<PAGE> 1
FORM 8-K
CURRENT REPORT
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 23, 1996
Commission Registrant; State of IRS Employer
File Number Incorporation; Address; Identification No
and Telephone Number
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313) 436-9261
<PAGE>
ITEM 5. OTHER EVENTS.
Audited financial statements of CMS Energy Corporation which became available
January 26, 1996 and CMS Energy Corporation's Management's Discussion and
Analysis, which are being filed pursuant to Regulation section 210.3-12 of
Regulation S-X, together with the Report of Independent Public Accountants,
Arthur Andersen LLP, dated January 26, 1996.
<PAGE>
<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS ENERGY CORPORATION (a
Michigan corporation) and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, common stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
CMS Energy Corporation and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
January 26, 1996.
<PAGE>
<PAGE> 4
CMS Energy Corporation
Management's Discussion and Analysis
CMS Energy Corporation (CMS Energy) is the parent holding company of
Consumers Power Company (Consumers) and CMS Enterprises Company
(Enterprises). Consumers, a combination electric and gas utility company
serving the Lower Peninsula of Michigan, is the principal subsidiary of
CMS Energy. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of
which is the automotive industry. Enterprises is engaged in several
domestic and international energy-related businesses, including oil and
gas exploration and production, development and operation of independent
power production facilities, electric and gas marketing services to
utility, commercial and industrial customers, and storage and transmission
of natural gas.
Consolidated Earnings
Consolidated net income for 1995 totaled $204 million comprised of $201
million of net income attributable to one of two classes of common stock
of CMS Energy (CMS Energy Common Stock) or $2.27 per share compared to net
income of $179 million or $2.09 per share in 1994 and net income of $155
million or $1.90 per share in 1993. Net income attributable to the other
class of common stock of CMS Energy, (Class G Common Stock) which reflects
the separate performance of the gas distribution, storage and
transportation currently conducted by Consumers and Michigan Gas Storage
Company (Consumers Gas Group) totaled $3 million or $.38 per share in
1995. The improved net income for 1995 reflects increased utility
electric sales and utility gas deliveries, increased electric utility
revenue as a result of the May 1994 rate increase, reversal of losses
previously recorded for gas utility contingencies (see Note 4), improved
operating results from Consumers' interest in the Midland Cogeneration
Venture (MCV) Facility, a natural gas-fueled, combined cycle cogeneration
facility (MCV Facility), and the continuing growth of the international
businesses. For further information, see the Electric and Gas Utility
Results of Operations sections and the individual international results of
operations sections. The increased 1994 net income over the 1993 period
reflects a significant increase in utility electric sales, the impact of
the 1994 electric rate increase, recognition of incentive revenue related
to demand-side management (DSM) programs, the favorable resolution of a
previously recorded gas cost contingency, and the growth of international
businesses.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from
its subsidiaries. In 1995, CMS Energy received a $70 million dividend
from Consumers compared to $176 million in 1994. This decrease represents
Consumers temporarily suspending its common dividends to CMS Energy in
lieu of CMS Energy making a direct equity infusion of cash into Consumers.
In 1996, Consumers plans to resume common stock dividend payments to CMS
Energy.
CMS Energy's consolidated cash from operations is derived mainly from
Consumers' sale and transportation of natural gas, its generation,
transmission, and sale of electricity and CMS NOMECO Oil & Gas Co.'s (CMS
NOMECO) sale of oil and natural gas. Consolidated cash from operations
during 1995 increased $70 million from the 1994 level primarily from
higher sales of electricity and gas, lower gas inventories, timing of cash
payments related to its utility operations, CMS NOMECO's increased sale of
oil and natural gas and the growth of the international businesses
partially offset by Consumers' higher power purchases from the MCV
Partnership. CMS Energy primarily uses this operating cash to expand its
international businesses, maintain its electric and gas utility systems,
retire portions of its long-term securities and pay dividends.
Financing Activities: Net cash provided by financing activities in 1995
increased $163 million from 1994, primarily reflecting the issuance of
Class G Common Stock and increased long-term debt. Net cash provided by
financing activities in 1994 increased by $214 million primarily
reflecting the issuance of Consumers preferred stock.
In January 1994, CMS Energy filed a shelf-registration statement with the
Securities and Exchange Commission (SEC) for the issuance and sale of up
to $250 million of CMS Energy General Term Notes, Series A (GTNs). As of
December 31, 1995, CMS Energy had issued approximately $221 million of
GTNs with a weighted average interest rate of 7.7 percent.
In the third quarter 1995, CMS Energy received net proceeds of
approximately $123 million from the issuance of 7.52 million shares of
Class G Common Stock at a price to the public of $17.75 per share,
initially representing 23.50 percent of the common stockholder's equity
value attributed to the Consumers Gas Group. All of the proceeds from this
sale will fund the capital programs and be used for general corporate
purposes of CMS Energy. Initially, such proceeds were used to repay a
portion of CMS Energy's indebtedness under the Credit Facility, none of
which was attributable to the Consumers Gas Group. In 1995, CMS Energy
issued approximately $90 million of CMS Energy Common Stock in conjunction
with the acquisitions of Terra Energy Ltd. (Terra) and Walter
International, Inc. (Walter).
In January 1995, CMS Generation Co. (CMS Generation), a subsidiary of
Enterprises, entered into a one-year $118 million bridge credit facility
for the acquisition of HYDRA-CO Enterprises, Inc. (HYDRA-CO) of which
approximately $109 million remained outstanding as of December 31, 1995.
In January 1996, CMS Generation refinanced the bridge credit facility into
a $110 million, five-year term loan.
During 1995, CMS Energy paid $80 million in cash dividends to holders of
CMS Energy Common Stock compared to $67 million in 1994. The $13 million
increase reflects an annual increase of $.12 per share to $.96 per share,
commencing third quarter 1995. CMS Energy also paid $4 million in cash
dividends to holders of Class G Common Stock. Dividends on preferred
stock increased to $28 million in 1995, reflecting Consumers' issuance of
additional preferred stock in 1994.
In October 1995, CMS NOMECO filed a registration statement with the SEC
for an initial public offering of not more than 20 percent of CMS NOMECO
common stock. CMS Energy will continue to evaluate market conditions for
a possible future offering of CMS NOMECO common stock.
In November 1995, CMS Energy amended the terms of its $400 million
Unsecured Credit Facility, increased the amount to $450 million and
extended the termination date to June 30, 1998. CMS Energy also entered
into a $125 million, seven year Term Loan Agreement. As of December 31,
1995, $118 million and $125 million remains outstanding for the Unsecured
Credit Facility and Term Loan Agreement, respectively.
Investing Activities: Net cash used in investing activities in 1995
increased $307 million from 1994, primarily reflecting the acquisitions of
Transportadora de Gas del Norte S.A. (TGN), HYDRA-CO and Walter. Capital
expenditures, including assets placed under capital lease (see Note 17),
deferred DSM costs, investment in international subsidiaries and common
stock issued for acquisitions totaled $1,053 million in 1995 as compared
to $672 million in 1994 and $768 in 1993. Capital expenditures for 1995
include approximately $200 million for acquisitions which commenced in
1994 but did not close until 1995. CMS Energy's expenditures for its
utility, independent power production, oil and gas exploration and
production, and gas transmission and marketing business segments were $454
million, $239 million, $168 million and $178 million, respectively.
Financing and Investing Outlook: CMS Energy estimates that capital
expenditures, including new lease commitments, and investments in
partnerships and unconsolidated subsidiaries, will total approximately
$2.4 billion over the next three years.
In Millions
Years Ended December 31 1996 1997 1998
- ----------------------- ---- ---- ----
Electric utility $311 $285 $295
Gas utility 124 110 105
Oil and gas exploration and production 120 135 150
Independent power production 189 175 150
Natural gas transmission, storage and marketing 112 70 50
---- ---- ----
$856 $775 $750
==== ==== ====
CMS Energy is required to redeem or retire approximately $1,266 million of
long-term debt over the three-year period ending December 1998. Cash
provided by operating activities is expected to satisfy a substantial
portion of these capital expenditures and debt retirements. In January
1996, Consumers issued and sold 4 million shares of Trust Originated
Preferred Securities with net proceeds totaling $96 million (see Note 8).
CMS Energy will continue to evaluate the capital markets in 1996 as a
source of financing its subsidiaries' investing activities and required
debt retirements.
Consumers has several available, unsecured, committed lines of credit
totaling $145 million and a $425 million working capital facility.
Consumers has Federal Energy Regulatory Commission (FERC) authorization to
issue or guarantee up to $900 million in short-term debt through
December 31, 1996. Consumers uses short-term borrowings to finance
working capital and gas in storage, and to pay for capital expenditures
between long-term financings. Consumers has an agreement permitting the
sales of certain accounts receivable for up to $500 million. At December
31, 1995 and 1994, receivables sold totaled $295 million and $275 million,
respectively.
Electric Utility Results of Operations
Pretax Operating Income
Change Compared to Prior Year
In Millions
------------------------------
1995/1994 1994/1993
--------- ---------
Sales $ 59 $ 33
Rate increase and other regulatory issues 9 38
Other operation and maintenance
expense (O&M), general taxes and depreciation (38) (25)
----- -----
Total change $ 30 $ 46
===== =====
Electric Sales: Total electric sales in 1995 were a record 35.5 billion
kilowatt-hours (kWh), a 3.0 percent increase from the 1994 level as a
result of economic growth and warmer summer temperatures. The increase in
total electric sales included a 4.2 percent increase in sales to
Consumers' ultimate customers, with fairly consistent increases in the
residential, commercial, and industrial sectors. The increase was
partially offset by a decrease in certain sales to other utilities.
Total electric sales in 1994 were 34.5 billion kWh, a 5.2 percent increase
from the 1993 level, which included a 4.2 percent increase in system sales
to Consumers' ultimate customers.
Power Costs: Power costs for 1995 totaled $970 million, a $20 million
increase from the corresponding 1994 period, primarily reflecting
increased purchased power costs due to higher sales levels. Power costs
for 1994 totaled $950 million, a $42 million increase as compared to 1993
which reflects increased kWh production at Consumers' generating plants
and greater power purchases from outside sources to meet increased sales
demand.
Operating Expenses: Electric operation and maintenance expense for 1995
compared to 1994 increased $13 million, which included $9 million of
additional postretirement benefit costs and increased expenditures to
improve electric system reliability. Electric depreciation for 1995
compared to 1994 increased $15 million, reflecting additional property and
equipment. Electric general taxes increased $11 million in 1995 compared
to 1994, reflecting millage rate increases and additional capital
investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' annual obligation to
purchase contract capacity from the MCV Partnership increased 108
megawatts (MW) in 1995 to 1,240 MW. In 1993, the Michigan Public Service
Commission (MPSC) issued the March 1993 and May 1993 orders (Settlement
Order) that have allowed Consumers to recover substantially all payments
for 915 MW of contract capacity purchased from the MCV Partnership. The
Association of Business Advocating Tariff Equity (ABATE) and the Michigan
Attorney General (Attorney General) have appealed the Settlement Order to
the Michigan Court of Appeals (Court of Appeals). The market for the
remaining 325 MW of contract capacity was assessed at the end of 1992.
This assessment, along with the Settlement Order, resulted in Consumers
recognizing a loss for the present value of the estimated future
underrecoveries of power purchases from the MCV Partnership. Additional
losses may occur if actual future experience materially differs from the
1992 estimates. As anticipated in 1992, Consumers continues to experience
cash underrecoveries associated with the Settlement Order. These after-
tax cash underrecoveries totaled $90 million, $61 million and $59 million
in 1995, 1994 and 1993, respectively. Estimated future after-tax cash
underrecoveries, and possible losses for 1996 and the next four years are
shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional under-
recoveries and losses (a) $20 $22 $72 $72 $74
(a) If unable to sell any capacity above the MPSC's authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including cost recovery for the 325 MW of MCV
Facility capacity above the MPSC's currently authorized level. For
further information regarding the settlement, see Note 4.
In 1994 and 1995, Consumers terminated power purchase agreements with the
developers of a proposed 65 MW coal-fired cogeneration facility and a
proposed 44 MW wood and chipped-tire plant. To replace this capacity,
109 MW of less expensive contract capacity from the MCV Facility which
Consumers is currently not authorized to recover from retail customers
would be used. For further information, see Note 4.
Electric Rate Proceedings: Consumers filed a request with the MPSC in
late 1994 to increase its retail electric rates. In early 1996, the MPSC
granted Consumers authority to increase its annual electric retail rates
by $46 million. This partial final order did not address cost recovery
related to the 325 MW of MCV Facility contract capacity above 915 MW. The
MPSC stated that this matter would be addressed in connection with its
consideration of the proposed settlement agreement discussed below.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues. One of these issues, Consumers' electric
rate case, was addressed, in part, by the order discussed above. If fully
adopted, the settlement agreement would resolve Consumers' depreciation
and special competitive service cases (discussed below) and cost recovery
of 325 MW of uncommitted MCV Facility capacity. Consumers expects a final
order in the spring of 1996. For more information regarding the electric
rate order and the settlement, see Note 4.
In 1995, Consumers filed a request with the MPSC, seeking approval to
increase its traditional depreciation expense by $21 million and
reallocate certain portions of its utility plant from production to
transmission, resulting in a $28 million decrease. If both aspects of the
request are approved, the net result would be a decrease in electric
depreciation expense of $7 million for ratemaking purposes. The MPSC
staff's filing in this case did not support Consumers' requested increase
in depreciation expense, but instead proposed a decrease of $24 million.
The MPSC staff also did not support the reallocation of plant investment
as proposed by Consumers but suggested several alternatives which could
partially address this issue. In September 1995, the Administrative Law
Judge (ALJ) issued a proposal for decision that essentially supported the
MPSC staff's position regarding depreciation expense and recommended that
the MPSC reject both Consumers' and the MPSC staff's positions regarding
the reallocation of Consumers' depreciation reserve and plant investment.
This case is currently part of the proposed settlement discussed above.
Special Rates: Consumers currently has a request before the MPSC that,
if approved, would allow Consumers a certain level of rate-pricing
flexibility to respond to customers' alternative energy options. This
request has been consolidated into the settlement proceeding discussed
above.
Electric Conservation Efforts: In June 1995, the MPSC issued an order
that authorized Consumers to discontinue future DSM program expenditures
and cease all new programs. For further information, see Note 4.
Electric Environmental Matters: The 1990 federal Clean Air Act as amended
on November 15, 1990 (Clean Air Act) significantly increased the
environmental constraints that utilities will operate under in the future.
While the Clean Air Act's provisions require Consumers to make certain
capital expenditures in order to comply with the amendments for nitrogen
oxide reductions, Consumers' generating units are presently operating at
or near the sulfur dioxide emission limits which will be effective in the
year 2000. Therefore, management believes that Consumers' annual
operating costs will not be materially affected.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Michigan Environmental Response Act) was substantially amended in June
1995. The Michigan law bears similarities to the Federal Comprehensive
Environmental Response, Compensation and Liability Act (Superfund). The
purpose of the 1995 amendments was generally to encourage development of
industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur costs at a number of sites. Consumers believes
costs incurred for both investigation and required remedial actions are
properly recoverable in rates.
Consumers is a so-called "potentially responsible party" at several sites
being administered under Superfund. Along with Consumers, there are
numerous credit-worthy, potentially responsible parties with substantial
assets cooperating with respect to the individual sites. Based on current
information, management believes it is unlikely that Consumers' liability
at any of the known Superfund sites, individually or in total, will have a
material adverse effect on its financial position, liquidity or results of
operations. For further information regarding electric environmental
matters, see Note 14.
Electric Outlook
Competition: Consumers currently expects approximately 2 percent average
annual growth in electric system sales over the next five years.
Consumers continues to be affected by the developing competitive market
for electricity. The primary sources of competition include: the
installation of cogeneration or other self-generation facilities by
Consumers' larger industrial customers; the formation of municipal
utilities which would displace retail service by Consumers to an entire
community; and competition from neighboring utilities which offer flexible
rate arrangements designed to encourage movement to their respective
service areas. Consumers continues to work toward retaining its current
retail service customers.
In an effort to meet the challenge of competition, Consumers has signed
long-term sales contracts with some of its largest industrial customers,
including its largest customer, General Motors Corporation. Under the
General Motors contract, Consumers will serve certain facilities at least
five years and other facilities at least 10 years in exchange for
competitively discounted electric rates. Certain facilities will have the
option of taking retail wheeling service (if available) after the first
three years of the contract. The MPSC approved this contract in 1995.
As part of an order issued in early 1996, the MPSC significantly reduced
the rate subsidization of residential customers by industrial and large
commercial customers. In addition to offering electric rates that are
competitive with other energy providers, Consumers is pursuing other
strategies to retain its "at-risk" customers. These strategies include:
minimizing outages for each customer, promptly responding to customer
inquiries, and providing consulting services to help customers use energy
efficiently.
In 1994, the MPSC approved a framework for a five-year experimental retail
wheeling program for Consumers and The Detroit Edison Company (Detroit
Edison). Under the experiment, up to 60 MW of Consumers' additional load
requirements could be met by retail wheeling. The program becomes
effective upon Consumers' next solicitation for capacity. In June 1995,
the MPSC issued an order that set rates and charges for retail delivery
service under the experiment. Consumers, ABATE and The Dow Chemical
Company filed claims of appeal of the MPSC's retail wheeling orders. The
Court of Appeals subsequently consolidated these appeals with those
previously filed by Detroit Edison and the Attorney General. Consumers
does not expect this short-term experiment to have a material impact on
its financial position, liquidity or results of operations.
In March 1995, the FERC issued a notice of proposed rulemaking (NOPR) and
a supplemental NOPR that propose changes in the wholesale electric
industry. Among the most significant proposals is a requirement that
utilities provide open access to the domestic interstate transmission
grid. The FERC's final rules are expected to be announced in the spring
of 1996. Consumers is unable to predict the terms of these rules.
However, management believes that Consumers is well-positioned to conform
to open access as it has been voluntarily providing this transmission
service since 1992.
The Governor of the State of Michigan has proposed that the MPSC review
the existing statutory and regulatory framework governing Michigan
utilities in light of increasing competition in the utility industry and
recommend appropriate revisions. At this time, no proceedings have been
initiated at the MPSC on this matter and no new legislation has been
introduced.
Changes in the competitive environment facing regulated utilities may
eventually lead to the discontinuance of Statement of Financial Accounting
Standards (SFAS) 71, which allows the deferral of certain costs and the
recording of regulatory assets. Management has evaluated Consumers'
current regulatory position and believes it continues to support the
recognition of Consumers' $779 million of electric-related regulatory
assets. If changes in the industry were to lead to Consumers
discontinuing the application of SFAS 71, for all or part of its business,
Consumers may be required to write-off the portion of any regulatory asset
for which no regulatory assurance of recovery continued to exist.
Consumers does not believe that there is any current evidence that
supports the write-off of any of its electric-related regulatory assets.
For further information regarding SFAS 71 and Consumers' regulatory
assets, see Notes 2 and 19.
Nuclear Matters: In July 1995, the Nuclear Regulatory Commission (NRC)
issued its Systematic Assessment of Licensee Performance report for the
Palisades nuclear plant (Palisades). The report recognized improved
performance at the plant, specifically in the areas of Engineering and
Plant Operations. In the report, the NRC noted areas which continue to
require management's attention, but also recognized the development and
implementation of plans for corrective action designed to address
previously identified weak areas. The report noted that performance in
the areas of Maintenance and Plant Support was good and remained
unchanged.
Consumers' on-site storage pool for spent nuclear fuel at Palisades is at
capacity. Consequently, Consumers is using NRC-approved dry casks, which
are steel and concrete vaults, for temporary on-site storage. In 1996,
Consumers plans to unload and replace one of the casks where a minor flaw
has been detected. For further information, see Note 15.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan and Consumers has been storing low-
level waste at its nuclear plant sites. Consumers began shipping its low-
level waste to a site in South Carolina during 1995 and plans to have all
its currently stored low-level waste removed from the plant sites by the
end of 1996.
Consumers is required to make certain calculations and report to the NRC
about the continuing ability of the Palisades reactor vessel to withstand
postulated "pressurized thermal shock" events during its remaining license
life. Analysis of recent data from testing of similar materials indicates
that the Palisades reactor vessel can be safely operated through late
1999. Consumers is developing plans to anneal the reactor vessel in 1998
at an estimated cost of $20 million to $30 million. This repair would
allow for operation of the plant to the end of its license life in the
year 2007. Consumers cannot predict whether the studies being conducted
as a part of the development plans will support a future decision to
anneal.
At the SEC staff's request, the Financial Accounting Standards Board
(FASB) is reviewing the accounting for closure and removal costs for long-
lived assets, including decommissioning. The current electric utility
industry accounting practices of recording the cost of removal as a
component of depreciation could be changed. The FASB's tentative decision
includes recognition of the cost of closure and removal obligation as a
liability based on discounted future cash flows with the offset recorded
as part of the cost of the plant asset.
Stray Voltage: Consumers has experienced a number of lawsuits relating to
the effect of so-called stray voltage on certain livestock. At December
31, 1995, Consumers had 30 separate stray voltage lawsuits awaiting trial
court action, down from 83 lawsuits at December 31, 1994. CMS Energy
believes that the resolution of these lawsuits will not have a material
impact on its financial position or results of operations.
Gas Utility Results of Operations
Pretax Operating Income
Change Compared to Prior Year
In Millions
-----------------------------
1995/1994 1994/1993
--------- ---------
Sales $ 12 $ (3)
Regulatory recovery of gas cost 19 10
O&M, general taxes and depreciation (15) (19)
----- -----
Total change $ 16 $(12)
===== =====
Gas Deliveries: Gas sales in 1995 totaled 253.6 billion cubic feet (bcf),
a 5.2 percent increase from 1994 levels, and total system deliveries,
excluding transport to the MCV Facility, increased 6.5 percent from 1994.
On a weather-adjusted basis, total system deliveries increased 4.1
percent, reflecting significant growth. In 1994, total system deliveries,
excluding transport to the MCV Facility, were 314 bcf, a slight decrease
from 1993 deliveries.
Cost of Gas Sold: The cost of gas sold for 1995 increased $9 million from
the 1994 level, as a result of increased deliveries. The increased costs
reflect the reversal of a $23 million gas supplier loss contingency.
Operating Expenses: Gas operation and maintenance expense increased $9
million, reflecting an $8 million gas inventory loss. Gas depreciation
for 1995 compared to 1994 increased $7 million, reflecting additional
capital investment in property and equipment.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to
increase Consumers' annual gas rates. The requested increase reflected
increased expenditures, including those associated with postretirement
benefits, and a 13 percent return on equity. The MPSC staff has
recommended a $13 million rate decrease. In November 1995, the ALJ issued
a proposal for decision that essentially adopted the MPSC staff's
position. Consumers currently requests a $7 million increase in its
annual gas rates. A final order from the MPSC is expected in early 1996.
For further information regarding Consumers' current gas rate case, see
Note 4.
Consumers entered into a special natural gas transportation contract with
one of its transportation customers in response to the customer's proposal
to by-pass Consumers' system in favor of a competitive alternative. The
contract provides for discounted gas transportation rates in an effort to
induce the customer to remain on Consumers' system. In February 1995, the
MPSC approved the contract but stated that the revenue shortfall created
by the difference between the contract's discounted rate and the floor
price of one of Consumers' MPSC authorized gas transportation rates must
be borne by Consumers' shareholders. In March 1995, Consumers filed an
appeal with the Court of Appeals claiming that the MPSC decision denies
Consumers the opportunity to earn its authorized rate of return and is
therefore unconstitutional.
Gas Cost Recovery Matters: In October 1995, the MPSC issued an order
regarding a $44 million (excluding any interest) gas supply contract
pricing dispute between Consumers and certain intrastate producers. The
order stated that Consumers was not obligated to seek prior approval of
market-based pricing provisions that were implemented under the contracts
in question. The producers subsequently filed a claim of appeal of the
MPSC order with the Court of Appeals. Consumers believes the MPSC order
supports its position that the producers' theories are without merit and
intends to vigorously oppose any claims they may raise but cannot predict
the outcome of this issue.
Gas Environmental Matters: Consumers expects that it will ultimately
incur investigation and remedial action costs at a number of sites,
including some that formerly housed manufactured gas plant facilities.
Data available to Consumers and its continued internal review of these
former manufactured gas plant sites have resulted in an estimate for all
costs related to investigation and remedial action of between $48 million
and $112 million. These estimates are based on undiscounted 1995 costs.
At December 31, 1995, Consumers has accrued a liability for $48 million
and has established a regulatory asset for approximately the same amount.
Any significant change in assumptions such as remediation technique,
nature and extent of contamination and regulatory requirements, could
impact the estimate of remedial action costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in December 1994.
Consumers believes that remedial action costs are recoverable in rates and
is continuing discussions with certain insurance companies regarding
coverage for some or all of the costs which may be incurred for these
sites. For further information, see Note 14.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2
percent per year (excluding transportation to the MCV Facility and off-
system deliveries) over the next five years, primarily due to a steadily
growing customer base. Additionally, Consumers has several strategies
which will support increased load requirements in the future. These
strategies include increased efforts to promote natural gas to both
current and potential customers that are using other fuels for space and
water heating. The emerging use of natural gas vehicles also provides
Consumers with sales growth opportunities. In addition, as air quality
standards continue to become more stringent, management believes that
greater opportunities exist for converting industrial boiler load and
other processes to natural gas. Consumers also plans additional capital
expenditures to construct new gas mains that are expected to expand
Consumers' system.
In 1995, Consumers purchased approximately 80 percent of its required gas
supply under long-term contracts, and the balance on the spot market.
Consumers estimates that approximately 35 percent of its gas purchases
will be under long-term contracts in future years as current contracts
expire. Consumers also has transmission contracts totaling approximately
90 percent of its supply requirements. The expiration dates of the
transmission contracts range from 1997 to 2004.
In 1995, the Low Income Home Energy Assistance Program provided
approximately $71 million in heating assistance to about 400,000 Michigan
households, with approximately 18 percent of funds going to Consumers'
customers. In late 1995, federal legislative approval provided Michigan
residents with approximately $60 million of funding for 1996. Consumers
cannot predict what level of funding will be approved for 1997.
In January 1996, the MPSC issued a Notice of legislative-type hearings to
be held February 12, 1996, to assess whether it is appropriate to allow
all natural gas customers access to gas transportation service. The
MPSC notice designated all eight local distribution companies whose rates
are regulated by the MPSC as parties to this proceeding.
Under SFAS 71, Consumers is allowed to defer certain costs to the future
and record regulatory assets, based on the recoverability of those costs
through the MPSC's approval. Consumers has evaluated its $276 million of
regulatory assets (see Note 19) related to its gas business, and believes
that sufficient regulatory assurance exists to provide for the recovery of
these deferred costs.
Oil and Gas Exploration and Production
Pretax Operating Income: 1995 pretax operating income increased $22
million from 1994, primarily due to higher sales volumes and oil sales
prices, income attributable to the acquisitions of Walter and Terra and
increased gains from the assignment of gas supply contracts, partially
offset by lower average market prices for gas. 1994 pretax operating
income increased $5 million from 1993, reflecting higher gas sales
volumes, lower international write-offs, and the gain from the disposition
of a gas supply contract, partially offset by lower average market prices
for oil and gas.
Capital Expenditures: In February 1995, CMS NOMECO closed on the
acquisition of Walter for approximately $49 million, consisting of
approximately $27 million of CMS Energy Common Stock and $22 million in
both cash and assumed debt. The Walter acquisition added proved reserves
of approximately 20 million barrels of oil.
In August 1995, CMS NOMECO acquired Terra with approximately $63 million
of CMS Energy Common Stock. The Terra acquisition added approximately 96
bcf of proved gas reserves.
Other capital expenditures for 1995 approximated $84 million, primarily
for development of existing oil and gas reserves.
Independent Power Production
Pretax Operating Income: 1995 pretax operating income increased $25
million, primarily reflecting higher capacity sales by the MCV
Partnership, as well as additional equity earnings by CMS Generation
subsidiaries primarily due to the HYDRA-CO acquisition. 1994 pretax
operating income increased $16 million from 1993, primarily reflecting
additional electric generating capacity.
Capital Expenditures: In January 1995, CMS Generation completed its
acquisition of HYDRA-CO for $153 million, net of $54 million cash. CMS
Generation acquired 224 MW of net generating capacity and also assumed
shared construction management responsibility for a 60 MW diesel-fueled
plant under construction in Jamaica, scheduled to go into service in the
fourth quarter of 1996.
Other capital expenditures for 1995 totaled approximately $86 million
related to expanding ownership in existing facilities and investments in
new facilities.
Natural Gas Transmission, Storage and Marketing
Pretax Operating Income: 1995 pretax operating income increased $5
million over 1994, reflecting growth from new pipeline investments and the
continued growth of existing projects and gas marketed to end-users. 1994
pretax operating income increased $2 million over 1993, reflecting
earnings growth from gas pipeline and storage projects and gas marketed to
end-users. In 1995, 101 bcf of natural gas was marketed compared to 66
bcf and 60 bcf in 1994 and 1993, respectively.
Capital Expenditures: In July 1995, CMS Gas Transmission and Storage
Company (CMS Gas Transmission), a subsidiary of Enterprises, acquired a 25
percent ownership interest in TGN for $136 million. TGN, which had 1995
revenues of approximately $150 million, owns and operates 2,600 miles of
pipelines that provide natural gas transmission service to the northern
and central parts of Argentina, with almost one bcf per day of existing
pipeline capacity.
CMS Gas Transmission, through an ownership interest in Nitrotec
Corporation, a proprietary gas technology company acquired in January
1996, currently has two helium recovery plants under construction and
scheduled to be in service no later than the first quarter of 1996. The
total estimated cost for these two plants, located in Colorado and Kansas,
is $8.2 million. One helium recovery plant was placed in service in
October 1995. Nitrotec Corporation has also started construction on a
$5.2 million nitrogen rejection facility in Texas.
In January 1996, CMS Gas Transmission signed a letter of intent to
transfer its 50 percent ownership interest to its partner, MHP
Corporation, in the Moss Bluff Gas Storage System, a salt cavern storage
facility on the Gulf Coast of Texas and MHP Corporation will transfer its
50 percent ownership interest to CMS Gas Transmission in the Grand Lacs
Limited Partnership, a marketing center for natural gas. CMS Gas
Transmission will also receive approximately $26 million.
In January 1996, CMS Gas Transmission acquired Petal Gas Storage Company,
a natural gas storage facility located in Forrest County, Mississippi.
The salt dome storage cavern provides up to 3.2 bcf per day of 10-day
storage service and has the capability of being refilled in 20 days.
Other capital expenditures in 1995 totaled approximately $42 million for
acquisitions, expansion of existing facilities and construction of new
facilities.
Other
New Accounting Standard: In 1995, the FASB issued SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which is effective for 1996. CMS Energy does not expect the
application of this statement to have a material impact on its financial
position, liquidity or results of operations. For further information,
see Note 2.
<PAGE>
<PAGE> 15
<TABLE>
Consolidated Statements of Income CMS Energy Corporation
<CAPTION>
In Millions,
Except Per Share Amounts
Years Ended December 31 1995 1994 1993
<S> <C> <C> <C>
Operating Revenue Electric utility $2,277 $2,189 $2,077
Gas utility 1,195 1,151 1,160
Oil and gas exploration and production 108 78 71
Independent power production 96 46 21
Natural gas transmission, storage and marketing 196 145 142
Other 18 5 5
---------------------------------
Total operating revenue 3,890 3,614 3,476
---------------------------------
Operating Expenses Operation
Fuel for electric generation 283 306 293
Purchased power - related parties 491 482 467
Purchased and interchange power 196 162 148
Cost of gas sold 821 785 801
Other 698 621 565
---------------------------------
Total operation 2,489 2,356 2,274
Maintenance 186 192 206
Depreciation, depletion and amortization 416 379 364
General taxes 196 184 193
---------------------------------
Total operating expenses 3,287 3,111 3,037
---------------------------------
Pretax Operating Electric utility 362 332 286
Income (Loss) Gas utility 151 135 147
Oil and gas exploration and production 30 8 3
Independent power production 46 21 5
Natural gas transmission, storage and marketing 14 9 7
Other - (2) (9)
---------------------------------
Total pretax operating income 603 503 439
---------------------------------
Income Taxes 130 103 81
---------------------------------
Net Operating Income 473 400 358
---------------------------------
Other Income Accretion income (Note 2) 11 13 14
(Deductions) Accretion expense (Note 2) (31) (35) (36)
Other income taxes, net 12 11 6
Bond income - - 32
Other, net 10 19 15
---------------------------------
Total other income 2 8 31
---------------------------------
Fixed Charges Interest on long-term debt 224 193 204
Other interest 27 18 24
Capitalized interest (8) (6) (5)
Preferred dividends 28 24 11
---------------------------------
Net fixed charges 271 229 234
---------------------------------
Net Income $ 204 $ 179 $ 155
=================================
Net Income Attributable to Common Stocks - CMS Energy $ 201 $ 179 $ 155
Class G $ 3 $ - $ -
=================================
Average Common Shares Outstanding - CMS Energy 89 86 81
Class G 8 - -
=================================
Earnings Per Average Common Share - CMS Energy $ 2.27 $ 2.09 $ 1.90
Class G $ .38 $ - $ -
=================================
Dividends Declared Per Common Share - CMS Energy $ .90 $ .78 $ .60
Class G $ .56 $ - $ -
=================================
<FN>
The accompanying notes are an integral part of these statements.
/TABLE
<PAGE>
<PAGE> 16
<TABLE>
Consolidated Statements of Cash Flows CMS Energy Corporation
<CAPTION>
In Millions
Years Ended December 31 1995 1994 1993
<S> <C> <C> <C>
Cash Flows From Net income $ 204 $ 179 $ 155
Operating Activities Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning depreciation of $51,
$49 and $46, respectively) 416 379 364
Capital lease amortization 37 36 31
Debt discount amortization 24 37 36
Deferred income taxes and investment tax credit 75 56 56
Accretion expense (Note 2) 31 35 36
Accretion income -
abandoned Midland project (Note 2) (11) (13) (14)
Power purchases - settlement (Note 3) (137) (87) (84)
Undistributed earnings of related parties (53) (25) (9)
Other 7 3 1
Changes in other assets and liabilities (Note 17) 89 12 (88)
-------- -------- --------
Net cash provided by operating activities 682 612 484
-------- -------- --------
Cash Flows From Capital expenditures (excludes capital lease additions
Investing Activities of $31, $36 and $58, respectively and DSM) (Note 17) (535) (575) (550)
Investments in partnerships and unconsolidated
subsidiaries (242) (52) (108)
Acquisition of companies, net of cash acquired (146) - -
Investments in nuclear decommissioning trust funds (51) (49) (46)
Cost to retire property, net (41) (38) (32)
Other (14) (6) (5)
Deferred demand-side management costs (9) (9) (52)
Proceeds from sale of property 22 20 6
Proceeds from sale of bond investments - - 322
Sale of subsidiary - - (14)
-------- -------- --------
Net cash used in investing activities (1,016) (709) (479)
-------- -------- --------
Cash Flows From Proceeds from bank loans, notes and bonds 333 701 673
Financing Activities Issuance of common stock 160 30 132
Increase in notes payable, net 2 80 44
Payment of common stock dividends (84) (67) (49)
Retirement of bonds and other long-term debt (44) (279) (645)
Payment of capital lease obligations (37) (35) (26)
Repayment of bank loans (18) (473) (192)
Retirement of common stock (1) (2) (3)
Issuance of preferred stock - 193 -
-------- -------- --------
Net cash provided by (used in)
financing activities 311 148 (66)
-------- -------- --------
Net Increase (Decrease) in Cash and Temporary Cash Investments (23) 51 (61)
Cash and temporary cash investments
Beginning of year 79 28 89
-------- -------- --------
End of year $ 56 $ 79 $ 28
======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 17
<TABLE>
Consolidated Balance Sheets CMS Energy Corporation
<CAPTION>
ASSETS In Millions
December 31 1995 1994
<S> <C> <C>
Plant and Property Electric $6,103 $5,771
(At Cost) Gas 2,218 2,102
Oil and gas properties (full-cost method) 1,074 934
Other 105 61
----------------
9,500 8,868
Less accumulated depreciation, depletion and amortization (Note 2) 4,627 4,299
----------------
4,873 4,569
Construction work-in-progress 201 245
----------------
5,074 4,814
----------------
Investments Independent power production 275 152
First Midland Limited Partnership (Notes 3 and 20) 225 218
Natural gas transmission, storage and marketing 193 40
Midland Cogeneration Venture Limited Partnership (Notes 3 and 20) 103 74
Other 22 16
----------------
818 500
----------------
Current Assets Cash and temporary cash investments at cost, which
approximates market 56 79
Accounts receivable and accrued revenue, less allowances
of $4 in 1995 and $5 in 1994 (Note 6) 296 156
Inventories at average cost
Gas in underground storage 184 235
Materials and supplies 83 75
Generating plant fuel stock 37 37
Deferred income taxes (Note 5) 24 34
Prepayments and other 230 216
----------------
910 832
----------------
Non-current Assets Postretirement benefits (Note 12) 462 478
Nuclear decommissioning trust funds (Note 2) 304 213
Abandoned Midland project 131 147
Other 444 394
----------------
1,341 1,232
----------------
Total Assets $8,143 $7,378
================
</TABLE>
<PAGE>
<PAGE> 18
<TABLE>
CMS Energy Corporation
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES In Millions
December 31 1995 1994
<S> <C> <C>
Capitalization Common stockholders' equity $1,469 $1,107
Preferred stock of subsidiary 356 356
Long-term debt (Note 7) 2,906 2,709
Non-current portion of capital leases (Note 13) 106 108
----------------
4,837 4,280
----------------
Current Liabilities Current portion of long-term debt and capital leases 207 64
Notes payable 341 339
Accounts payable 304 194
Accrued taxes 256 216
Power purchases - settlement (Note 3) 90 95
Accounts payable - related parties 53 50
Accrued interest 45 40
Accrued refunds 22 25
Other 192 198
----------------
1,510 1,221
----------------
Non-current Deferred income taxes (Note 5) 640 582
Liabilities Postretirement benefits (Note 12) 533 544
Power purchases - settlement (Note 3) 221 324
Deferred investment tax credits 171 181
Regulatory liabilities for income taxes, net (Notes 5 and 19) 44 16
Other 187 230
----------------
1,796 1,877
----------------
Commitments and Contingencies (Notes 2, 3, 4, 13, 14 and 15)
Total Stockholders' Investment and Liabilities $8,143 $7,378
================
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 19
<TABLE>
Consolidated Statements of Preferred Stock CMS Energy Corporation
<CAPTION>
Optional
Redemption Number of Shares In Millions
December 31 Series Price 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Consumers' Preferred Stock
Cumulative, $100 par value,
authorized 7,500,000 shares,
with no mandatory redemption $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
7.45 101.00 379,549 379,549 38 38
7.68 101.00 207,565 207,565 21 21
7.72 101.00 289,642 289,642 29 29
7.76 102.21 308,072 308,072 31 31
Consumers' Class A Preferred Stock
Cumulative, no par value,
authorized 16,000,000 shares,
with no mandatory redemption 2.08 25.00 (a) 8,000,000 8,000,000 193 193
---- ----
Total Preferred Stock $356 $356
==== ====
<FN>
(a) Redeemable beginning April 1, 1999.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 20
<TABLE>
Consolidated Statements of Common Stockholders' Equity CMS Energy Corporation
<CAPTION>
In Millions,
Except Number of Shares
Other Retained
Number Common Paid-in Revaluation Earnings
of Shares Stock Capital Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 79,965,722 $1 $1,539 $ - $(813) $ 727
Net income 155 155
Common stock:
Dividends declared (49) (49)
Reacquired (97,442) (3) (3)
Issued 5,135,726 132 132
Reissued 192,789 4 4
----------- -- ------- ---- ------ -------
Balance at December 31, 1993 85,196,795 1 1,672 - (707) 966
Net income 179 179
Common stock:
Dividends declared (67) (67)
Reacquired (85,174) (2) (2)
Issued 1,389,578 30 30
Reissued 33,350 1 1
----------- -- ------- ---- ------ -------
Balance at December 31, 1994 86,534,549 1 1,701 - (595) 1,107
Net income 204 204
Common stock:
Dividends declared:
CMS Energy (80) (80)
Class G (4) (4)
Reacquired (21,514) (1) (1)
Issued:
CMS Energy 5,039,019 126 126
Class G (a) 124 124
Reissued 41,447 1 1
Change in unrealized
investment loss (8) (8)
----------- -- ------- --- ------ -------
Balance at December 31, 1995 91,593,501 $1 $1,951 $(8) $(475) $1,469
=========== == ======= ==== ====== =======
<FN>
(a) Number of Class G common shares issued during 1995 and outstanding at December 31, 1995 was 7,618,602.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE> 21
CMS Energy Corporation
Notes to Consolidated Financial Statements
1: Corporate Structure
CMS Energy Corporation (CMS Energy) is the parent holding company of
Consumers Power Company (Consumers) and CMS Enterprises Company
(Enterprises). Consumers, a combination electric and gas utility company
serving the Lower Peninsula of Michigan, is the principal subsidiary of
CMS Energy. Consumers' customer base includes a mix of residential,
commercial and diversified industrial customers, the largest segment of
which is the automotive industry. Enterprises is engaged in several
domestic and international energy-related businesses, including oil and
gas exploration and production, development and operation of independent
power production facilities, electric and gas marketing services to
utility, commercial and industrial customers, and storage and transmission
of natural gas.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include CMS
Energy, Consumers and Enterprises and their wholly owned subsidiaries.
The financial statements are prepared in conformity with generally
accepted accounting principles and include the use of management's
estimates. CMS Energy uses the equity method of accounting for
investments in companies and partnerships where it has more than a 20
percent but less than a majority ownership interest and includes these
results in operating income. For the years ended December 31, 1995, 1994
and 1993, undistributed equity earnings were $53 million, $25 million and
$9 million, respectively.
Accretion Income and Expense: In 1991, the Michigan Public Service
Commission (MPSC) ordered that Consumers could recover a portion of its
abandoned Midland investment over a 10-year period, but did not allow
Consumers to earn a return on that amount. Consumers reduced the
recoverable investment to the present value of the future recoveries.
During the recovery period, the unrecovered asset is adjusted to its
present value. This adjustment is reflected as accretion income.
Conversely, Consumers recorded a loss in 1992 for the present value of its
estimated future underrecoveries of power costs resulting from purchases
from the Midland Cogeneration Venture Limited Partnership (MCV
Partnership) (see Note 3), and now recognizes accretion expense annually
to reflect the time value of money on the recorded loss.
Gas Inventory: Consumers uses the weighted average cost method for
valuing working gas inventory. Cushion gas, which is gas stored to
maintain reservoir pressure for recovery of working gas, is recorded in
the appropriate gas utility plant account. Consumers stores gas inventory
in its underground storage facilities.
Maintenance, Depreciation and Depletion: Property repairs and minor
property replacements are charged to maintenance expense. Depreciable
property retired or sold plus cost of removal (net of salvage credits) is
charged to accumulated depreciation. Consumers bases depreciation
provisions for utility plant on straight-line and units-of-production
rates approved by the MPSC. The composite depreciation rate for electric
utility property was 3.5 percent for 1995, 3.5 percent for 1994 and 3.4
percent for 1993. The composite rate for gas utility plant was 4.3
percent for 1995, 4.2 percent for 1994 and 4.4 percent for 1993. The
composite rate for Consumers' other plant and property was 4.9 percent for
1995 and 4.7 percent for 1994 and 1993.
CMS NOMECO Oil & Gas Co. (CMS NOMECO), a wholly owned subsidiary of
Enterprises, follows the full-cost method of accounting and, accordingly,
capitalizes its exploration and development costs, including the cost of
non-productive drilling and surrendered acreage, on a country-by-country
basis. The capitalized costs in each cost center are being amortized on an
overall units-of-production method based on total estimated proved oil and
gas reserves. Other depreciable property of CMS Energy and its
subsidiaries is amortized over its estimated useful life.
New Accounting Standard: During 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement, which is effective for 1996
financial statements, requires that an asset be reviewed for impairment
whenever events indicate that its carrying amount may not be recoverable.
The statement also requires that a loss be recognized whenever a portion
of an asset's cost is excluded from a rate-regulated company's rate base.
CMS Energy does not expect the application of this statement to have a
material impact on its financial position or results of operations.
Nuclear Fuel Cost: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Interest
on leased nuclear fuel is expensed as incurred. Under federal law, the
U.S. Department of Energy (DOE) is responsible for permanent disposal of
spent nuclear fuel at costs to be paid by affected utilities. However, in
1994, the DOE asserted that it does not have a legal obligation to accept
spent nuclear fuel without an operational repository. In 1995, federal
legislation was introduced to clarify the DOE's obligation to accept spent
nuclear fuel and direct the DOE to establish an integrated spent fuel
management system that includes designing and constructing an interim
storage facility in Nevada. For fuel used after April 6, 1983, Consumers
charges disposal costs to nuclear fuel expense, recovers them through
electric rates and remits to the DOE quarterly. Consumers elected to
defer payment for disposal of spent nuclear fuel burned before April 7,
1983, until the spent fuel is delivered to the DOE, which was originally
scheduled to occur in 1998. At December 31, 1995, Consumers has recorded
a liability to the DOE of $100 million, including interest. Consumers
recovered through electric rates the amount of this liability, excluding a
portion of interest.
Nuclear Plant Decommissioning: Consumers collects approximately $45
million annually from its electric customers to decommission its two
nuclear plants. On March 1, 1995, Consumers filed updated decommissioning
information with the MPSC which estimated decommissioning costs for the
Big Rock Point nuclear plant (Big Rock), owned by Consumers, and the
Palisades nuclear plant (Palisades), owned by Consumers, to be $303
million and $524 million (in 1995 dollars), respectively. The estimated
decommissioning costs increased from previous estimates principally due to
the unavailability of low- and high-level radioactive waste disposal
facilities. Amounts collected from electric retail customers and
deposited in trusts (including trust earnings) are credited to accumulated
depreciation. To meet Nuclear Regulatory Commission (NRC) decommissioning
requirements, Consumers prepared site-specific decommissioning cost
estimates for Big Rock and Palisades, assuming that each plant site will
eventually be restored to conform with the adjacent landscape, and that
all contaminated equipment will be disassembled and disposed of in a
licensed burial facility. After the plants are retired, Consumers plans
to maintain the facilities in protective storage until radioactive waste
disposal facilities are available. As a result, the majority of
decommissioning costs will be incurred several years after each plant's
NRC operating license expires. When Big Rock's and Palisades' NRC
licenses expire in 2000 and 2007, respectively, the trust funds are
estimated to have accumulated to $257 million and $686 million,
respectively. It is estimated that at the time the plants are fully
decommissioned (in the years 2030 for Big Rock and 2046 for Palisades),
the trust funds will have provided $1 billion for Big Rock and $2.1
billion for Palisades including trust earnings over this decommissioning
period. Based on this plan, Consumers believes that the current
decommissioning surcharge will be sufficient to provide for
decommissioning of its nuclear plants. At December 31, 1995, Consumers
had an investment in nuclear decommissioning trust funds of $304 million.
Reclassifications: CMS Energy has reclassified certain prior year amounts
for comparative purposes. These reclassifications did not affect the net
income for the years presented.
Related-Party Transactions: In 1995, 1994 and 1993, Consumers purchased
$53 million, $48 million and $52 million, respectively, of electric
generating capacity and energy from affiliates of Enterprises. Affiliates
of CMS Energy sold, stored and transported natural gas and provided other
services to the Midland Cogeneration Venture (MCV) totaling approximately
$26 million, $22 million and $27 million for 1995, 1994 and 1993,
respectively. For additional discussion of related-party transactions
with the MCV Partnership and the First Midland Limited Partnership (FMLP),
see Notes 3 and 20. Other related-party transactions are immaterial.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas
used by its customers but not billed at the end of an accounting period.
Consumers accrues or reduces revenue for any underrecovery or overrecovery
of electric power supply costs and natural gas costs by establishing a
corresponding asset or liability until it bills or refunds these
differences to customers following an MPSC order.
Utility Regulation: Consumers accounts for the effects of regulation
under SFAS 71, Accounting for the Effects of Certain Types of Regulation.
As a result, the actions of regulators affect when revenues, expenses,
assets and liabilities are recognized.
Other: For significant accounting policies regarding income taxes, see
Note 5; for pensions and other postretirement benefits, see Note 12; and
for cash equivalents, see Note 17.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the natural gas-fueled,
combined cycle cogeneration facility (MCV Facility), contracted to sell
electricity to Consumers for a 35-year period beginning in 1990 and to
supply electricity and steam to The Dow Chemical Company. Consumers,
through its subsidiaries, holds the following assets related to the MCV
Partnership and MCV Facility: 1) CMS Midland Inc. (CMS Midland) owns a 49
percent general partnership interest in the MCV Partnership; and 2) CMS
Midland Holdings Company (CMS Holdings) holds through the FMLP a 35
percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' annual obligation
for purchase of contract capacity from the MCV Partnership under a 35-year
power purchase agreement (PPA) increased 108 megawatts (MW) to its maximum
amount of 1,240 MW in 1995. The March 1993 and May 1993 orders issued by
the MPSC (Settlement Order) allowed Consumers to recover substantially all
of the payments for its ongoing purchase of 915 MW of contract capacity.
The Association of Businesses Advocating Tariff Equity (ABATE) and the
Michigan Attorney General (Attorney General) have appealed the Settlement
Order to the Michigan Court of Appeals (Court of Appeals). Under the
Settlement Order, capacity and energy purchases from the MCV Partnership
above the 915 MW level can be utilized to satisfy customers' power needs
but the MPSC will determine the levels of recovery from retail customers
at a later date. The Settlement Order also provides Consumers the right
to remarket to third parties the remaining contract capacity. The MCV
Partnership did not object to the Settlement Order.
The PPA provides that Consumers is to pay the MCV Partnership a minimum
levelized average capacity charge of 3.77 cents per kilowatt-hour (kWh), a
fixed energy charge and a variable energy charge which is based primarily
on Consumers' average cost of coal consumed. The Settlement Order permits
Consumers to recover capacity charges averaging 3.62 cents per kWh for 915
MW of capacity, the fixed energy charge and the prescribed energy charges
associated with the scheduled deliveries within certain hourly
availability limits, whether or not those deliveries are scheduled on an
economic basis. For all energy delivered on an economic basis above the
availability limits to 915 MW, Consumers has been allowed to recover 1/2
cent per kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized a loss for the present value of the
estimated future underrecoveries of power costs under the PPA as a result
of the Settlement Order. This loss was based, in part, on management's
assessment of the future availability of the MCV Facility, and the effect
of the future power market on the amount, timing and price at which
various increments of the capacity, above the MPSC authorized level, could
be resold. Additional losses may occur if actual future experience
materially differs from the 1992 estimates. As anticipated in 1992,
Consumers continues to experience cash underrecoveries associated with the
Settlement Order. If Consumers is unable to sell any capacity above the
current MPSC-authorized level, future additional after-tax losses and
after-tax cash underrecoveries would be incurred. Consumers' estimates of
its future after-tax cash underrecoveries, and possible losses for 1996
and the next four years are shown in the table below.
After-tax, In Millions
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Estimated cash underrecoveries $56 $55 $ 8 $ 9 $ 7
Possible additional under-
recoveries and losses (a) $20 $22 $72 $72 $74
(a) If unable to sell any capacity above the MPSC's authorized level.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that would potentially resolve several issues in
three pending proceedings, including cost recovery for the 325 MW of MCV
Facility capacity above the MPSC's currently authorized level. For
further information regarding this proposed settlement, see Note 4.
At December 31, 1995 and 1994, the after-tax present value of the
Settlement Order liability totaled $202 million and $272 million,
respectively. The reduction in the liability since December 31, 1994,
reflects after-tax cash underrecoveries of $90 million, partially offset
by after-tax accretion expense of $20 million. The undiscounted after-tax
amount associated with the liability totaled $607 million at December 31,
1995.
In 1994 and 1995, Consumers paid $44 million to terminate power purchase
agreements with the developers of two proposed independent power projects
totaling 109 MW. As part of the proposed settlement reached with the MPSC
staff (see Note 4), Consumers is seeking MPSC approval to utilize less-
expensive contract capacity from the MCV Facility which Consumers is
currently not authorized to recover from retail customers. Cost recovery
for this contract capacity would start in late 1996. Even if Consumers is
not allowed to substitute MCV Facility capacity for the capacity to be
provided under the terminated agreements, Consumers believes that the MPSC
would approve recovery of the buyout costs due to the significant customer
savings resulting from the terminated power purchase agreements. As a
result, Consumers has recorded a regulatory asset of $44 million.
Power Supply Cost Recovery Matters Related to Power Purchases from the MCV
Partnership: As part of the 1993 and 1994 plan case orders, the MPSC
confirmed the recovery of certain costs related to power purchases from
the MCV Partnership. ABATE or the Attorney General has appealed these
plan case orders to the Court of Appeals.
As part of its decision in the 1993 Power Supply Cost Recovery (PSCR)
reconciliation case issued February 23, 1995, the MPSC disallowed a
portion of the costs related to purchases from the MCV Partnership, and
instead assumed recovery of those costs from wholesale customers and
reduced recovery from retail customers. Consumers believes this is
contrary to the terms of the Settlement Order and has appealed the
February 23 order on this issue.
4: Rate Matters
Electric Rate Proceedings: In late 1994, Consumers filed a request with
the MPSC to increase its retail electric rates. The request included
provisions for ratemaking treatment of expected sales losses to
competition and the treatment of the 325 MW of MCV Facility contract
capacity above 915 MW. Consumers also requested that the MPSC eliminate
subsidization of residential rates in a two-step adjustment.
Early in 1996, the MPSC issued a partial final order in this case,
granting Consumers a $46 million annual increase in its electric retail
rates. This order authorized a 12.25 percent return on equity as compared
to the previously approved 11.75 percent, approved recovery of certain
costs associated with a proposed settlement related to the Ludington
pumped storage plant (Ludington), jointly owned by Consumers and The
Detroit Edison Company (Detroit Edison), (see Note 14), and significantly
reduced (in a two-step adjustment) the subsidization of residential
customers by industrial and large commercial customers. As a result,
residential customers were allocated approximately $31 million of the $46
million increase.
This order did not address cost recovery related to the 325 MW of MCV
Facility contract capacity above 915 MW. The MPSC stated that this matter
would be addressed in connection with its consideration of the proposed
settlement agreement discussed below.
Consumers also has a separate request before the MPSC to offer competitive
special rates to certain large qualifying customers. In addition,
Consumers filed a request with the MPSC, seeking to adjust its
depreciation rates and to reallocate certain portions of its electric
production plant to transmission accounts. If approved, this would result
in a net decrease in depreciation expense of $7 million for ratemaking
purposes. For further information regarding these requests, see the
Electric Rate Proceedings and Special Rates discussions in the
Management's Discussion and Analysis.
In September 1995, Consumers and the MPSC staff reached a proposed
settlement agreement that, if approved by the MPSC, would resolve several
outstanding regulatory issues currently before the MPSC in separate
proceedings. Some of these issues were preliminarily addressed in early
1996 when the MPSC issued an order in Consumers' electric rate case (see
above). If fully adopted, the settlement agreement would: provide for
cost recovery of the 325 MW of uncommitted MCV Facility capacity;
implement provisions for incentive ratemaking; resolve the special
competitive services and depreciation rate cases; implement a limited
direct access program; and accelerate recovery of nuclear plant
investment. Consumers expects a final order in the spring of 1996.
Electric Demand-side Management: In June 1995, the MPSC authorized
Consumers to discontinue future demand-side management (DSM) program
expenditures and cease all new programs. Consumers is deferring and
amortizing past program costs ($68 million at December 31, 1995) over the
period these costs are being recovered from customers in accordance with
an MPSC accounting order.
Gas Rates: As part of an agreement approved by the MPSC, Consumers filed
a gas rate case in December 1994. The request, among other things,
incorporated cost increases, including costs for postretirement benefits
and costs related to Consumers' former manufactured gas plant sites and
proposed a 13 percent rate of return on equity, instead of the current
13.25 percent. Consumers currently requests a $7 million increase in its
annual gas rates. The MPSC staff supports a $13 million rate decrease,
which includes a lower rate base, a lower return on common equity, a
revised capital structure and a lower operating cost forecast than
Consumers had projected. In November 1995, the Administrative Law Judge
(ALJ) issued a proposal for decision that essentially adopted the MPSC
staff's position. Consumers expects an MPSC decision in early 1996.
Gas Cost Recovery Matters: In 1993, the MPSC issued a ruling favorable to
Consumers regarding a gas pricing disagreement between Consumers and
certain intrastate producers. In 1995, management concluded that the
intrastate producers' pending appeals of the MPSC order would not be
successful and accordingly reversed $23 million (pretax) of a previously
accrued loss. The MPSC ruling was affirmed by the Court of Appeals in
June 1995. The producers have petitioned the Michigan Supreme Court for
review.
In October 1995, the MPSC issued an order regarding a $44 million
(excluding any interest) gas supply contract pricing dispute between
Consumers and certain intrastate producers. The order stated that
Consumers was not obligated to seek prior approval of market-based pricing
provisions that were implemented under the contracts in question. The
producers subsequently filed a claim of appeal of the MPSC order with the
Court of Appeals. Consumers believes the MPSC order supports its position
that the producers' theories are without merit and intends to vigorously
oppose any claims they may raise but cannot predict the outcome of this
issue.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's or Consumers' financial position or
results of operations.
5: Income Taxes
CMS Energy and its subsidiaries (including Consumers) file a consolidated
federal income tax return. Income taxes are generally allocated based on
each subsidiary's separate taxable income. CMS Energy and Consumers
practice full deferred tax accounting for temporary differences.
CMS Energy uses investment tax credits (ITC) to reduce current income
taxes payable and defers and amortizes ITC over the life of the related
property. Any alternative minimum tax (AMT) paid generally becomes a tax
credit that can be carried forward indefinitely to reduce regular tax
liabilities in future periods when regular taxes paid exceed the tax
calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions
Years Ended December 31 1995 1994 1993
- ----------------------- ----- ----- -----
Current federal income taxes $ 43 $ 36 $ 19
Deferred income taxes 85 66 67
Deferred income taxes - tax rate change - - (1)
Deferred ITC, net (10) (10) (10)
----- ----- -----
$118 $ 92 $ 75
===== ===== =====
Operating $130 $103 $ 81
Other (12) (11) (6)
----- ----- -----
$118 $ 92 $ 75
===== ===== =====
<PAGE>
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
In Millions
December 31 1995 1994
- ----------- ------- -------
Property $ (603) $ (601)
Unconsolidated investments (266) (246)
Postretirement benefits (Note 12) (173) (177)
Abandoned Midland project (46) (51)
Employee benefit obligations (includes
postretirement benefits of $175 and $174) (Note 12) 204 203
Power purchases - settlement (Note 3) 112 146
AMT carryforward 161 154
ITC carryforward (expires 2005) 23 37
Other (28) (13)
------- -------
$ (616) $ (548)
======= =======
Gross deferred tax liabilities $(1,698) $(1,659)
Gross deferred tax assets 1,082 1,111
------- -------
$ (616) $ (548)
======= =======
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
In Millions
Years Ended December 31 1995 1994 1993
- ----------------------- ------ ------ ------
Net income before preferred
dividends $ 232 $ 203 $ 166
Income tax expense 118 92 75
------ ------ ------
350 295 241
Statutory federal income tax rate x 35% x 35% x 35%
------ ------ ------
Expected income tax expense 123 103 84
Increase (decrease) in taxes from:
Capitalized overheads previously
flowed through 5 5 5
Differences in book and tax
depreciation not previously deferred 6 7 5
ITC amortization (10) (10) (10)
Nonconventional Fuel Tax Credit (13) (8) (6)
Other, net 7 (5) (3)
------ ------ ------
$118 $ 92 $ 75
====== ====== ======
6: Short-Term Financings
Consumers has Federal Energy Regulatory Commission (FERC) authorization to
issue or guarantee up to $900 million of short-term debt through December
31, 1996. Consumers has an unsecured $425 million facility and unsecured,
committed lines of credit aggregating $145 million that are used to
finance seasonal working capital requirements. At December 31, 1995, $238
million and $103 million were outstanding under these facilities at
weighted average interest rates of 6.4 percent and 6.9 percent,
respectively. Consumers has an established $500 million trade receivables
purchase and sale program. At December 31, 1995 and 1994, receivables
sold under the agreement totaled $295 million and $275 million,
respectively. Accounts receivable and accrued revenue in the Consolidated
Balance Sheets have been reduced to reflect receivables sold.
7: Long-Term Debt
At December 31, 1995 and 1994, long term debt consists of the following:
<TABLE>
<CAPTION>
In Millions
December 31
Maturing/Expiring Interest Rate 1995 1994
<S> <C> <C> <C> <C>
First Mortgage Bonds 1996 to 2023 5.875% to 8.875% $1,341 $1,341
Long-Term Bank Debt 1999 6.2% (a) 400 400
Sr. Deferred Coupon Notes 1997 and 1999 9.5% and 9.875% 347 355
General Term Notes 1997 to 2002 7.7% (a) 221 94
Bank Loans 1996 to 2006 8.01% (a) 177 21
Pollution Control Revenue Bonds 2000 to 2018 5.9% (a) 131 131
Term Loan Agreement 2002 7.7% (a) 125 -
Unsecured Credit Facility 1998 7.63% (a) 118 196
Revolving Line of Credit 1999 7.13% 112 89
Nuclear Fuel Disposal 1998 5.5% 100 95
Senior Serial Notes - - - 36
Other - - 4 6
------ ------
Principal Amount Outstanding 3,076 2,764
Current Amounts (161) (21)
Net Unamortized Discount (9) (34)
------ -------
Total Long-Term Debt $2,906 $2,709
====== =======
</TABLE>
(a) Represents the weighted average interest rate during 1995.
The scheduled maturities of long-term debt and improvement fund
obligations are as follows: $161 million in 1996, $325 million in 1997,
$803 million in 1998, $716 million in 1999 and $10 million in 2000.
CMS Energy
In January 1994, CMS Energy filed a shelf-registration statement with the
Securities and Exchange Commission (SEC) permitting the issuance and sale
of up to $250 million of CMS Energy Series A General Term Notes (GTNs).
The GTNs are offered from time to time on terms determined at the time of
sale.
In 1994, CMS Energy refinanced its $220 million Secured Revolving Credit
Facility dated November 30, 1992 with a $400 million Unsecured Revolving
Credit Facility dated July 29, 1994 (Unsecured Credit Facility) and
extended the termination date to June 30, 1997. In November 1995, CMS
Energy amended the terms of its $400 million Unsecured Credit Facility
increased the amount to $450 million and extended the termination date to
June 30, 1998. CMS also entered into a $125 million, seven year Term Loan
Agreement dated November 21, 1995 (Term Loan Agreement).
Consumers
First Mortgage Bonds: Consumers secures its first mortgage bonds by a
mortgage and lien on substantially all of its property. Consumers' ability
to issue and sell securities is restricted by certain provisions in its
First Mortgage Bond Indenture, its Articles of Incorporation (Articles)
and the need for regulatory approvals in compliance with appropriate
federal law.
Long-Term Bank Debt: During 1994, Consumers entered into a $400 million
unsecured, variable rate, five-year term loan and subsequently used the
proceeds to refinance certain long-term bank debt. In 1993, Consumers
entered into an interest rate swap agreement, exchanging variable-rate
interest for fixed-rate interest on $250 million of its long-term bank
debt. The swap agreement hedges the variable rate exposure associated
with Consumers' long-term bank debt. The swap agreement began to decrease
in February 1995 and will terminate by May 1996. At December 31, 1995,
the amount of the swap totaled $94 million at 5.4 percent. The swap
agreement had the effect of decreasing the weighted average interest rate
to 6.3 percent from 6.6 percent for the 12-month period ended December 31,
1995.
Other: Consumers' long-term Pollution Control Revenue Bonds are secured
by irrevocable letters of credit or first mortgage bonds.
CMS NOMECO
CMS NOMECO's existing Revolving Line of Credit, which converts to term
loans maturing from November 1996 through November 1999, was increased
from $110 million at December 31, 1994 to $140 million at December 31,
1995.
Senior serial notes amounting to $28 million, with a weighted average
interest rate of 9.40 percent, were repaid in full on August 10, 1995. In
connection with this early extinguishment of debt, CMS NOMECO incurred a
$1.5 million prepayment premium. The notes were retired with available
proceeds from the bank credit line.
CMS Generation
In January 1995, CMS Generation Co. (CMS Generation), a subsidiary of
Enterprises, entered into a one-year $118 million bridge credit facility
for the acquisition of HYDRA-CO Enterprises, Inc. of which approximately
$109 million remained outstanding as of December 31, 1995. In January,
1996, CMS Generation refinanced this bridge facility with a $110 million,
five-year term loan.
8: Capitalization
CMS Energy
Capital Stock: During 1995, CMS Energy amended its Articles of
Incorporation and authorized a new class of common stock of CMS Energy
(Class G Common Stock), which reflects the separate performance of the gas
distribution, storage and transportation businesses of Consumers and
Michigan Gas Storage Company, a subsidiary of Consumers (Consumers Gas
Group). The pre-existing common stock (CMS Energy Common Stock) continues
to be outstanding and reflects the performance of all of the businesses of
CMS Energy and its subsidiaries, including the business of the Consumers
Gas Group, except for the interest in the Consumers Gas Group attributable
to the outstanding shares of the Class G Common Stock. The filing of the
restated Articles of Incorporation with the Michigan Department of
Commerce increased the number of authorized shares of capital stock from
255 million shares to 320 million shares, consisting of 250 million shares
of CMS Energy Common Stock, par value $.01 per share, 60 million shares of
Class G Common Stock, no par value, and 10 million shares of Preferred
Stock, par value $.01 per share.
CMS Energy filed a shelf-registration statement with the SEC on February
15, 1995 covering the issuance of up to $200 million of securities
encompassing CMS Energy Common Stock and Class G Common Stock (Common
Stock), Preferred Stock of CMS Energy or of a special purpose affiliate of
CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy continually
evaluates the capital markets and may offer such securities from time to
time, at terms to be determined at or prior to the time of the sale. In
the third quarter 1995, CMS Energy received net proceeds of approximately
$123 million from the issuance of 7.52 million shares of Class G Common
Stock at a price to the public of $17.75 per share, initially representing
23.50 percent of the common stockholder's equity value attributed to the
Consumers Gas Group. All of the proceeds will fund the capital programs
and be used for general corporate purposes of CMS Energy. Initially, such
proceeds were used to repay a portion of CMS Energy's indebtedness under
the Credit Facility, none of which is attributable to the Consumers Gas
Group. The issuance of additional shares, during 1995, increased the
common stockholder's equity value attributable to the Consumers Gas Group
represented by the outstanding shares of Class G Common Stock, to 23.73
percent as of December 31, 1995.
Other: Under its most restrictive borrowing arrangement at December 31,
1995, none of CMS Energy's net income was restricted for payment of common
dividends.
Consumers
Capital Stock: During 1995, the MPSC issued an order authorizing
Consumers to issue and sell up to $300 million of intermediate and/or
long-term debt and $100 million of preferred stock or subordinate
debentures. In January 1996, 4 million shares of 8.36 percent Trust
Originated Preferred Securities were issued and sold through a business
trust wholly owned by Consumers. The trust was formed for the sole
purpose of issuing preferred securities and the only asset of the trust is
$103 million of 8.36 percent unsecured subordinated deferrable interest
notes issued by Consumers. The obligations of Consumers with respect to
the preferred securities under the notes that mature in 2015, the
indenture under which the notes will be issued, Consumers' guarantee of
the preferred securities and the Declaration of Trust, taken together,
constitute a full and unconditional guarantee by Consumers of the trust's
obligations under the Trust Originated Preferred Securities. Net proceeds
from the sale totaled $96 million.
Other: Under the provisions of its Articles at December 31, 1995,
Consumers had $197 million of unrestricted retained earnings available to
pay common dividends.
CMS NOMECO
In February 1995, CMS Energy acquired Walter International, Inc. (Walter),
a Houston-based independent oil company, for approximately $49 million,
consisting of approximately $27 million of CMS Energy Common Stock and $22
million in cash and assumed debt. Walter was merged with a wholly owned
subsidiary of CMS NOMECO.
In August 1995, CMS Energy acquired 100 percent of the common stock of
Terra Energy Ltd. (Terra), a gas exploration company, located in Traverse
City, Michigan for approximately $63 million. Terra has become a wholly
owned subsidiary of CMS NOMECO.
In October 1995, CMS NOMECO filed a registration statement with the SEC
for an initial public offering of not more than 20 percent of CMS NOMECO
common stock. CMS Energy will continue to evaluate market conditions for
a possible future offering of CMS NOMECO common stock.
9: Earnings Per Share and Dividends
Earnings per share attributable to Common Stock, for the year ended
December 31, 1995 reflect the performance of the Consumers Gas Group since
initial issuance of Class G Common Stock during the third quarter of 1995.
The Class G Common Stock participates in earnings and dividends from the
issue date. The allocation of earnings (loss) attributable to each class
of common stock and the related amounts per share are computed by
considering the weighted average number of shares outstanding.
Earnings (loss) attributable to outstanding Class G Common Stock are equal
to Consumers Gas Group net income (loss) multiplied by a fraction, the
numerator is the weighted average number of shares of Class G Common Stock
outstanding during the period (Outstanding Shares) and the denominator
represents the weighted average number of Outstanding Shares and Retained
Interest Shares, shares not held by the holders of the Outstanding Shares,
during the period. The earnings attributable to Class G Common Stock on a
per share basis, for the year ended December 31, 1995, are based on 23.45
percent of the income of the Consumers Gas Group since the initial
issuance.
Earnings per share for Class G Common Stock are omitted from the
statements of income for the years ended December 31, 1994 and 1993, since
the Class G Common Stock was not part of the equity structure of CMS
Energy. For purpose of analysis, following are pro forma data for the
years ended December 31, 1995 and 1994 which give effect to the issuance
and sale of 7.52 million shares of Class G Common Stock (representing
23.50 percent of the equity attributable to the Consumers Gas Group) on
January 1, 1994.
In Millions, Except Per Share Amounts
Pro Forma Pro Forma
Years Ended December 31, 1995 1994
- ------------------------ ----- -----
Net Income $ 204 $ 179
Net Income attributable to CMS Energy
Common Stock $ 189 $ 167
Net Income attributable to outstanding
Class G Common Stock $ 15 $ 12
Average shares outstanding:
CMS Energy Common Stock 88.810 85.888
Class G Common Stock 7.536 7.520
Earnings per share attributable to
CMS Energy Common Stock $2.14 $1.94
Earnings per share attributable to
outstanding Class G Common Stock $1.93 $1.66
Holders of Class G Common Stock have no direct rights in the equity or
assets of the Consumers Gas Group, but rather have rights in the equity
and assets of CMS Energy as a whole. In the sole discretion of the Board
of Directors of CMS Energy (Board of Directors), dividends may be paid
exclusively to the holders of Class G Common Stock, exclusively to the
holders of CMS Energy Common Stock, or to the holders of both classes in
equal or unequal amounts. The Board of Directors has stated its intention
to declare and pay dividends on the CMS Energy Common Stock based
primarily on the earnings and financial condition of CMS Energy.
Dividends on the Class G Common Stock are paid at the discretion of the
Board of Directors based primarily upon the earnings and financial
condition of the Consumers Gas Group, and to a lesser extent, CMS Energy
as a whole. It is the Board of Directors' current intention that the
declaration or payment of dividends with respect to the Class G Common
Stock will not be reduced, suspended or eliminated as a result of factors
arising out of or relating to the electric utility business or the
international businesses of CMS Energy unless such factors also require,
in the Board of Directors' sole discretion, the omission of the
declaration or reduction in payment of dividends on both the CMS Energy
Common Stock and the Class G Common Stock.
The Board of Directors declared a dividend on CMS Energy Common Stock of
$.21 per share for the first and second quarters and $.24 per share for
the third and fourth quarters of 1995. A dividend on Class G Common Stock
of $.28 per share was declared by the Board of Directors for the third and
fourth quarters of 1995.
10: Financial Instruments
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted
market prices of similar investments or other valuation techniques. The
carrying amounts of all long-term investments in financial instruments
approximate fair value.
The carrying amount of long-term debt was $2.9 billion and $2.7 billion at
December 31, 1995 and 1994, respectively, and the fair value was $3.0
billion and $2.6 billion on those dates. Although the current fair value
of the long-term debt may differ from the current carrying amount,
settlement of the reported debt is generally not expected until maturity.
The fair values of CMS Energy's off-balance-sheet financial instruments
are based on the amounts estimated to terminate or settle the instruments.
At December 31, 1995, the fair value of CMS Energy's interest rate swap
agreements was $16 million, representing the amount that CMS Energy would
pay to terminate the agreements. At December 31, 1994, CMS Energy would
have received $5 million to terminate the agreements. Guarantees and
letters of credit were $148 million and $123 million at December 31, 1995
and 1994, respectively.
In 1994, CMS Energy adopted SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, which did not materially impact CMS
Energy's financial position or results of operations.
11: Executive Incentive Compensation
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
common stock of CMS Energy, stock options and stock appreciation rights
may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. During 1995,
shareholders approved amendments to the CMS Energy Performance Incentive
Stock Plan. The amendments authorized awards under the plan consisting of
any class of common stock of CMS Energy and established performance based
business criteria for certain plan awards. The amendments also increased
the number of shares reserved for award to not more than 3 percent of each
class of CMS Energy common stock outstanding on January 1 each year, less
the number of shares of restricted common stock awarded and of common
stock subject to options granted under the plan during the immediately
preceding four calendar years. Any forfeitures are subject to award under
the plan. At December 31, 1995, awards of up to 1,174,388 shares of CMS
Energy Common Stock and 211,634 shares of Class G Common Stock may be
issued.
Restricted shares of common stock are outstanding shares with full voting
and dividend rights. Shares of restricted common stock cannot be
distributed until they are vested and the performance objectives are met.
Further, the restricted stock is subject to forfeiture if employment
terminates before vesting. If key employees exceed performance
objectives, the plan will allow additional awards. Restricted shares vest
fully if control of CMS Energy changes, as defined by the plan. At
December 31, 1995, 475,447 shares of the 517,447 restricted shares
outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an
earlier plan approved by shareholders, expired in September 1995.
Under both plans, for stock options and stock appreciation rights, the
exercise price on each grant date equaled the closing market price on the
grant date. Options are exercisable upon grant and expire up to 10 years
and one month from date of grant. The status of the restricted stock
granted under the Performance Incentive Stock Plan and options granted
under both plans follows.
Restricted
Stock Options
---------- ---------------
Number Number Price
CMS Energy Common Stock of Shares of Shares per Share
--------- --------- ---------------
Outstanding at January 1, 1993 323,266 1,435,091 $7.13 - $34.25
Granted 132,000 249,000 $25.13 - $26.25
Exercised or Issued (54,938) (152,125) $ 7.13 - $21.13
Canceled (84,141) (33,000) $20.50 - $33.88
-------- -------- --------------
Outstanding at December 31, 1993 316,187 1,498,966 $ 7.13 - $34.25
Granted 133,500 273,000 $21.25 - $22.38
Exercised or Issued (39,361) (158,300) $7.13 - $22.00
Canceled (79,970) (123,000) $26.25 - $33.88
-------- -------- --------------
Outstanding at December 31, 1994 330,356 1,490,666 $ 7.13 - $34.25
Granted 253,337 304,000 $23.25 -$34.25
Exercised or Issued (43,939) (147,666) $7.13 -$22.00
Canceled (22,307) (55,000) $20.50 -$34.25
-------- -------- -------------
Outstanding at December 31, 1995 517,447 1,592,000 $13.00 -$34.25
======== ========= =============
During 1995, 6,924 restricted shares and 10,000 options of Class G Common
Stock were granted at a price of $17.88.
12: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: CMS Energy and its
subsidiaries adopted SFAS 106, Employers' Accounting for Postretirement
Benefits Other than Pensions, effective as of the beginning of 1992 and
Consumers recorded a liability of $466 million for the accumulated
transition obligation and a corresponding regulatory asset for anticipated
recovery in utility rates (see Note 19). CMS Energy's international
subsidiaries expensed their accumulated transition obligation liability.
The amount of such transition obligation is not material to the
presentation of the consolidated financial statements or significant to
CMS Energy's total transition obligation. Both the MPSC and FERC have
generally allowed recovery of SFAS 106 costs. In May 1994, the MPSC
authorized recovery of the electric utility portion of these costs over 18
years. During 1995, the FERC granted Consumers a waiver of a three-year
filing requirement for cost recovery with respect to its wholesale
electric business, which at December 31, 1995, had recorded a regulatory
asset and liability of $7 million. In December 1994, Consumers requested
that the MPSC approve recovery of the gas utility portion of these costs
(see Note 4). CMS Energy funds the benefits using external Voluntary
Employee Beneficiary Associations, a legal entity, established under
guidelines of the Internal Revenue Code, through which the company can
provide certain benefits for its employees or retirees. Funding of the
health care benefits coincides with Consumers' recovery in rates. A
portion of the life insurance benefits have previously been funded.
Retiree health care costs at December 31, 1995, are based on the
assumption that costs would increase 9.5 percent in 1996, then decrease
gradually to 6 percent in 2004 and thereafter. The health care cost trend
rate assumption significantly affects the amounts reported. For example,
a 1 percentage point increase in each year's estimated health care cost
assumption would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by $80 million and the aggregate of the
service and interest cost components of net periodic postretirement
benefit costs for 1995 by $9 million.
Years Ended December 31 1995 1994 1993
- ----------------------- ---- ---- ----
Weighted average discount rate 7.50% 8.00% 7.25%
Expected long-term rate of return
on plan assets 7.00% 7.00% 8.50%
Net postretirement benefit costs for the health care benefits and life
insurance benefits consisted of:
In Millions
Years Ended December 31 1995 1994 1993
- ----------------------- ---- ---- ----
Service cost $ 11 $ 13 $ 13
Interest cost 40 41 38
Actual return on assets (4) - -
Net amortization and deferral 1 - -
---- ---- ----
Net postretirement benefit costs $ 48 $ 54 $ 51
==== ==== ====
The funded status of the postretirement benefit plans is reconciled with
the liability recorded at December 31 as follows:
In Millions
1995 1994
---- ----
Actuarial present value of estimated benefits
Retirees $ 331 $ 338
Eligible for retirement 46 44
Active (upon retirement) 200 170
----- -----
Accumulated postretirement benefit obligation 577 552
Plan assets (primarily stocks, bonds and money
market investments) at fair value 78 36
----- -----
Accumulated postretirement benefit obligation
in excess of plan assets (499) (516)
Unrecognized net loss from experience
different than assumed 1 4
----- -----
Recorded liability $(498) $(512)
===== =====
CMS Energy's postretirement health care plan is partially funded; the
accumulated postretirement benefit obligation for that plan is $562
million and $536 million at December 31, 1995 and 1994, respectively.
Supplemental Executive Retirement Plan: Certain management employees
qualify to participate in the Supplemental Executive Retirement Plan
(SERP). SERP benefits, which are based on an employee's years of service
and earnings as defined in the SERP, are paid from a trust established and
funded in 1988. Because the SERP is not a qualified plan under the
Internal Revenue Code, earnings of the trust are taxable and trust assets
are included in consolidated assets. At December 31, 1995 and 1994, trust
assets at cost (which approximates market) were $28 million and $19
million, respectively, and were classified as other non-current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined
benefit pension plan (Pension Plan) covers substantially all employees.
The benefits are based on an employee's years of accredited service and
earnings, as defined in the plan, during an employee's five highest years
of earnings. Because the plan was fully funded, no contributions were
made in 1993 and 1994. A contribution of $9 million was made in 1995.
Years Ended December 31 1995 1994 1993
- ----------------------- ----- ----- -----
Discount rate 7.50% 8.00% 7.25%
Rate of compensation increase 4.50% 4.50% 4.50%
Expected long-term rate
of return on assets 9.25% 9.25% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions
Years Ended December 31 1995 1994 1993
- ----------------------- ----- ----- -----
Service cost $ 23 $ 24 $ 19
Interest cost 56 51 50
Actual return on plan assets (168) 21 (92)
Net amortization and deferral 103 (85) 34
---- ---- ----
Net periodic pension cost $ 14 $ 11 $ 11
====== ===== =====
The funded status of the Pension Plan and SERP reconciled to the pension
liability recorded at December 31 was:
In Millions
Pension Plan SERP
1995 1994 1995 1994
- -----------------------------------------------------------------------
Actuarial present value of
estimated benefits
Vested $ 496 $ 421 $ 20 $ 17
Non-vested 74 61 1 -
----- ----- ----- -----
Accumulated benefit obligation 570 482 21 17
Provision for future
pay increases 183 154 13 11
----- ----- ----- -----
Projected benefit obligation 753 636 34 28
Plan assets (primarily stocks and bonds,
including $104 in 1995 and $79 in 1994
in common stock of CMS Energy)
at fair value 779 637 - -
----- ----- ----- -----
Projected benefit obligation less than
(in excess of) plan assets 26 1 (34) (28)
Unrecognized net (gain) loss from
experience different than assumed (69) (35) 7 5
Unrecognized prior service cost 43 40 2 2
Unrecognized net transition
(asset) obligation (32)) (39) - 1
----- ----- ----- -----
Recorded liability $ (32) $ (33) $ (25) $(20)
===== ===== ===== =====
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years and 11 years for the SERP's
unrecognized net transition obligation. Prior service costs are amortized
on a straight-line basis over the average remaining service period of
active employees.
13: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, aircraft, construction equipment, computer equipment,
nuclear fuel and buildings. Consumers' nuclear fuel capital leasing
arrangement is scheduled to expire in November 1997 and provides for
additional one-year extensions upon mutual agreement by the parties. Upon
termination of the lease, the lessor would be entitled to a cash payment
equal to its remaining investment, which was $65 million as of December
31, 1995. Consumers is responsible for payment of taxes, maintenance,
operating costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 1995, were:
In Millions
Capital Operating
Leases Leases
------- --------
1996 $ 55 $ 7
1997 56 7
1998 17 6
1999 14 4
2000 13 3
2001 and thereafter 24 18
---- ----
Total minimum lease payments 179 $45
Less imputed interest 27 ====
----
Present value of net minimum lease payments 152
Less current portion 46
----
Non-current portion $106
====
Consumers recovers these charges from customers and accordingly charges
payments for its capital and operating leases to operating expense.
Operating lease charges, including charges to clearing and other accounts
as of December 31, 1995, 1994 and 1993, were $11 million, $10 million and
$10 million, respectively.
Capital lease expenses for the years ended December 31, 1995, 1994 and
1993 were $46 million, $43 million and $34 million, respectively.
Included in these amounts for the years ended 1995, 1994 and 1993 are
nuclear fuel lease expenses of $25 million, $21 million and $13 million,
respectively.
14: Commitments, Contingencies and Other
Ludington Pumped Storage Plant: Early in 1996, the FERC and MPSC approved
the recovery of costs associated with a settlement designed to resolve all
legal issues related to fish mortality at Ludington. Consumers, Detroit
Edison, the Attorney General, the Michigan Department of Natural Resources
(DNR) and certain other parties agreed to the terms of the settlement in
1994. Approval of the settlement requires Consumers to transfer certain
land to the State of Michigan and the Great Lakes Fishery Trust, make
certain recreational improvements, and incur future annual payments of
approximately $1 million (over 24 years) to improve fishery resources.
The settlement resolves two lawsuits filed by the Attorney General in 1986
and 1987 on behalf of the State of Michigan.
Environmental Matters: Consumers is a so-called "Potentially Responsible
Party" at several sites being administered under the Comprehensive
Environmental Response, Compensation and Liability Act (Superfund).
Superfund liability is joint and several and along with Consumers, there
are numerous credit-worthy, potentially responsible parties with
substantial assets cooperating with respect to the individual sites.
Based upon past negotiations, Consumers estimates its total liability for
the significant sites will average less than 4 percent of the estimated
total site remediation costs, and such liability is expected to be less
than $9 million. At December 31, 1995, Consumers has accrued a liability
for its estimated losses.
The Michigan Natural Resources and Environmental Protection Act (formerly
the Michigan Environmental Response Act) was substantially amended in June
1995. The Michigan law bears similarities to the federal Superfund law.
The purpose of the 1995 amendments was generally to encourage development
of industrial sites and to remove liability from some parties who were not
responsible for activities causing contamination. Consumers expects that
it will ultimately incur investigation and remedial action costs at a
number of sites, including some of the 23 sites that formerly housed
manufactured gas plant facilities, even those in which it has a partial or
no current ownership interest.
Consumers has prepared plans for remedial investigation/feasibility
studies for several of these sites. Three of the four plans submitted by
Consumers have been approved by the DNR or the Michigan Department of
Environmental Quality (a new department succeeding to some of the former
jurisdiction of the DNR). The findings for the first remedial
investigation indicate that the expenditures for remedial action at this
site are likely to be minimal. However, Consumers does not believe that a
single site is representative of all of the sites. Data available to
Consumers and its continued internal review have resulted in an estimate
for all costs related to investigation and remedial action for all 23
sites of between $48 million and $112 million. These estimates are based
on undiscounted 1995 costs. At December 31, 1995, Consumers has accrued a
liability of $48 million and has established a regulatory asset for
approximately the same amount. Any significant change in assumptions such
as remediation technique, nature and extent of contamination and legal and
regulatory requirements, could impact the estimate of remedial action
costs for the sites.
Consumers requested recovery and deferral of certain investigation and
remedial action costs in its gas rate case filed in 1994. Consumers
believes that remedial action costs are properly recoverable in rates as
the MPSC in 1993 addressed the question of recovery of investigation and
remedial action costs for another Michigan gas utility as part of a gas
rate case. In order to be recoverable in rates, prudent costs must be
approved in a rate case. Any costs amortized in years prior to filing a
rate case may not be recoverable. The MPSC has approved similar deferred
accounting requests by several other similar Michigan utilities relative
to investigation and remedial action costs. During 1995, as part of
Consumers' rate case, the MPSC staff and the ALJ recommended that the MPSC
adopt the same accounting and cost recovery previously provided to other
Michigan utilities. Consumers is continuing discussions with certain
insurance companies regarding coverage for some or all of the costs which
may be incurred for these sites.
The Federal Clean Air Act as amended on November 15, 1990 (Clean Air Act)
contains provisions that limit emissions of sulfur dioxide and nitrogen
oxides and require emissions monitoring. Consumers' coal-fueled electric
generating units burn low-sulfur coal and are presently operating at or
near the sulfur dioxide emission limits which will be effective in the
year 2000. The Clean Air Act's provisions required Consumers to make
capital expenditures totaling $25 million to install equipment at certain
generating units. Consumers estimates capital expenditures for in-process
and possible modifications at other coal-fired units to be an additional
$50 million by the year 2000. Final acid rain program nitrogen oxide
regulations specifying the limits applicable to the other coal-fired units
are expected to be issued in 1996. Management believes that Consumers'
annual operating costs will not be materially affected.
Capital Expenditures: CMS Energy estimates capital expenditures,
including investments in unconsolidated subsidiaries and new lease
commitments, of $856 million for 1996, $775 million for 1997 and $750
million for 1998.
Commitments for Coal and Gas Supplies: Consumers has entered into coal
supply contracts with various suppliers for its coal-fired generating
stations. These contracts have expiration dates that range from 1997 to
2004. Consumers contracts for approximately 60 - 70 percent of its annual
coal requirements which in 1995 totaled $233 million (72 percent was under
long-term contracts). Consumers supplements its long-term contracts with
spot-market purchases to fulfill its coal needs.
Consumers has entered into gas supply contracts with various suppliers for
its natural gas business. These contracts have expiration dates that
range from 1996 to 2003. In 1995, Consumers' gas requirements totaled
$694 million (80 percent was under long-term contracts). In the future,
Consumers expects that approximately 35 percent of its annual gas
requirements will be under long-term contracts. Consumers supplements its
long-term contracts with spot-market purchases to fulfill its gas needs.
Other: As of December 31, 1995, CMS Energy and Enterprises have
guaranteed up to $62 million in contingent obligations of unconsolidated
affiliates of Enterprises' subsidiaries.
CMS NOMECO periodically enters into oil and gas price hedging arrangements
to mitigate its exposure to price fluctuations on the sale of crude oil
and natural gas. These arrangements limit potential gains/losses from any
future decrease/increase in the spot prices. As of December 31, 1994 CMS
NOMECO was party to gas price collar contracts on 7.3 billion cubic feet
(bcf) of gas for the delivery months of January through December 1995 at
prices ranging from $2.05 to $2.35 per million British thermal unit
(MMBtu). As of December 31, 1995, CMS NOMECO also has contracts on 7.4
bcf of gas for the delivery months of January through May 1996 at prices
ranging from $1.89 to $2.18 per MMBtu. These hedging arrangements are
accounted for as hedges; accordingly, any changes in market value and
gains or losses from settlements are deferred and recognized at such time
as the hedged transaction is completed. As of December 31, 1994 and
December 31, 1995, the fair values of these hedge arrangements were not
materially different than the book value.
CMS NOMECO also has one arrangement which is used to fix the prices that
CMS NOMECO will pay to supply gas for the years 2001 - 2006 by purchasing
the economic equivalent of 10,000 MMBtu per day at a fixed, escalated
price starting at $2.82 per MMBtu in 2001. The settlement periods are
each a one-year period ending December 31, 2001 through 2006 on 3.65
MMBtu. If the "floating price," essentially the then current Gulf Coast
spot price, for a period is higher than the "fixed price," the seller pays
CMS NOMECO the difference, and vice versa. If a party's exposure at any
time exceeds $2 million, that party is required to obtain a letter of
credit in favor of the other party for the excess over $2 million and up
to $10 million. At December 31, 1995, a letter of credit was not
required.
Consumers has experienced a number of lawsuits filed against it relating
to so-called stray voltage. Claimants contend that stray voltage results
when small electrical currents present in grounded electrical systems are
diverted from their intended path. Consumers maintains a policy of
investigating all customer calls regarding stray voltage and working with
customers to address their concerns including, when necessary, modifying
the grounding of the customer's service. At December 31, 1995, Consumers
had 30 separate stray voltage lawsuits awaiting trial court action, down
from 83 lawsuits at December 31, 1994.
In addition to the matters disclosed in these notes, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental
agencies, arising from the ordinary course of business involving personal
injury and property damage, contractual matters, environmental issues,
federal and state taxes, rates, licensing and other matters.
Estimated losses for certain contingencies discussed in this note have
been accrued. Resolution of these contingencies is not expected to have a
material impact on CMS Energy's financial position or results of
operations.
15: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks
now being used by Consumers at Palisades. In order to address concerns
raised subsequent to the initial cask loading, Consumers and the NRC each
analyzed the effects of seismic and other natural hazards on the support
pad on which the casks are placed, and confirmed that the pad location is
acceptable to support the casks. As of December 31, 1995, Consumers had
loaded 13 dry storage casks with spent nuclear fuel at Palisades.
In 1996, Consumers plans to unload and replace one of the loaded casks.
In a review of the cask manufacturer's quality assurance program,
Consumers detected indications of minor flaws in welds in the steel liner
of one of the loaded casks. Although the cask continues to safely store
spent fuel and there is no requirement for its replacement, Consumers has
nevertheless decided to remove the spent fuel and insert it in another
cask. Consumers has examined radiographs for all of its casks and has
found all other welds acceptable. Certain parties, including the Attorney
General, have petitioned the NRC to suspend Consumers' general license to
store spent fuel, claiming that Consumers' cask unloading procedure does
not satisfy NRC regulations. The NRC staff is reviewing the petitions.
The Low-Level Radioactive Waste Policy Act encourages the respective
states, individually or in cooperation with each other, to be responsible
for the disposal of low-level radioactive waste. Currently, a low-level
waste site does not exist in Michigan and Consumers has been storing low-
level waste at its nuclear plant sites. Consumers began shipping its low-
level waste to a site in South Carolina during 1995 and plans to have all
its currently stored low-level waste removed from the plant sites by the
end of 1996.
Consumers maintains insurance coverage against property damage, debris
removal, personal injury liability and other risks that are present at its
nuclear generating facilities. This insurance includes coverage for
replacement power costs for the major portion of prolonged accidental
outages for 12 months after a 21 week exclusion with reduced coverage to
approximately 80 percent for two additional years. If certain loss events
occur at its own or other nuclear plants similarly insured, Consumers
could be required to pay maximum assessments of: $30 million in any one
year to Nuclear Mutual Ltd. (NML) and Nuclear Electric Insurance LTD.
(NEIL); $79 million per event under the nuclear liability secondary
financial protection program, limited to $10 million per event in any one
year; and $6 million in the event of nuclear workers claiming bodily
injury from radiation exposure. Consumers considers the possibility of
these assessments to be remote.
Under its NML and NEIL policies, Consumers may be entitled to cash
distributions following the discontinued operation of its nuclear
facilities. The amount of any distribution would be determined by NML and
NEIL and would be based, in part, on their overall underwriting
experience.
As an NRC licensee, Consumers is required to make certain calculations and
report to the NRC about the continuing ability of the Palisades reactor
vessel to withstand postulated "pressurized thermal shock" events during
its remaining license life, in light of the embrittlement of reactor
vessel materials over time due to operation in a radioactive environment.
Analysis of recent data from testing of similar materials indicates that
the Palisades reactor vessel can be safely operated through late 1999. In
April 1995, Consumers received a Safety Evaluation Report from the NRC
concurring with this evaluation and requesting submittal of an action plan
to provide for operation of the plant beyond 1999. Consumers is
developing plans to anneal the reactor vessel in 1998 at an estimated cost
of $20 million to $30 million. This repair would allow for operation of
the plant to the end of its license life in the year 2007. Consumers
cannot predict whether the studies being conducted as part of the
development plans will support a future decision to anneal.
16: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the
jointly owned facilities. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
In Millions
December 31 1995 1994
- ----------- ---- ----
Net investment
Ludington - 51% $116 $119
Campbell Unit 3 - 93.3% 332 337
Transmission lines - various 33 31
Accumulated depreciation
Ludington $ 81 $ 76
Campbell Unit 3 238 224
Transmission lines 14 11
17: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments
with an original maturity of three months or less are considered cash
equivalents. Other cash flow activities and non-cash investing and
financing activities for the years ended December 31 were:
In Millions
1995 1994 1993
---- ---- ----
Cash transactions
Interest paid (net of amounts capitalized) $207 $162 $193
Income taxes paid (net of refunds) 34 36 32
Non-cash transactions
Nuclear fuel placed under capital lease $ 26 $ 21 $ 28
Other assets placed under capital leases 5 15 30
Common Stock issued to acquire companies 90 - -
Assumption of debt 20 - -
Capital leases refinanced 21 - 42
Changes in other assets and liabilities as shown on the Consolidated
Statements of Cash Flows at December 31 are described below:
In Millions
1995 1994 1993
---- ---- ----
Sale of receivables, net $ 20 $(10) $ 60
Accounts receivable (80) (15) 22
Accrued revenue (24) 20 (48)
Inventories 43 (4) (32)
Accounts payable 112 26 (31)
Accrued refunds (3) (3) (49)
Other current assets and liabilities, net 30 4 (4)
Non-current deferred amounts, net (9) (6) (6)
---- ---- ----
$ 89 $ 12 $(88)
==== ==== ====
18: Reportable Segments
CMS Energy operates principally in the following five business segments:
electric utility, gas utility, oil and gas exploration and production,
independent power production, and natural gas transmission, storage and
marketing.
The Consolidated Statements of Income show operating revenue and pretax
operating income by business segment. Other segment information follows:
In Millions
Years Ended December 31 1995 1994 1993
- ----------------------- ---- ---- ----
Depreciation, depletion and amortization
Electric utility $ 272 $ 257 $ 241
Gas utility 83 76 73
Oil and gas exploration and production 52 41 45
Independent power production 4 2 2
Natural gas transmission, storage
and marketing 3 2 1
Other 2 1 2
------ ------ ------
$ 416 $ 379 $ 364
====== ====== ======
Identifiable assets
Electric utility (a) $4,522 $4,364 $4,100
Gas utility (a) 1,690 1,673 1,628
Oil and gas exploration and production 660 469 398
Independent power production 840 536 488
Natural gas transmission, storage
and marketing 303 109 75
Other 128 227 275
------ ------ ------
$8,143 $7,378 $6,964
====== ====== ======
Capital expenditures (b)
Electric utility $ 328 $ 358 $ 403
Gas utility 126 134 158
Oil and gas exploration and production (c) 168 115 83
Independent power production 239 29 110
Natural gas transmission, storage
and marketing 178 31 14
Other 14 5 -
------ ------ ------
$1,053 $ 672 $ 768
====== ====== ======
(a) Amounts include an attributed portion of Consumers' other common
assets to both the electric and gas utility businesses.
(b) Includes capital leases for nuclear fuel and other assets and electric
DSM costs (see Statement of Cash Flows). Amounts also include an
attributed portion of Consumers' capital expenditures for plant and
equipment common to both the electric and gas utility businesses.
(c) Includes common stock issued for acquisitions.
19: Effects of the Ratemaking Process
The following regulatory assets (liabilities) which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets.
These assets represent probable future revenue to Consumers associated
with certain incurred costs as these costs are recovered through the
ratemaking process.
In Millions
December 31 1995 1994
- ----------- ---- ----
Postretirement benefits (Note 12) $ 487 $ 503
Income taxes (Note 5) 176 189
Abandoned Midland project 131 147
DSM - deferred costs (Note 4) 68 71
Trunkline settlement 55 85
Manufactured gas plant sites (Note 14) 47 47
Power purchase contracts (Note 3) 44 30
Uranium enrichment facility 25 25
Other 22 31
------ ------
Total regulatory assets $1,055 $1,128
====== ======
Income taxes (Note 5) $ (220) $ (205)
DSM - deferred revenue (25) (21)
Other (1) -
------ ------
Total regulatory liabilities $ (246) $ (226)
====== ======
At December 31, 1995, approximately $778 million of Consumers' regulatory
assets are being recovered through rates being charged to customers over
periods of up to 17 years. Consumers anticipates MPSC approval for
recovery of the remaining amounts.
20: Summarized Financial Information of Significant Related Energy
Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers'
1995 obligation to purchase electric capacity from the MCV Partnership was
approximately 16 percent of Consumers' owned and contracted capacity.
Summarized financial information of the MCV Partnership follows:
Statements of Income
In Millions
Years Ended December 31 1995 1994 1993
- ----------------------- ----- ----- -----
Operating revenue (a) $ 618 $ 579 $ 548
Operating expenses 386 378 362
------ ------ ------
Operating income 232 201 186
Other expense, net 171 183 189
------ ------ ------
Net income (loss) $ 61 $ 18 $ (3)
====== ====== ======
Balance Sheets
In Millions
December 31 1995 1994
- ----------- ------ ------
Assets
Current assets (b) $ 263 $ 206
Property, plant and equipment, net 1,948 2,012
Other assets 156 154
------ ------
$2,367 $2,372
====== ======
Liabilities and Partners' Equity
Current liabilities $ 225 $ 218
Long-term debt and other non-current
liabilities (c) 2,008 2,081
Partners' equity (d) 134 73
------ ------
$2,367 $2,372
====== ======
(a) Revenue from Consumers totaled $571 million, $534 million and $505
million for 1995, 1994 and 1993, respectively.
(b) At December 31, 1995 and 1994, $48 million was receivable from
Consumers.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership.
CMS Holdings holds a 46.4 percent ownership interest in FMLP. At December
31, 1995 and 1994, lease obligations of $1.6 billion and $1.7 billion,
respectively, were owed to the owner trust. CMS Holdings' share of the
interest and principal portion for the 1995 lease payments was $66 million
and $23 million, respectively, and for the 1994 lease payments was $68
million and $14 million, respectively. The lease payments service $1.1
billion and $1.2 billion in non-recourse debt outstanding as of December
31, 1995 and 1994, respectively, of the owner-trust. FMLP's debt is
secured by the MCV Partnership's lease obligations, assets, and operating
revenues. For 1995 and 1994, the owner-trust made debt payments
(including interest) of $192 million and $175 million, respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which is being amortized to expense over the life of
its investment in the MCV Partnership.
<PAGE>
<PAGE> 46
ITEM 7 - FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
(1)-(22) Not applicable.
(23) Consent of Arthur Andersen LLP.
(24)-(26) Not applicable.
(27) Financial Data Schedule.
(28)-(99) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by
the undersigned hereunto duly authorized.
CMS ENERGY CORPORATION
Dated: February 23, 1996 By: \s\ A.M. Wright
---------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer
and Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit
Number
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
<PAGE>
<PAGE>
Exhibit (23)
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 8-K, into CMS Energy Corporation's
previously filed Registration Statements No. 33-9732, No. 33-29681,
No. 33-47629, No. 33-64044, No. 33-51877, No. 33-57719, No. 33-60007,
No. 33-61595 and No. 33-62573.
Arthur Andersen LLP
Detroit Michigan
February 23, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET, AND
STATEMENT OF COMMON STOCKHOLDERS' EQUITY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000811156
<NAME> CMS ENERGY CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,377
<OTHER-PROPERTY-AND-INVEST> 1,515
<TOTAL-CURRENT-ASSETS> 910
<TOTAL-DEFERRED-CHARGES> 1,341
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,143
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 1,951
<RETAINED-EARNINGS> (475)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,469
0
356
<LONG-TERM-DEBT-NET> 1,866
<SHORT-TERM-NOTES> 341
<LONG-TERM-NOTES-PAYABLE> 1,040
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 161
0
<CAPITAL-LEASE-OBLIGATIONS> 106
<LEASES-CURRENT> 46
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,750
<TOT-CAPITALIZATION-AND-LIAB> 8,143
<GROSS-OPERATING-REVENUE> 3,890
<INCOME-TAX-EXPENSE> 118
<OTHER-OPERATING-EXPENSES> 3,287
<TOTAL-OPERATING-EXPENSES> 3,417
<OPERATING-INCOME-LOSS> 473
<OTHER-INCOME-NET> (10)
<INCOME-BEFORE-INTEREST-EXPEN> 475
<TOTAL-INTEREST-EXPENSE> 243
<NET-INCOME> 232
28
<EARNINGS-AVAILABLE-FOR-COMM> 204
<COMMON-STOCK-DIVIDENDS> 84
<TOTAL-INTEREST-ON-BONDS> 135
<CASH-FLOW-OPERATIONS> 682
<EPS-PRIMARY> 2.27<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS for CMS Energy Common Stock $2.27
EPS for Class G Common Stock $.38
</FN>
</TABLE>
