructuring, and its
appeal is limited to this jurisdictional issue.
As a result of an informal process involving consultations with
MPSC staff and other interested parties, as directed in the MPSC's
February 1998 order, Consumers submitted to the MPSC in June 1998
its plan for implementing direct-access. The primary issues
addressed in the plan are: 1) the implementation schedule; 2) the
direct-access service options available to customers and suppliers;
3) the process and requirements for customers and others to obtain
direct-access service; and 4) the roles and responsibilities for
Consumers, customers and suppliers. Under the schedule in the
plan, Consumers will, over the 1998-2001 period, phase-in 750 MW of
electric capacity for direct-access to customers. In 1998, 300 MW
of direct-access for bidding will be open, and an additional 150 MW
will open for each year from 1999 to 2001. This plan is consistent
with the previous orders regarding the phase-in process. Due to
the time required for the MPSC to review the plan, Consumers does
not believe direct-access will commence prior to the fourth quarter
of 1998. For further information regarding the effects of the
restructuring on accounting methods, see Electric Business Outlook
- - Electric Application of SFAS 71 in the MD&A. Consumers cannot
predict the outcome or timing of electric restructuring on
Consumers' financial position, liquidity, or results of operations.
OTHER ELECTRIC UNCERTAINTIES
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 FMLP, a 35 percent lessor interest in
the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings-
In Millions
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Pretax operating
income $13 $10 $23 $18 $51 $46
Income taxes and
other 4 3 7 5 16 14
---- ---- ---- ---- ---- ----
Net income $ 9 $ 7 $16 $13 $35 $32
==== ==== ==== ==== ==== ====
Power Purchases from the MCV Partnership- After September 2007,
pursuant to the terms of the PPA and related undertakings,
Consumers will only be required to pay the MCV Partnership the
capacity charge and energy charge amounts authorized for recovery
from electric customers by the MPSC. Currently, Consumers' annual
obligation to purchase 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 has, since January 1,
1993, permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the
fixed and variable energy charges. Beginning January 1, 1996, the
MPSC has also permitted Consumers to recover capacity charges for
the remaining 325 MW of MCV Facility contract capacity. The order
approving such recovery indicated that the recoverable capacity
charge for the 325 MW would gradually increase from an initial
average charge of 2.86 cents per kWh to an average charge of 3.62
cents per kWh over the 1996-2004 time period. Because the MPSC
allowed Consumers to suspend the PSCR process as part of the
electric industry restructuring order (see "Electric Restructuring"
in this Note), Consumers expects to recover a portion of the future
increases in approved capacity charges through an adjustment to the
frozen PSCR charge.
Consumers recognized a loss in 1992 for the present value of the
estimated future underrecoveries of power costs under the PPA. At
June 30, 1998 and December 31,1997, the after-tax present value of
the PPA liability totaled $126 million and $117 million,
respectively. The increase in the liability since December 31,
1997 reflects an additional $37 million accrual ($24 million after-tax)
for higher than anticipated MCV Facility availability levels
experienced in prior periods and an after-tax accretion expense of
$5 million, partially offset by after-tax cash underrecoveries of
$20 million. The undiscounted after-tax amount associated with the
liability totaled $176 million at June 30, 1998. The after-tax
cash underrecoveries are currently based on the assumption that the
MCV Facility will be available to generate electricity 91.5 percent
of the time over its expected life. For the first six months of
1998 the MCV Facility was available 99 percent of the time,
resulting in $11 million over anticipated after-tax cash
underrecoveries. Consumers believes it will continue to experience
after-tax cash underrecoveries associated with the PPA in amounts
as those shown below.
In Millions
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Estimated cash
underrecoveries,
net of tax $34 $22 $21 $20 $19
==== ==== ==== ==== ====
Consumers bases the above estimated underrecoveries, in part, on an
estimate 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, Consumers will need to recognize losses
for future underrecoveries larger than amounts previously recorded.
Therefore, Consumers would experience larger amounts of cash
underrecoveries than originally anticipated. Management will
continue to evaluate the adequacy of the accrued liability
considering actual MCV Facility operations.
In February 1998, the MCV Partnership filed a claim of appeal from
the January 1998 and February 1998 MPSC orders in the electric
utility industry restructuring. At the same time, the MCV
Partnership filed suit in the U.S. District Court seeking a
declaration that the MPSC's failure to provide Consumers and the
MCV Partnership a certain source of recovery of capacity payments
after 2007 deprived the MCV Partnership of its rights under the
Public Utilities Regulatory Policies Act of 1978. The MCV
Partnership is seeking to prohibit the MPSC from implementing
portions of the order.
PSCR Matters Related to Power Purchases from the MCV Partnership-
As part of a 1995 decision in the 1993 PSCR reconciliation case,
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 an earlier 1993 settlement order and
appealed. The MCV Partnership and ABATE also filed separate
appeals of this order. In November 1996, the Court of Appeals
affirmed the MPSC's 1995 decision. The MCV Partnership filed an
application for leave to appeal with the Michigan Supreme Court
which was denied in January 1998. This matter is now closed.
Nuclear Matters: Consumers filed updated decommissioning
information with the MPSC in 1995 that 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.
On March 31, 1998, Consumers filed with the MPSC a new
decommissioning cost estimate for Big Rock and Palisades of $294
million and $518 million (in 1997 dollars) respectively. The
estimated decommissioning costs decreased from previous estimates
primarily due to a decrease in offsite burial costs. Consumers
recommended a reallocation of its existing surcharge between the
two plants on January 1, 1999 to provide additional funds to
decommission Big Rock. Consumers filed a revision to its Post
Shutdown Activities Report (formerly decommissioning report) with
the NRC to reflect the shutdown of Big Rock.
Big Rock is being decommissioned. It was closed permanently on
August 29, 1997 because management determined that it would be
uneconomical to operate in an increasingly competitive environment.
Consumers originally scheduled the plant to close May 31, 2000, at
the end of the plant's operating license. Plant decommissioning
began in September 1997 and may take five to ten years to return
the site to its original condition.
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.
Palisades' temporary on-site storage pool for spent nuclear fuel is
at capacity. Consequently, Consumers is using NRC-approved steel
and concrete vaults, commonly known as "dry casks", for temporary
on-site storage.
As of June 30, 1998 Consumers had loaded 13 dry storage casks with
spent nuclear fuel at Palisades. Consumers plans to load five
additional casks at Palisades in 1999 pending approval by the NRC.
In June 1997, the NRC approved Consumers' process for unloading
spent fuel from a cask at Palisades previously discovered to have
minor weld flaws. Consumers intends to transfer the spent fuel to
a new transportable cask when one is available.
A planned outage for refueling and maintenance at Palisades was
completed June 7, 1998. Consumers replaced 60 nuclear fuel
assemblies in the plant's reactor during the outage.
The NRC requires Consumers to make certain calculations and report
to it on the continuing ability of the Palisades reactor vessel to
withstand postulated pressurized thermal shock events during its
remaining license life, considering the embrittlement of reactor
vessel materials over time due to operation in a radioactive
environment. Based on continuing analysis of data 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, it can operate
Palisades to the end of its license life in the year 2007 without
annealing the reactor vessel. Nevertheless, Consumers will
continue to monitor the matter.
Capital Expenditures: Consumers estimates electric capital
expenditures, including new lease commitments, of $320 million for
1998, $265 million for 1999, and $255 million for 2000. For
further information, see the Capital Expenditures Outlook section
in the MD&A.
GAS CONTINGENCIES
Gas Environmental Matters: 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 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a
partial or no current ownership interest. In 1998 Consumers plans
to study indoor air issues at residences on some sites and ground
water impacts or surface soil impacts at other sites. On sites
where Consumers has received site-wide study plan approvals, it
will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed.
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 1998 costs. As
of June 30,1998, 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
techniques, nature and extent of contamination, and legal and
regulatory requirements, could affect the estimate of remedial
action costs for the sites. According to an MPSC rate order issued
in 1996, Consumers will defer and amortize, over a period of ten
years, environmental clean-up costs above the amount currently
being recovered in rates. 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, or has
initiated a lawsuit against, certain insurance companies regarding
coverage for some or all of the costs that it may incur for these
sites.
GAS RATE MATTERS
GCR Matters: In 1995, the MPSC issued an order regarding a $44
million (excluding interest) gas supply contract pricing dispute
between Consumers and certain gas producers. The order stated that
Consumers was not obligated to seek prior approval of market-based
pricing changes that Consumers implemented under the contracts in
question. The Court of Appeals upheld the MPSC order. The
producers sought leave to appeal with the Michigan Supreme Court.
Their request is still pending. 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.
Gas Restructuring: In December 1997, the MPSC approved Consumers'
application to implement a statewide experimental gas
transportation pilot program. Consumers' expanded experimental
program will extend over a three-year period, eventually allowing
300,000 residential, commercial and industrial retail gas sales
customers to choose their gas supplier. The program is voluntary
for natural gas customers. Participating customers are being
selected on a first-come, first-served basis, up to a limit of
100,000 customers beginning April 1, 1998. As of July 23, 1998
approximately 21,800 customers chose alternative gas suppliers,
representing approximately 13 bcf of gas load. Of these
alternative gas suppliers, one was a CMS Energy affiliate. Up to
100,000 more customers may be added beginning April 1 of each of
the next two years. Customers choosing to remain as sales
customers of Consumers will not see a rate change in their natural
gas rates. The order allowing the implementation of this program:
1) suspends Consumers' gas cost recovery clause, effective April 1,
1998 for a three-year period, establishing a gas commodity cost at
a fixed rate of $2.84 per mcf; 2) establishes an earnings sharing
mechanism that will provide for refunds to customers if Consumers'
earnings during the three year term of the program exceed certain
pre-determined levels; and 3) establishes a gas transportation code
of conduct that addresses concerns about the relationship between
Consumers and marketers, including its affiliated marketers. This
experimental program will allow competing gas suppliers, including
marketers and brokers, to market natural gas to a large number of
retail customers in direct competition with Consumers. In January
1998, the Attorney General, ABATE and other parties filed claims of
appeal regarding the program with the Court of Appeals. At June
30, 1998, Consumers had an exposure to gas price increases if the
cost was to exceed $2.84 per mcf for the following volumes: 5
percent of its 1998 requirements; 40 percent of its 1999
requirements; and 65 percent of its 2000 requirements. Additional
forward coverage is currently under review. The forward contracts
currently in place were consummated at prices less than $2.84 per
mcf. The contracts are being used to hedge Consumers' gas
commodity cost increases in a three-year experimental gas program.
For further information regarding the effects of the restructuring
on accounting methods, see Gas Business Outlook - Application of
SFAS 71 in the MD&A.
OTHER GAS UNCERTAINTIES
Capital Expenditures: Consumers estimates gas capital
expenditures, including new lease commitments, of $115 million for
1998, $115 million for 1999, and $115 million for 2000. For
further information, see the Capital Expenditures Outlook section
in the MD&A.
In addition to the matters disclosed in this note, 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. These
lawsuits and proceedings may involve personal injury, property
damage, contractual matters, environmental issues, federal and
state taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies
discussed in this Note. Resolution of these contingencies is not
expected to have a material adverse impact on Consumers' financial
position, liquidity, or results of operations.
3: Short-Term Financings and Capitalization
Authorization: At July 1, 1998, Consumers had remaining FERC
authorization to: 1) issue or guarantee up to $900 million of
short-term securities outstanding at any one time, through June
2000; 2) guarantee, through 1999, up to $25 million in loans made
by others to residents of Michigan for making energy-related home
improvements; and 3) issue long-term securities with maturities up
to 30 years, through June 2000, up to $950 million and $200 million
for refinancing purposes and for general corporate purposes,
respectively.
Short-Term Financings: Consumers has an unsecured $425 million
credit facility and unsecured lines of credit aggregating $120
million. These facilities are available to finance seasonal
working capital requirements and to pay for capital expenditures
between long-term financings. At June 30, 1998, a total of $255
million was outstanding at a weighted average interest rate of 6.0
percent, compared with $241 million outstanding at June 30, 1997,
at a weighted average interest rate of 6.2 percent. In January
1998, Consumers entered into interest rate swaps totaling $300
million. These swap arrangements have had an immaterial effect on
interest expense.
Consumers also has in place a $500 million trade receivables sale
program. At June 30, 1998 and 1997, receivables sold under the
program totaled $236 million and $266 million, respectively.
Accounts receivable and accrued revenue in the Consolidated Balance
Sheets have been reduced to reflect receivables sold.
Capital Stock: The primary asset of Consumers Power Company
Financing I is $103 million principal amount of 8.36 percent
subordinated deferrable interest notes due 2015 from Consumers.
The primary asset of Consumers Energy Company Financing II is $124
million principal amount of 8.20 percent subordinated deferrable
interest notes due 2027 from Consumers.
Long-Term Financings: The following table describes the new
issuances of long-term financings which have occurred during 1998
through early August 1998.
In Millions
Month Interest Principal
Issued Maturity Rate (%) Amount Use of Proceeds
Senior Notes (a) February 2008 6.375 $ 250 Pay down First
Mortgage Bonds
Senior Notes (a) March 2018 6.875 225 Pay down First
Mortgage Bonds
Senior Notes (a) May 2008 6.2 (b) 250 Pay down First
Mortgage Bonds
and Long-Term
Bank Debt
Senior Notes (a) June 2018 6.5 (c) 200 Pay down First
Mortgage Bonds
and general
corporate purposes
Long-Term
Bank Debt May 2001-2003 6.05 (d) 225 Pay down Long-Term
Bank Debt
and general
corporate purposes
------
Total $1,150
======
(a) The Senior Notes are secured by Consumers First Mortgage Bonds
issued contemporaneously in a similar amount.
(b) The interest rate may be reset in 2003.
(c) The interest rate will be reset in June 2005.
(d) The interest rate is variable; weighted average interest rate
upon original issuance was 6.05 percent.
The following table describes the retirements of long-term
financings which have occurred during 1998 through early August
1998.
In Millions
Month Interest Principal
Retired Maturity Rate (%) Amount
------- -------- ----- -------
First Mortgage Bonds February 1998 8.75 $248
Long-Term Bank Debt February 1998 6.4 (a) 50
First Mortgage Bonds March 2001-2002 7.5 119
First Mortgage Bonds April 2023 7.375 36
First Mortgage Bonds May 1998 6.875 43
Long-Term Bank Debt May 1998-1999 6.3 (b) 350
First Mortgage Bonds July 1999 8.875 136
----
Total $982
====
(a) The interest rate was variable; weighted average interest rate
at December 31, 1997 was 6.4 percent.
(b) The interest rate was variable; weighted average interest rate
at March 31, 1998 was 6.3 percent.
Consumers had unsecured, variable rate long-term bank debt with an
outstanding balance at June 30, 1998 and 1997 of $225 million and
$400 million, respectively. At June 30, 1998 and 1997 the debt
carried weighted average interest rates of 6.1 percent and 6.2
percent, respectively. In February 1998, Consumers retired $50
million of its $400 million unsecured long-term bank debt. In May
1998, Consumers refinanced the remaining $350 million unsecured
long-term bank debt, in part with $225 million unsecured long-term
bank debt. To cover the remaining $125 million of bank debt
refinancing, in May 1998 Consumers issued $250 million of senior
notes due 2008, at an interest rate of 6.2 percent. The $125
million balance of senior notes due 2008 will be used for refunding
or repurchasing various First Mortgage Bonds or for general
corporate purposes.
Under the provisions of its Articles of Incorporation at June 30,
1998, Consumers had $312 million of unrestricted retained earnings
available to pay common dividends. In July 1998, Consumers
declared a $44 million common dividend to be paid in August 1998.
<PAGE> 72
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance
sheets of CONSUMERS ENERGY COMPANY (a Michigan corporation
and wholly owned subsidiary of CMS Energy Corporation) and
subsidiaries as of June 30, 1998 and 1997, the related
consolidated statements of income and common stockholder's
equity for the three-month, six-month, and twelve-month
periods then ended, and the related consolidated statements
of cash flows for the six-month and twelve-month periods
then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial
statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
and consolidated statements of long-term debt and preferred
stock of Consumers Energy Company and subsidiaries as of
December 31, 1997, and the related consolidated statements
of income, common stockholder's equity and cash flows for
the year then ended (not presented herein), and, in our
report dated January 26, 1998, we expressed an unqualified
opinion on those statements. In our opinion, the
information set forth in the accompanying consolidated
balance sheet as of December 31, 1997, is fairly stated, in
all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Arthur Andersen
LLP
Detroit, Michigan,
August 11, 1998.
<PAGE> 73
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
CMS Energy
Quantitative and Qualitative Disclosures About Market Risk is contained
in PART 1: CMS ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
which is incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of certain legal proceedings see Note 2, subsections
"Stray Voltage" and "Anti-Trust", of the Condensed Notes to the
Consolidated Financial Statements in Part I of this Report, incorporated
by reference herein. The discussion is limited to an update of
developments that have occurred in various judicial and administrative
proceedings, many of which are more fully described in CMS Energy's and
Consumers' Form 10-K for the year ended December 31, 1997, and in their
Form 10-Q for the quarter ended March 31, 1998. The Condensed Notes also
include additional information regarding various pending administrative
and judicial proceedings involving rate, operating and environmental
matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the CMS Energy Annual Meeting of Shareholders held on May 22, 1998, the
shareholders ratified the appointment of Arthur Andersen LLP as
independent auditors of CMS Energy for the year ended December 31, 1998.
The vote was 91,399,366 shares in favor and 345,414 against, with 449,175
abstaining. The CMS Energy shareholders voted against a shareholder's
proposal to adopt a five point program addressing Consumers' operating as
a "Utility of Choice" and under "Utility of Choice" guidelines. The vote
was 2,549,545 shares in favor and 76,358,536 against, with 3,770,814
abstaining. The CMS Energy shareholders also elected all ten nominees
for the office of director. The votes for individual nominees were as
follows:
CMS ENERGY CORPORATION
Number of Votes: For Withheld Total
William T. McCormick, Jr. 91,441,628 752,327 92,193,955
John M. Deutch 91,480,907 713,048 92,193,955
James J. Duderstadt 91,464,959 728,996 92,193,955
Kathleen R. Flaherty 91,473,241 720,714 92,193,955
Victor J. Fryling 91,486,712 707,243 92,193,955
Earl D. Holton 91,501,516 692,439 92,193,955
William U. Parfet 91,453,119 740,836 92,193,955
Percy A. Pierre 91,474,471 719,484 92,193,955
Kenneth Whipple 91,497,651 696,304 92,193,955
John B. Yasinsky 91,504,196 689,759 92,193,955
Consumers did not solicit proxies for the matters submitted to votes at
the contemporaneous May 22, 1998 Consumers' Annual Meeting of
Shareholders. All 84,108,789 shares of Consumers Common Stock were voted
in favor of re-electing the above-named individuals as directors of
Consumers and in favor of ratifying the appointment of Arthur Andersen LLP
as independent auditors of Consumers for the year ended December 31, 1998.
None of the 441,599 shares of Consumers Preferred Stock were voted at the
Annual Meeting.
<PAGE>
<PAGE> 74
ITEM 5. OTHER INFORMATION
A shareholder who intends to submit a proposal for a vote at CMS Energy's
1999 Annual Meeting of Shareholders but which will not be included in
CMS Energy's 1999 proxy statement must send the proposal to reach
CMS Energy on or before March 6, 1999. The proposals should be addressed
to: Mr. Thomas A. McNish, Corporate Secretary, Fairlane Plaza South, Suite
1100, 330 Town Center Drive, Dearborn, Michigan 48126. Failure to timely
submit the proposal will allow management to use discretionary voting
authority when the proposal is raised at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
(12) - CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
(27)(a) - CMS Energy: Financial Data Schedule
(27)(b) - Consumers: Financial Data Schedule
(99) - CMS Energy: Consumers Gas Group Financials
(b) REPORTS ON FORM 8-K
Current Reports on Form 8-K dated June 23, 1998 and July 30, 1998 were
filed by CMS Energy covering matters pursuant to "Item 5. Other Events."
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized. The
signature for each undersigned company shall be deemed to relate
only to matters having reference to such company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Dated: August 14, 1998 By
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
(Registrant)
Dated: August 14, 1998 By
Alan M. Wright
Senior Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and Preferred Securities Dividends and Distributions
(Millions of Dollars)
Six Months
Ended Years Ended December 31
June 30, 1998 1997 1996 1995 1994 1993
(b)
<S> <C> <C> <C> <C> <C> <C>
Earnings as defined (a)
Consolidated net income $ 110 $ 244 $ 224 $ 195 $ 177 $ 130
Income taxes 45 108 137 113 91 62
Exclude equity basis subsidiaries (38) (80) (85) (57) (18) (6)
Fixed charges as defined, adjusted to
exclude capitalized interest of $11, $13,
$5, $4, $2, and $2 million for the six
months ended June 30, 1998 and for the
years ended December 31, 1997, 1996,
1995, 1994 and 1993, respectively 197 360 313 299 253 247
----- ----- ----- ----- ----- -----
Earnings as defined $ 314 $ 632 $ 589 $ 550 $ 503 $ 433
===== ===== ===== ===== ===== =====
Fixed charges as defined (a)
Interest on long-term debt $ 154 $ 273 $ 230 $ 224 $ 193 $ 204
Estimated interest portion of lease rental 3 8 10 9 9 12
Other interest charges 25 49 43 42 30 25
Preferred securities dividends and
distributions 40 67 54 42 36 17
----- ----- ----- ----- ----- -----
Fixed charges as defined $ 222 $ 397 $ 337 $ 317 $ 268 $ 258
===== ===== ===== ===== ===== =====
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.41 1.59 1.75 1.74 1.88 1.68
===== ===== ===== ===== ===== =====
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K.
(b) Excludes a cumulative effect of change in accounting after-tax gain of $43 million.
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
Exhibit(15)
To CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by
reference in its Registration Statements No. 33-29681, No.
33-47629, No. 33-60007, No. 33-61595, No. 33-62573, No. 333-32229,
No. 333-34087, No. 333-48899, and No. 333-60795 its
Form 10-Q for the quarter ended June 30, 1998, which
includes our report dated August 11, 1998 covering the
unaudited interim financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that
report is not considered a part of the registration
statement prepared or certified by our firm or a report
prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Arthur Andersen
LLP
Detroit, Michigan,
August 11, 1998.
ARTHUR ANDERSEN LLP
Exhibit(15)
To Consumers Energy Corporation:
We are aware that Consumers Energy Corporation has
incorporated by reference in its Registration Statements No.
333-58943 and No. 333-59953 its Form 10-Q for the quarter
ended June 30, 1998, which includes our report dated August
11, 1998 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of
the Securities Act of 1933, that report is not considered a
part of the registration statement prepared or certified by
our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Arthur Andersen LLP
Detroit, Michigan,
August 11, 1998.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,350
<OTHER-PROPERTY-AND-INVEST> 2,724
<TOTAL-CURRENT-ASSETS> 1,257
<TOTAL-DEFERRED-CHARGES> 1,527
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 9,858
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,297
<RETAINED-EARNINGS> (292)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,877
393
238
<LONG-TERM-DEBT-NET> 1,551
<SHORT-TERM-NOTES> 255
<LONG-TERM-NOTES-PAYABLE> 2,743
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 88
0
<CAPITAL-LEASE-OBLIGATIONS> 78
<LEASES-CURRENT> 38
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,468
<TOT-CAPITALIZATION-AND-LIAB> 9,858
<GROSS-OPERATING-REVENUE> 2,506
<INCOME-TAX-EXPENSE> 68
<OTHER-OPERATING-EXPENSES> 2,121
<TOTAL-OPERATING-EXPENSES> 2,189
<OPERATING-INCOME-LOSS> 317
<OTHER-INCOME-NET> 30
<INCOME-BEFORE-INTEREST-EXPEN> 347
<TOTAL-INTEREST-EXPENSE> 168
<NET-INCOME> 179
26
<EARNINGS-AVAILABLE-FOR-COMM> 153
<COMMON-STOCK-DIVIDENDS> 66
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 309
<EPS-PRIMARY> 1.42<F1>
<EPS-DILUTED> 1.39
<FN>
<F1> EPS for CMS Energy Common Stock $1.42
EPS for Class G Common Stock $1.20
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND
STATEMENT OF COMMON STOCKHOLDER'S EQUITY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000201533
<NAME> CONSUMERS ENERGY COMPANY
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,350
<OTHER-PROPERTY-AND-INVEST> 732
<TOTAL-CURRENT-ASSETS> 754
<TOTAL-DEFERRED-CHARGES> 1,240
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,076
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 452
<RETAINED-EARNINGS> 396
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,748
220
238
<LONG-TERM-DEBT-NET> 995
<SHORT-TERM-NOTES> 255
<LONG-TERM-NOTES-PAYABLE> 1,164
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 56
0
<CAPITAL-LEASE-OBLIGATIONS> 77
<LEASES-CURRENT> 38
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,344
<TOT-CAPITALIZATION-AND-LIAB> 7,076
<GROSS-OPERATING-REVENUE> 1,883
<INCOME-TAX-EXPENSE> 90
<OTHER-OPERATING-EXPENSES> 1,559
<TOTAL-OPERATING-EXPENSES> 1,649
<OPERATING-INCOME-LOSS> 234
<OTHER-INCOME-NET> 34
<INCOME-BEFORE-INTEREST-EXPEN> 268
<TOTAL-INTEREST-EXPENSE> 87
<NET-INCOME> 181
19
<EARNINGS-AVAILABLE-FOR-COMM> 162
<COMMON-STOCK-DIVIDENDS> 129
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 322
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
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 Company, a subsidiary of
Consumers (collectively, Consumers Gas Group). Accordingly, this MD&A
should be read along with the MD&A in the 1997 Annual Report of CMS Energy
included and incorporated by reference herein.
CMS Energy is the parent holding company of Consumers and CMS Enterprises
Company. Consumers, a combination electric and gas utility company
serving the Lower Peninsula of Michigan, is the principal subsidiary of
CMS Energy. For further information regarding the businesses of
CMS Energy, including the nature and issuance of Class G Common Stock, see
the MD&A of CMS Energy.
Results of Operations
In Millions
June 30 1998 1997 Change
---- ---- ------
Three months ended $ 4 $ 5 $ (1)
Six months ended 40 44 (4)
Twelve months ended 56 50 6
The decreases in earnings for the three months and six months ended June
30, 1998 compared to the same 1997 periods reflect decreased gas
deliveries due to warmer 1998 temperatures and higher operations expense
related to growth in retail services programs. The first six months of
1998 were the third warmest since 1864. Revenues were down for the six
month period ended June 30, 1998 due to the elimination of surcharges
related to past conservation programs. Partially offsetting the decrease
for the six month period ended June 30, 1998 was the benefit resulting
from an accounting change for property taxes. The recognition of property
tax expense was changed from expensing on a calendar year basis to a
fiscal year basis which resulted in a benefit of $18 million ($12 million
after-tax). This one-time benefit helped to offset the warmest winter
since 1880. The increase in earnings for the twelve months ended June 30,
1998 compared to the 1997 period reflects the change in accounting for
property taxes implemented in March 1998 as discussed above. Also
benefitting the 1998 period was the recognition of interest income from a
related-party property sale. Partially offsetting these increases were
decreased gas deliveries due to warmer winter temperatures during the
1997/1998 winter heating season and reduced revenues due to the
elimination of surcharges related to past conservation programs.
Gas Issues
For a discussion of Consumers Gas Group operating issues, see Consumers
Gas Group Results of Operations-Uncertainties in 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 the first six months of 1998 and
1997 totaled $139 million and $208 million, respectively. The $69 million
decrease is due primarily to higher summer gas inventory balances because
of lower sales resulting from warmer weather, the noncash effect of the
property tax accounting change and a decrease in the sale of accounts
receivable. 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 for the first six
months of 1998 and 1997 totaled $52 million and $56 million,
respectively. The $4 million decrease in cash used primarily reflects a
decrease in capital expenditures.
Financing Activities: Cash used in financing activities during the first
six months of 1998 and 1997 totaled $37 million and $135 million,
respectively. The $98 million decrease in cash used primarily reflects an
increase in the proceeds from senior notes, partially offset by an
increase in the retirement of bonds and other long-term debt and the
return of CMS Energy stockholders' contributions.
Other Investing and Financing Matters: Consumers has an agreement
permitting the sale of certain accounts receivable for up to $500 million.
At June 30, 1998, receivables sold under the program totaled $236 million.
Consumers Gas Group's attributed portion of receivables sold under the
program totaled $40 million. Accounts receivable and accrued revenue in
the Consolidated Balance Sheets have been reduced to reflect receivables
sold. For detailed information, see "Short-Term and Long-Term Financings,
and Capitalization" in CMS Energy's Note 3.
Forward-Looking Information
For cautionary statements relating to Consumers Gas Group's forward-looking
information, see the Forward-Looking Information section 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 1998 1999 2000
---- ---- ----
Gas utility (a) $112 $112 $112
Michigan Gas Storage 3 3 3
---- ---- ----
$115 $115 $115
==== ==== ====
(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
the outlook of Consumers Gas Group, see the Consumers Gas Group Outlook
discussion in CMS Energy's MD&A.
(This page intentionally left blank)
<PAGE>
<TABLE>
Consumers Gas Group
Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997 1998 1997
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 170 $ 220 $ 599 $ 718 $1,085 $1,242
------ ------ ------ ------ ------ ------
Operating Expenses
Operation
Cost of gas sold 74 118 338 432 600 729
Other 44 43 90 82 183 186
------ ------ ------ ------ ------ ------
118 161 428 514 783 915
Maintenance 8 8 16 16 34 38
Depreciation, depletion and
amortization 14 17 51 55 89 91
General taxes 9 11 29 32 52 55
------ ------ ------ ------ ------ ------
149 197 524 617 958 1,099
------ ------ ------ ------ ------ ------
Pretax Operating Income 21 23 75 101 127 143
------ ------ ------ ------ ------ ------
Other Deductions - - - (1) (1) (5)
------ ------ ------ ------ ------ ------
Fixed Charges
Interest on long-term debt 7 7 14 14 28 29
Other interest 4 3 8 6 15 13
Capitalized interest - - - - - (1)
Preferred stock dividends 1 2 2 3 4 6
------ ------ ------ ------ ------ ------
12 12 24 23 47 47
------ ------ ------ ------ ------ ------
Income Before Income Taxes 9 11 51 77 79 91
Income Taxes 5 6 23 33 35 41
------ ------ ------ ------ ------ ------
Net Income before cumulative effect
of change in accounting principle 4 5 28 44 44 50
Cumulative effect of change in
accounting for property taxes,
net of $6 tax - - 12 - 12 -
------ ------ ------ ------ ------ ------
Net Income $ 4 $ 5 $ 40 $ 44 $ 56 $ 50
====== ====== ====== ====== ====== ======
Net Income Attributable to
CMS Energy Shareholders through
Retained Interest $ 3 $ 3 $ 30 $ 33 $ 42 $ 38
------ ------ ------ ------ ------ ------
Net Income Attributable to
Class G Shareholders $ 1 $ 2 $ 10 $ 11 $ 14 $ 12
------ ------ ------ ------ ------ ------
Average Class G Common Shares
Outstanding 8 8 8 8 8 8
------ ------ ------ ------ ------ ------
Basic and Diluted Earnings Per
Average Class G Common Share
Before Change in Accounting
Principle $ .12 $ .16 $ .84 $ 1.34 $ 1.35 $ 1.52
------ ------ ------ ------ ------ ------
Cumulative Effect of Change in
Accounting Principle, Net of Tax,
Per Average Class G Common Share $ - $ - $ .36 $ - $ .36 $ -
------ ------ ------ ------ ------ ------
Basic and Diluted Earnings Per
Average Class G Common Share $ .12 $ .16 $ 1.20 $ 1.34 $ 1.71 $ 1.52
------ ------ ------ ------ ------ ------
Dividend Declared Per Class G
Common Share $ .31 $ .295 $ .62 $ .59 $ 1.24 $ 1.18
====== ====== ====== ====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
/TABLE
<PAGE>
<PAGE> 5
<TABLE>
Consumers Gas Group
Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997
In Millions
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 40 $ 44 $ 56 $ 50
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 51 55 89 91
Deferred income taxes and investment tax credit 11 7 9 13
Capital lease and other amortization 2 1 5 2
Cumulative effect of accounting change for
property taxes (18) - (18) -
Other - (1) - -
Changes in other assets and liabilities 53 102 13 42
------ ------ ------ ------
Net cash provided by operating activities 139 208 154 198
------ ------ ------ ------
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under
capital lease) (49) (51) (111) (135)
Cost to retire property, net (4) (4) (9) (9)
Other 1 (1) 2 (1)
------ ------ ------ ------
Net cash used in investing activities (52) (56) (118) (145)
------ ------ ------ ------
Cash Flows from Financing Activities
Proceeds from senior notes 182 - 182 -
Issuance of common stock 3 2 8 5
Retirement of bonds and other long-term debt (123) (30) (133) (38)
Increase (decrease) in notes payable, net (55) (85) 35 6
Return of CMS Energy stockholders' contribution (21) - (60) -
Payment of common stock dividends (20) (19) (41) (38)
Payment of capital lease obligations (3) (1) (6) (2)
Proceeds from long-term note - - 25 -
Proceeds from bank loans - - - 23
Repayment of long-term note - (2) - (2)
Retirement of preferred stock - - (26) -
------ ------ ------ ------
Net cash used in financing activities (37) (135) (16) (46)
------ ------ ------ ------
Net Increase in Cash and Temporary Cash Investments 50 17 20 7
Cash and Temporary Cash Investments, Beginning of Period 2 15 32 25
------ ------ ------ ------
Cash and Temporary Cash Investments, End of Period $ 52 $ 32 $ 52 $ 32
====== ====== ====== ======
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $ 18 $ 21 $ 39 $ 42
Income taxes paid (net of refunds) 24 25 39 40
Non-cash transactions
Assets placed under capital lease $ 3 $ 1 $ 5 $ 2
====== ====== ====== ======
<FN>
All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 6
<TABLE>
Consumers Gas Group
Balance Sheets
<CAPTION>
ASSETS June 30 June 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
<S> <C> <C> <C>
Plant and Property (At cost)
Plant and property $2,307 $2,322 $2,270
Less accumulated depreciation, depletion and amortization 1,215 1,231 1,202
------ ------ ------
1,092 1,091 1,068
Construction work-in-progress 29 28 22
------ ------ ------
1,121 1,119 1,090
------ ------ ------
Current Assets
Cash and temporary cash investments at cost, which approximates market52 2 32
Accounts receivable and accrued revenue, less allowances
of $3, $3, and $2, respectively (Note 3) 14 53 72
Inventories at average cost
Gas in underground storage 178 197 125
Materials and supplies 6 7 8
Deferred income taxes - 6 3
Prepayments and other 46 51 27
------ ------ ------
296 316 267
------ ------ ------
Non-current Assets
Postretirement benefits 137 142 148
Deferred income taxes 10 6 12
Other 61 61 60
------ ------ ------
208 209 220
------ ------ ------
Total Assets $1,625 $1,644 $1,577
====== ====== ======
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES June 30 June 30
1998 December 31 1997
(Unaudited) 1997 (Unaudited)
In Millions
<S> <C> <C> <C>
Capitalization
Common stockholders' equity $ 360 $ 358 $ 397
Preferred stock 52 52 78
Long-term debt 486 333 356
Non-current portion of capital leases 16 16 16
------ ------ ------
914 759 847
------ ------ ------
Current Liabilities
Current portion of long-term debt and capital leases 27 118 82
Notes payable 64 119 29
Accounts payable 74 94 86
Accrued taxes 45 65 44
Accrued refunds 8 10 5
Accrued interest 6 4 4
Deferred income taxes 3 - -
Other 43 44 40
------ ------ ------
270 454 290
------ ------ ------
Non-current Liabilities
Regulatory liabilities for income taxes, net 180 173 177
Postretirement benefits 164 168 172
Deferred investment tax credit 25 25 26
Other 72 65 65
------ ------ ------
441 431 440
------ ------ ------
Commitments and Contingencies (Note 4)
Total Stockholders' Investment and Liabilities $1,625 $1,644 $1,577
====== ====== ======
<FN>
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 8
<TABLE>
Consumers Gas Group
Statements of Common Stockholders' Equity
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 1998 1997 1998 1997 1998 1997
In Millions
<S> <C> <C> <C> <C> <C> <C>
Common Stock
At beginning and end of period $184 $184 $184 $184 $184 $184
---- ---- ---- ---- ---- ----
Other Paid-in Capital
At beginning of period 88 135 102 134 136 131
Common stock issued 1 1 3 2 8 5
Return of CMS Energy stockholders'
contribution (5) - (21) - (60) -
---- ---- ---- ---- ---- ----
At end of period 84 136 84 136 84 136
---- ---- ---- ---- ---- ----
Retained Earnings
At beginning of period 98 81 72 52 77 65
Net income 4 5 40 44 56 50
Common stock dividends declared (10) (9) (20) (19) (41) (38)
---- ---- ---- ---- ---- ----
At end of period 92 77 92 77 92 77
---- ---- ---- ---- ---- ----
Total Common Stockholders' Equity $360 $397 $360 $397 $360 $397
==== ==== ==== ==== ==== ====
<FN>
The accompanying condensed notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 9
Consumers Gas Group
Condensed Notes to Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving the
Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy.
For further information regarding the businesses of CMS Energy, see the
Notes to Consolidated Financial Statements of CMS Energy included and
incorporated by reference herein.
CMS Energy has issued 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 Company, a subsidiary of Consumers (collectively, Consumers
Gas Group). For further information regarding the nature and issuance of
the Class G Common Stock, see Note 4 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 1997 Annual
Report of CMS Energy that includes the Report of Independent Public
Accountants, included and incorporated by reference herein.
2: Earnings Per Share and Dividends
Earnings per share for the three month period ended June 30, 1998 and June
30, 1997 reflect the performance of Consumers Gas Group. The Class G
Common Stock has participated in earnings and dividends since its original
issue date in July 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 six months ended
June 30, 1998 and 1997, are based on 25.27 percent and 24.30 percent of
the income of Consumers Gas Group, respectively.
In February and May 1998, CMS Energy declared and paid dividends of $.31
per share on Class G Common Stock. In July 1998, the Board of Directors
declared a quarterly dividend of $.325 per share on Class G Common Stock
to be paid in August 1998. This represents an increase in the annualized
dividend on Class G Common Stock to $1.30 per share from the previous
dividend of $1.24 per share (a 4.8 percent increase).
3: Short-Term And Long-Term Financings, and Capitalization
Short-Term Financings: Consumers' short-term financings are discussed in
Consolidated Financial Statements of CMS Energy Note 3 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 June 30, 1998 and 1997, is estimated by management
to be $40 million and $58 million, respectively. Accounts receivable and
accrued revenue in the balance sheets have been reduced to reflect
receivables sold. The portions of short-term debt and receivables sold
attributable 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. 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.
Capital Stock and Long-Term Debt: Consumers Gas Group's capital stock and
long-term debt, including debt resulting from the sale of Trust 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 long-term debt and capital stock of
CMS Energy and Consumers, see Note 3 to the Consolidated Financial
Statements of CMS Energy included and incorporated by reference herein.
4: Commitments and Contingencies
Capital Expenditures: Consumers Gas Group estimates capital expenditures,
including new lease commitments, of $115 million for 1998, 1999 and 2000.
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 Consumers Gas Group Contingencies
and Consumers Gas Group Matters in CMS Energy's Note 2 included and
incorporated by reference herein.
<PAGE> 11
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying balance sheets of CONSUMERS GAS GROUP
(representing a business unit of Consumers Energy Company and its wholly-
owned subsidiary, Michigan Gas Storage Company) as of June 30, 1998 and
1997, the related statements of income and common stockholders' equity for
the three-month, six-month, and twelve-month periods then ended, and the
related statements of cash flows for the six-month and twelve-month
periods then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Consumers Gas Group as of December 31,
1997, and the related statements of income, common stockholders' equity
and cash flows for the year then ended (not presented herein), and, in our
report dated January 26, 1998, we expressed an unqualified opinion on
those statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1997, is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
Arthur
Andersen
LLP
Detroit, Michigan,
August 11, 1998.
<PAGE>
<PAGE>
