Item 1. BUSINESS. CONSUMERS CONSOLIDATED REVENUE AND SALES BY BUSINESS SEGMENT.
Consumers Gas Supply: In 1994, Consumers purchased approximately 83 percent of its required gas supply under long term contracts. Trunkline, Consumers' primary gas supplier, supplied 35 percent of the overall requirement. Of Consumers' remaining gas supply requirements purchased under long term contract, 14 percent came from Michigan producers and 35 percent from various other producers and non-affiliated marketing companies in the United States and Canada. The remaining 17 percent of Consumers' 1994 gas supply requirements were met by purchases on the spot market.
Consumers' supply contract with Trunkline, which obligated Trunkline to supply 325 thousand mcf per day to Consumers, expired on November 1, 1994. This obligation has been replaced with three two-year contracts and four one-year contracts with independent producers at fixed prices for an aggregate of 255 thousand mcf per day. Consumers expects to obtain the balance of its gas supply requirements in the spot market.
Consumers' firm transportation agreements are with Trunkline, Panhandle, ANR Pipeline Company and Great Lakes Gas Transmission Company. These agreements are utilized by Consumers to transport its required gas supplies to market and to replenish its storage fields. In total, Consumers' firm transportation arrangements will carry almost 90 percent of Consumers' total gas supply requirements.
Consumers' portfolio of firm transportation from pipelines is as follows:
Volume (dekatherms/day) Expiration ------ ---------------- Trunkline 41,400 February 1997 336,375 October 2002
Panhandle 40,000 March 2000 25,000 March 2000
ANR Pipeline Company 40,000 October 1999 10,000 December 2001 6,000 December 2002 24,900 October 2003 58,765 October 2003
Great Lakes Gas Transmission Company 84,000 March 2004
The balance of Consumers' required gas supply is transported on interruptible contracts. The amount of interruptible capacity and the utilization thereof is primarily a function of the price for such service and the availability and price of the spot supplies to be purchased and transported. Consumers' utilization of interruptible transportation is generally in off-peak summer months.
CMS Energy Oil and Gas Exploration and Production
CMS NOMECO, a wholly owned subsidiary of Enterprises, is an oil and natural gas producer with activities in Michigan and 12 other states, the Gulf of Mexico, Australia, Colombia, Ecuador, Equatorial Guinea, New Zealand, Papua New Guinea, Venezuela and Yemen. In 1994, it produced approximately 2.2 MMbbls of oil, condensate and plant products and approximately 20.5 bcf of gas compared to 1.9 MMbbls and 18.5 bcf in 1993.
During 1994 CMS NOMECO participated with a working interest in drilling wells as follows:
Type of Number of Number of Success Well Wells Successful Wells Ratio ---------- ---------- ----------------- ------------ Gross Net Gross Net Gross Net
Exploratory 15 5.04 7 2.42 47% 48%
Development 21 2.99 19 2.83 90% 95% -- ---- -- ---- Total 36 8.03 26 5.25 72% 65% == ==== == ====
The numbers do not include CMS NOMECO's participation in Devonian Antrim Shale gas wells in Michigan, where CMS NOMECO drilled 12 wells during 1994 with a 92 percent success rate.
CMS NOMECO has a 14 percent working interest in a consortium which is conducting oil development and production operations in Block 16 and the adjoining Tivacuno Block of the Oriente Basin of Ecuador. Production commenced from the Tivacuno field in May 1994, the Bogi-Caprion field in June, followed by the Amo field in December. By year end all three fields were producing at a pipeline-curtailed rate of 33,000 barrels per day compared to total production capacity of 43,000 barrels per day. Further, the Ministry of Energy and Mines in Ecuador has recently informed the consortium members that the Ministry will seek to renegotiate the Risk Service Contract and other contracts governing the project. CMS NOMECO cannot predict the outcome of these negotiations. Ecuador currently represents approximately one-fifth of the total of CMS NOMECO's proven oil and gas reserves on an equivalent barrel basis.
In June 1994, CMS NOMECO acquired from Sun Company, Inc. a working interest in the Espinal block in Colombia, South America, which is operated by LASMO Oil (Colombia) Limited. The block, which includes 250,000 acres, is currently producing 8,500 barrels of oil per day. CMS NOMECO estimates the block to contain at least 75 million barrels of proven oil reserves of which CMS NOMECO's share of production is 14.7 percent.
In December 1994, a consortium in which CMS NOMECO is a 29 percent participant entered into an agreement with Maraven, S.A., a unit of the Venezuelan state oil company, to develop the Colon block in the Maracaibo basin of southwest Venezuela. The development program involves reworking, re-equipping and re-entering wells, and drilling new wells to optimize production from existing proved reserves. Total production from this block is expected to approximate 30,000 barrels per day by 1997.
In February 1995, CMS NOMECO acquired Walter for approximately $46 million, consisting of approximately $28 million of CMS Energy common stock and $18 million in both cash and assumed debt. CMS NOMECO's acquisition of Walter will add net production of 5,500 barrels per day in 1995 and proven reserves of 20 million barrels of oil. See Item 2.
ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of CMS Energy and its subsidiaries are owned in fee, except that most electric lines and gas mains are located, pursuant to easements and other rights, in public roads or on land owned by others. The statements under this item as to ownership of properties are made without regard to tax and assessment liens, judgments, easements, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumbrances, and other outstanding rights. None of these outstanding rights impairs the usefulness of such properties.
Substantially all of Consumers' properties are subject to the lien of its First Mortgage Bond Indenture.
CONSUMERS ELECTRIC UTILITY PROPERTIES
Consumers' electric generating system consists of five fossil-fueled plants, two nuclear plants, one pumped storage hydroelectric facility, seven gas combustion turbine plants and 13 hydroelectric plants.
The following table shows CMS NOMECO's undeveloped net acres of oil and gas leasehold interests at December 31.
Net Acres 1994 1993
Michigan 85,372 77,672 Louisiana (a) 30,418 37,295 Texas (a) 7,823 8,083 North Dakota 5,099 5,635 Indiana 2,518 5,034 Ohio 2,201 1,055 Other states 1,908 1,129 --------- ------- Total domestic 135,339 135,903 --------- ------- Yemen 401,897 120,563 Venezuela 234,002 - Colombia 85,217 - Ecuador 69,160 69,160 Papua New Guinea 63,220 96,825 Equatorial Guinea 47,330 83,334 New Zealand 602 602 Thailand - 188,000 --------- ------- Total international 901,428 558,484 --------- ------- Total 1,036,767 694,387 ========= ======= (a) Includes offshore acreage.
CONSUMERS OTHER PROPERTIES
CMS Midland owns a 49 percent interest in the MCV Partnership which was formed to construct and operate the MCV Facility. The MCV Facility has been sold to five owner trusts and leased back to the MCV Partnership. CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS Holdings' indirect beneficial interest in the MCV Facility is 35 percent.
Consumers owns fee title to 1,140 acres of land in the City and Township of Midland, Midland County, Michigan, occupied by the MCV Facility. The land is leased to the owners of the MCV Facility by five separate leases, each leasing an undivided interest and in the aggregate totaling 100 percent, for an initial term ending December 31, 2035 with possible renewal terms to June 15, 2090.
Consumers owns or leases three principal General Office buildings in Jackson, Michigan and 55 Regional and other field offices at various locations in Michigan's Lower Peninsula. Of these, two of the General Office buildings and eleven of the Regional and other field offices are leased. Also owned are miscellaneous parcels of real estate not now used in utility operations.
CMS ENERGY OTHER PROPERTIES
Various subsidiaries of CMS Generation own interests in independent power plants, including a 50 percent partnership interest in a 36 MW woodwaste- fueled power plant near Susanville, California; a 50 percent partnership interest in a 60 MW coal and woodwaste-fueled power plant in Filer City, Michigan; a 50 percent partnership interest in a 39 MW woodwaste-fueled power plant in Grayling Township, Michigan; a 50 percent interest in a 31 MW tire burning power plant near Sterling, Connecticut; a 50 percent interest in a 19 MW woodwaste-fueled power plant in Lyons Falls, New York; a 50 percent ownership interest in a 20 MW woodwaste-fueled power plant near Chateaugay, New York; an 18.6 percent interest in a consortium which owns an 88 percent interest in a 650 MW fossil-fueled plant in San Nicolas, Argentina; an 80 percent interest in a consortium which owns a 51 percent interest in 422 MW of oil and natural gas fuel plants in the Mendoza province, Argentina; a 25 percent interest in a consortium which owns a 59 percent interest in two hydroelectric power plants, with a total of 1,320 MW of capacity, on the Limay River in western Argentina; and a 32.5 percent interest in 135 MW of oil and coal fueled plants on Cebu Island, in the Philippines.
In October 1994, CMS Generation signed a stock purchase agreement with Niagara Mohawk Power Corporation to acquire its independent subsidiary, HYDRA-CO. In January 1995, CMS Generation assumed ownership in seven major electric generating plants, a number of smaller plants and a plant under construction totaling 795 MW of gross capacity and 250 MW of net ownership. The plants are fueled by coal, natural gas, wastewood, wind and water (hydro). The operating plants are located in California, Maine, New Jersey, New York, Oklahoma and North Carolina.
CMS Gas Transmission owns a 75 percent interest in a general partnership which owns and operates a 25-mile, 16-inch natural gas transmission pipeline in Jackson and Ingham Counties, Michigan; owns a 24 percent limited partnership interest in the Saginaw Bay Area Limited Partnership which owns 125 miles of 10-inch and 16-inch natural gas transmission pipeline in north-central Michigan; owns a 44 percent limited partnership interest in a partnership that owns certain pipelines of 20 and 12 miles interconnected to the Saginaw Bay Area Limited Partnership facilities; owns 100 percent interest in a natural gas treating plant in Otsego County, Michigan; owns 100 percent interest in 41 miles of gas transmission pipeline in Otsego and Montmorency Counties, Michigan; and owns a 50 percent general partnership interest in the Moss Bluff Gas Storage Systems, a high deliverability salt cavern storage facility on the Gulf Coast of Texas.
CMS Gas Transmission is currently developing, with other partners, the Grands Lacs Market Center. Located in southeastern Michigan, this site was selected as a North American natural gas market center which will provide natural gas storage services, peaking storage, wheeling, parking and other related natural gas services to both buyers and sellers.
CMS Energy, through certain subsidiaries, owns a 50 percent interest in Bay Harbor Limited Liability Company, a resort development in Emmet County, Michigan, owns approximately 6,000 acres of undeveloped land in Benzie and Manistee Counties, Michigan, and owns approximately 53 acres of undeveloped land in Muskegon County, Michigan.
CONSUMERS CAPITAL EXPENDITURES
Capital expenditures during 1994 for Consumers and its subsidiaries totaled $483 million for capital additions and $9 million for demand-side management programs. These capital additions include approximately $47 million for environmental protection additions and $36 million for capital leases of nuclear fuel and other assets. Of the $483 million, $349 million was incurred for electric utility additions and $134 million for gas utility additions. The electric and gas utility additions include an attributed portion of capital expenditures common to both businesses.
In 1995, capital expenditures are estimated to be $437 million for capital additions and $15 million for demand-side management programs. These capital addition estimates include approximately $40 million related to environmental protection additions and $44 million related to capital leases of nuclear fuel and other assets. Of the $437 million, $310 million will be incurred for electric utility additions and $127 million for gas utility additions. The estimated electric and gas utility additions include an attributed portion of anticipated capital expenditures common to both businesses.
CMS ENERGY CAPITAL EXPENDITURES
Capital expenditures during 1994 for CMS Energy and its subsidiaries totaled $664 million for capital additions and $9 million for demand-side management programs. These capital additions include approximately $47 million for environmental protection additions and $36 million for capital leases of nuclear fuel and other assets. Of the $664 million, $483 million was incurred by Consumers as discussed above. The remaining $181 million in capital additions include $115 million for oil and gas exploration and development, $30 million for independent power production, $31 million for natural gas transmission, storage and marketing and $5 million for other capital expenditures, primarily the Bay Harbor resort development in northern Michigan.
In 1995, capital expenditures are estimated to be $924 million for capital additions and $15 million for demand-side management programs. This capital addition estimate includes approximately $40 million related to environmental protection additions and $44 million related to capital leases of nuclear fuel and other assets. Of the $924 million, $437 million will be incurred by Consumers as discussed above. The remaining $487 million in capital additions will be incurred as follows: $132 million for oil and gas exploration and development (including the Walter acquisition), $255 million for independent power production (including the HYDRA-CO acquisition), and $100 million for natural gas transmission, storage and marketing.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Consumers and some of its subsidiaries and affiliates are parties to certain routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, income taxes, and rates and licensing. Reference is made to the Notes to the Consolidated Financial Statements included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating and environmental matters.
The Attorney General, ABATE, and the MPSC Staff typically intervene in MPSC proceedings concerning Consumers. Unless otherwise noted below, these parties have intervened in such proceedings. For many years, almost every significant MPSC order affecting Consumers has been appealed. Appeals from such MPSC orders are pending in the Michigan Court of Appeals and the Michigan Supreme Court. Consumers is vigorously pursuing these matters. Under Michigan civil procedure, parties may file a claim of appeal with the Michigan Court of Appeals which serves as a notice of appeal. The grounds on which the appeal is being made are not set forth until a later date when the parties file their briefs.
RATE CASE PROCEEDINGS
Appeal of MPSC Orders Related to the Abandoned Midland Nuclear Plant Investment
In November 1983, Consumers filed an electric rate case with the MPSC which sought recovery of its investment in the abandoned portion of the Midland nuclear plant. This case was separated into two phases in September 1984: a financial stabilization phase, MPSC Case No. U-7830, Step 3A, and a prudence phase, MPSC Case No. U-7830, Step 3B. Numerous orders were issued in these cases, including one issued in 1985 in the financial stabilization phase which contained certain conditions to Consumers' receiving financial stabilization rate relief.
On May 7, 1991, the MPSC issued final orders in both Step 3A and Step 3B proceedings. The MPSC ruled, among other things, that Consumers could recover approximately $760 million of its $2.1 billion of abandoned Midland investment. In Step 3A, the MPSC reviewed Consumers' compliance with the financial stabilization order conditions. Consumers, as well as the Attorney General and ABATE, among others, filed applications for rehearing with the MPSC of the May 7 Orders in Step 3A and Step 3B which were all denied by the MPSC. Several parties, including Consumers, have appealed the MPSC determinations in these orders to the Court of Appeals. Regarding the Step 3B order, the Attorney General and ABATE primarily disagreed with the standard used by the MPSC to determine the amount of investment that is recoverable by Consumers from its electric customers, contending that recovery should not be allowed for utility assets that have not been placed in service. Consumers disagreed with the date the MPSC determined it would have been prudent for Consumers to abandon construction of the Midland nuclear facility and the reduction in recoverable investment that resulted from this determination. In the Step 3A appeal, the Attorney General and ABATE contended that Consumers did not fully comply with the financial stabilization orders. Oral arguments were held on the appeals from the May 7 Step 3A order in December 1993 and on the Step 3B appeal on October 19, 1994. A decision on the Step 3A appeals has been held in abeyance pending resolution of Step 3B appeals. The Court of Appeals affirmed the MPSC determinations in Step 3B in an order issued in December 1994. Consumers and ABATE have filed applications for leave to appeal the Court of Appeals decision to the Michigan Supreme Court. The Attorney General filed a delayed appeal in February.
Appeal of 1991 General Electric Rate Case Order
Certain aspects of the electric rate case orders issued by the MPSC in May 7, 1991 and July 1, 1991 were appealed by the Attorney General, ABATE and the Michigan Association of Home Builders. The appeals of the Attorney General and the Michigan Association of Home Builders were dismissed and in May 1994, the Court of Appeals denied ABATE's appeal. In January 1995, the Michigan Supreme Court denied ABATE's application for leave to appeal this decision.
1993 Electric Rate Case
On May 10, 1994, the MPSC issued a final order in this case which increased annual electric revenues by $58 million, or about 2.8 percent, and approved an allowed rate of return on common equity of 11.75%. The rate increase is effective for service rendered on and after May 11, 1994. In August 1994, the MPSC denied petitions for rehearing filed by Consumers and the Attorney General. The Attorney General has appealed the MPSC order to the Michigan Court of Appeals arguing that the MPSC cannot require Consumers to spend money on DSM programs and that a modified interruptible rate authorized by the MPSC is unlawful because it permits Consumers to negotiate rates, for certain customers, within a specified range.
1994 Electric Rate Case Filing
In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. The filing addresses the ratemaking effect of jurisdictional sales losses by assuming adoption of a proposed special nonjurisdictional rate to large, qualifying industrial customers as requested by Consumers in an earlier June 1994 filing with the MPSC. An alternative approach presented would use the MCV contract capacity above 915 MW for jurisdictional electric customers and offer discounted jurisdictional tariffs. Consumers has also requested that the MPSC eliminate the rate subsidization of residential rates in a two-step adjustment. In addition, Consumers proposes to eliminate all DSM expenditures after April 1995 and further requests MPSC approval to recover costs associated with the proposed settlement of the proceedings concerning the operation of Ludington. Under MPSC rate case scheduling policies, a final order in this case is expected in October 1995.
Request for Approval of a Competitive Tariff for Certain Industrial Customers
In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility and allow the use of the MCV contract capacity above the level currently authorized by the MPSC to respond to customers' alternative energy options.
1994 Gas Rate Case Filing
In December 1994, Consumers filed a gas rate case requesting an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. Under MPSC rate case scheduling policies, a final order in this case is expected in late 1995.
MCV - RELATED PROCEEDINGS
Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $21 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers received these funds on February 16, 1995. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order (which established Consumers recovery of MCV costs for those and future years) is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award at this time until the remaining amount of MCV capacity is sold or the market for the capacity is confirmed.
In March 1994, a lawsuit was filed in federal court for the southern district of New York against CMS Energy, Consumers and CMS Holdings. The lawsuit was filed by the Owner Participants who, along with a partnership in which CMS Midland is a partner, are the lessors of the MCV Facility. The action alleged compensatory and punitive damages in excess of $1 billion and sought injunctive relief relating to Consumers' payments of fixed energy charges to the MCV.
On February 8, 1995, the Owner Participants filed a notice of dismissal of this lawsuit. Since the lawsuit had not progressed beyond a preliminary stage, no court action was required for dismissal of this suit. CMS Energy, Consumers and CMS Holdings have also dismissed the lawsuit that had been initiated by them on March 28, 1994, in Midland County, Michigan, in response to the Owner Participant lawsuit in New York. The dismissals are without prejudice and the parties have agreed that the dismissals will be without costs or attorney fees, each side bearing its own.
A separate suit filed by CMS Holdings against its partners in First Midland Limited Partnership (the partnership that is one of the lessors of the MCV Facility) to obtain a refund of tax indemnity payments owed to CMS Holdings by the other partners was decided in favor of CMS Holdings. The remaining portion of the $8 million originally in dispute, plus interest, have been paid. An order of dismissal was entered February 2, 1995 after the payments were received.
On May 5, 1994, the MCV Partnership notified Consumers of its desire to commence a second arbitration proceeding, this one regarding the methodology for calculation of the energy charge payable under the PPA. The MCV Partnership maintains that Consumers has breached the PPA in misapplying or misinterpreting the methodology for calculation since commercial operation in March 1990. In January 1995, MCV Partnership estimated that it is owed additional energy charge revenues for the years 1990-1994 of amounts ranging from $2.3 million to $6.7 million per year and estimated additional amounts of $6.3 million annually for 1995 through the end of the PPA. Consumers believes that the PPA is clear on the manner in which energy charges are to be calculated and that Consumers has followed the specified procedure correctly throughout the term of the PPA. In accordance with the dispute resolution procedures set out in the PPA, an arbitrator acceptable to both parties has been selected. The schedule established by the arbitrator requires briefs to be filed in June 1995 and anticipates a decision being issued in August 1995.
PALISADES PLANT -- SPENT NUCLEAR FUEL STORAGE
In April 1993, the NRC amended its regulations, effective May 7, 1993, to license the design of the dry spent fuel storage casks to be used by Consumers at Palisades. In May 1993, the Attorney General and certain other parties commenced litigation to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the NEPA. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected the claims of the Attorney General and certain other parties and upheld the NRC's rulemaking action. The Court found that the NRC's environmental assessment satisfied NEPA requirements, and that a site-specific environmental analysis concerning the use and operation of the dry storage casks at Palisades was not required. As of February 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades' 1995 refueling outage.
In the latter part of 1995, Consumers plans to unload and replace one of the dry storage casks previously loaded because of minor flaws detected in the welds in the liner of the cask. Although testing following cask loading did not disclose any leakage from the cask, Consumers has nevertheless decided to remove the spent fuel from the cask and insert it in another cask. Consumers has examined the radiographs for all of the casks fabricated for it to date, and has found all other welds acceptable. In order to address concerns raised subsequent to the initial cask loading, Consumers and the NRC analyzed the effects of seismic and other natural hazards on the support pad on which the casks are placed and concluded that the pad location is acceptable to support the casks.
CMS ENERGY'S EXEMPTION UNDER PUHCA
CMS Energy is exempt from registration under PUHCA. In December 1991, the Attorney General and the MMCG filed a request with the SEC for the revocation of CMS Energy's exemption. In January 1992, CMS Energy responded to the revocation request affirming its position that it is entitled to the exemption. In April 1992, the MPSC filed a statement with the SEC that recommended that the SEC impose certain conditions on CMS Energy's exemption. CMS Energy is vigorously contesting the revocation request and believes it will maintain the exemption. There has been no action taken by the SEC on this matter.
LUDINGTON PUMPED STORAGE PLANT
In October 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. A definitive settlement agreement was subsequently filed with the FERC on February 28, 1995. The proposed settlement, which allows for the continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve recreational areas and convey undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to MPSC approval of Consumers' recovery of all such settlement costs from electric customers, and approval by the FERC.
The proposed settlement would resolve lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan in the Circuit Court of Ingham County, seeking damages from Consumers and Detroit Edison for injuries to fishery resources because of the operation of the Ludington plant and the revocation of the plant's bottom-lands lease. The state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, with the latter amount to be adjusted upon installation of "adequate" fish barriers and other changed conditions. Since 1986 the parties have continued to dispute, in various courts, the amount of actual damages as well as the best alternative to mitigate future damages.
STRAY VOLTAGE LAWSUITS
Consumers has experienced an increase in the number of lawsuits relating to so-called stray voltage, which results when small electrical currents present in grounded electric systems are diverted from their intended path. Claimants contend that stray voltage affects farm animal behavior, reducing the productivity of their livestock operations. Investigation by Consumers of prior stray voltage complaints disclosed that many factors, including improper wiring and malfunctioning of on-farm equipment can lead to the stray voltage phenomenon. Consumers maintains a policy of investigating all customer calls regarding stray voltage and working with customers to address their concerns including, when necessary, modifying the configuration of the customer's hook-up to Consumers' system. On October 27, 1993, a complaint seeking certification as a class action suit was filed against Consumers in a local circuit court. The complaint alleged that in excess of a billion dollars of damages, primarily related to lost production by certain livestock owned by the purported class, were being incurred as a result of stray voltage from electricity being supplied by Consumers. Consumers believed the allegations to be without merit and vigorously opposed the certification of the class and this suit. On March 11, 1994, the court decided to deny class certification for this complaint and to dismiss, subject to refiling as separate suits, the October lawsuit with respect to all but one of the named plaintiffs. On April 4, 1994, the plaintiffs appealed the court's denial of class certification in this matter to the Court of Appeals. Subsequent to the filing of this appeal and the submission of the plaintiffs' brief on this issue, the Court of Appeals on its own motion issued an order which decided that since the lead case in the class action suit had not been dismissed, the trial court's decision to deny class certification was an interlocutory order and therefore not ripe for appeal. The Court of Appeals order also found that the trial court's decision that the other named plaintiffs had been misjoined was final and ripe for appeal. This issue had not been raised in the plaintiffs' appeal or brief. Consumers has addressed both issues in its brief filed with the Court of Appeals on July 14, 1994, in support of the trial court's decision. This matter is pending before the Court of Appeals. A number of individuals who would have been part of the class action have refiled their claims as separate lawsuits. At February 28, 1995, Consumers had 81 separate stray voltage cases pending.
RETAIL WHEELING PROCEEDINGS
On April 11, 1994, the MPSC issued an Opinion and Interim Order which approved the framework for a five year experimental retail wheeling program for Consumers and Detroit Edison, and remanded the case to the ALJ to determine appropriate rates and charges. The MPSC stated that the purpose of the experiment is to gather and evaluate information regarding whether retail wheeling is in the public interest and should occur on a permanent basis. The experimental program will commence with each utility's next solicitation of additional supply side resources. In February 1995, the ALJ issued a PFD which, among other things, found that retail wheeling is likely to create additional stranded investment costs which could be considered costs of transition from a regulated environment to an unregulated environment and that retail wheeling participants should bear their proportionate share of these costs. The PFD also stated that there should be no restrictions on the entities that can be third party power suppliers in the experiment and that retail wheeling charges should include costs associated with DSM programs, nuclear decommissioning, SFAS 106 costs, and amortization of the Midland plant. A ruling on the ALJ's recommended rate design is expected from the MPSC by mid-1995. In the short term, Consumers does not expect this experimental program to have a material impact on its financial position or results of operations.
WHOLESALE WHEELING PROCEEDINGS
Consumers has an approved open-access interconnection service schedule on file with the FERC for wholesale wheeling transactions. In 1992, Consumers also filed a separate but complementary open-access transmission tariff that would make both firm and non-firm transmission service available to eligible power generators, including investor-owned utilities, facilities that meet the ownership and technical requirements under PURPA, independent power producers, and municipal and cooperative utilities. The FERC accepted the filing, effective May 2, 1992, subject to refund, and ordered a hearing before an ALJ. In September 1993, the ALJ issued an initial decision that would compel reductions of the tariff rates ranging from 25% to 65%. On November 1, 1993, Consumers filed exceptions with the FERC, which are still pending, seeking reversal of the rate reductions proposed in the ALJ's initial decision. As of January 1, 1995, the amount of firm transmission service currently subject to the tariff is 21 MW.
ENVIRONMENTAL MATTERS
Consumers is subject to various federal, state and local laws and regulations relating to the environment. Consumers has been named as a party to several actions involving environmental issues. However, based on its present knowledge and subject to future legal and factual developments, CMS Energy and Consumers believe that it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition. See Item 1. BUSINESS. CONSUMERS AND CMS ENERGY ENVIRONMENTAL COMPLIANCE.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CMS Energy
None in the fourth quarter of 1994 for CMS Energy.
Consumers
None in the fourth quarter of 1994 for Consumers.
PART II
ITEM 5.
ITEM 5. MARKET FOR CMS ENERGY'S AND CONSUMERS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CMS Energy
Market prices for CMS Energy's common stock and related security holder matters are contained herein in Item 8, CMS Energy's Quarterly Financial and Common Stock Information, which is incorporated by reference herein. Number of common shareholders at February 28, 1995 was 62,996.
Consumers
Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In February, May, August, November and December 1994, Consumers paid $16 million, $66 million, $31 million, $36 million and $27 million cash in dividends, respectively, on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
CMS Energy
Selected financial information is contained in Item 8, CMS Energy's Selected Financial Information which is incorporated by reference herein.
Consumers
Selected financial information is contained in Item 8, Consumers' Selected Financial Information which is incorporated by reference herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CMS Energy
Management's discussion and analysis of financial condition and results of operations is contained in Item 8, CMS Energy's Management's Discussion and Analysis which is incorporated by reference herein.
Consumers
Management's discussion and analysis of financial condition and results of operations is contained in Item 8, Consumers' Management's Discussion and Analysis which is incorporated by reference herein.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
CMS Energy Page
Selected Financial Information 46 Management's Discussion and Analysis 48 Consolidated Statements of Income 60 Consolidated Statements of Cash Flows 61 Consolidated Balance Sheets 62 Consolidated Statements of Long-Term Debt 64 Consolidated Statements of Preferred Stock 65 Consolidated Statements of Common Stockholders' Equity 66 Notes to Consolidated Financial Statements 67 Report of Independent Public Accountants 91 Quarterly Financial and Common Stock Information 92
Consumers Page
Selected Financial Information 94 Management's Discussion and Analysis 95 Consolidated Statements of Income 104 Consolidated Statements of Cash Flows 105 Consolidated Balance Sheets 106 Consolidated Statements of Long-Term Debt 108 Consolidated Statements of Preferred Stock 109 Consolidated Statements of Common Stockholder's Equity 110 Notes to Consolidated Financial Statements 111 Report of Independent Public Accountants 133 Quarterly Financial Information 134
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CMS Energy Corporation
1994 Financial Statements
CMS Energy Corporation Management's Discussion and Analysis
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) storage and transmission of natural gas.
On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' or CMS Energy's consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive.
On February 14, 1995, CMS Energy mailed a proxy statement to its shareholders seeking their approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy. This proposed new class of Common Stock, designated Class G Common Stock, would reflect the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, would be the "Consumers Gas Group"). The existing CMS Energy Common Stock would continue to be outstanding if and after any shares of Class G Common Stock were issued by CMS Energy and would reflect 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 any outstanding shares of the Class G Common Stock.
CMS Energy also filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities. Such securities could encompass Common Stock of CMS Energy (including Class G if approved), Preferred Stock of CMS Energy or a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy will continually evaluate the capital markets and may offer such instruments from time to time, at terms to be determined at or prior to the time of the sale.
Consolidated Earnings
Consolidated net income for 1994 totaled $179 million or $2.09 per share, compared to net income of $155 million or $1.90 per share in 1993 and a net loss of $297 million or $3.72 per share in 1992. The improved net income in 1994 reflects a significant increase in utility electric sales, the impact from a May 1994 electric rate increase, the recognition of incentive revenue related to DSM programs, and the favorable resolution of a previously recorded gas cost contingency. The increased 1993 net income reflects the Settlement Order related to power purchases from the MCV Partnership as well as increased electric sales and gas deliveries. Earnings in 1994 and 1993 also reflect growth of non-utility businesses.
Cash Position, Financing and Investing
CMS Energy's primary ongoing source of operating cash is dividends from its principal subsidiaries. Consumers effected a quasi-reorganization as of December 31, 1992, which allowed it to resume paying common dividends (see Note 7 to the Consolidated Financial Statements). Consumers paid $176 million in common dividends in 1994. CMS Energy also received cash dividends of $9 million from its non-utility subsidiaries. CMS Energy paid $67 million in cash dividends to common shareholders compared to $49 million in 1993. The $18 million increase reflects an annual increase of $.12 per share, from $.72 per share to $.84 per share, commencing third quarter 1994.
CMS Energy's consolidated cash requirements are met by its operating and financing activities. In 1994, 1993 and 1992, CMS Energy's consolidated cash from operations was derived mainly from Consumers' sale and transportation of natural gas and its generation, sale and transmission of electricity and from CMS NOMECO's sale of oil and natural gas. Consolidated cash from operations for 1994 reflects Consumers' record- setting electric sales and increased electric rates which were approved by the MPSC in mid-1994. Cash from operations for 1993 primarily reflected increased electric sales and gas deliveries from 1992 levels and reduced after-tax cash shortfalls resulting from Consumers' purchases of power from the MCV Partnership. During 1992, CMS Energy generated cash primarily from its consolidated operating activities.
CMS Energy's primary use of cash continues to reflect its utility construction expenditures, improvements in the reliability of its electric and gas utility transmission and distribution systems and expansion of its non-utility businesses. It also has used its cash to retire portions of long-term securities and to pay common and preferred dividends.
Financing Activities: In January 1994, CMS Energy filed a shelf- registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. As of January 31, 1995, CMS Energy had issued approximately $99 million of GTNs with interest rates ranging from 6.75 to 8.50 percent and reduced the principal amount of Series B Notes outstanding by $114 million, to a balance of $167 million. Also, in July 1994, CMS Energy refinanced its Secured Credit Facility with a new $400 million Unsecured Credit Facility and extended the termination date to June 30, 1997. Additionally, in October 1994, CMS Energy filed a shelf- registration statement for the offering and issuance of up to two million shares of common stock. As described in the SEC filing, the shares may be offered and issued in connection with acquisitions of energy-related businesses and assets.
In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility for the acquisition of HYDRA-CO. CMS Energy is currently evaluating permanent financing options.
In early 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds of $193 million from the sale were used for general corporate purposes, including debt retirement and improvements to Consumers' distribution systems. Consumers continued its effort to reduce its future interest charges by retiring $101 million of high-cost first mortgage bonds. In November 1994, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its long-term, variable rate credit agreement and to reduce short-term borrowings.
In October 1993, CMS Energy issued 4.6 million shares of common stock at a price of $26-5/8. The net proceeds of $119 million were used to reduce existing debt and for general corporate purposes. During 1993, Consumers retired $51 million of high-cost outstanding debt and refinanced $573 million of other debt at lower interest rates. In November 1993, CMS NOMECO amended the terms of its loan agreement and increased the amount to $110 million.
For further information on financing activities, see Note 7.
Investing Activities: Capital expenditures (excluding assets placed under capital leases of $36 million), deferred DSM costs and investments in unconsolidated subsidiaries totaled $637 million for 1994 as compared to $710 million in 1993 and $525 million in 1992. CMS Energy's expenditures for its utility, independent power production, oil and gas exploration and production, and natural gas pipeline, storage and marketing business segments were $456 million, $30 million, $115 million and $31 million, respectively.
Financing and Investing Outlook: CMS Energy estimates that capital expenditures, including DSM, new lease commitments and investments in unconsolidated subsidiaries, will total approximately $2.2 billion over the next three years.
In Millions Years Ended December 31 1995 1996 1997 - ----------------------- ---- ---- ---- Electric utility (a) $325 $255 $269 Gas utility (a) 127 119 111 Oil and gas exploration and production (b) 132 100 110 Independent power production (c) 255 144 117 Natural gas pipeline, storage and marketing 100 29 20 ---- ---- ---- $939 $647 $627 ==== ==== ====
(a) Includes a portion of anticipated capital expenditures common to both utility businesses. (b)(c) 1995 capital expenditures include requirements of (b)$42 million and (c)$155 million for acquisitions which commenced in 1994 but did not close until 1995.
CMS Energy is required to redeem or retire approximately $720 million of long-term debt during 1995 through 1997. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures and debt retirements. Additionally, CMS Energy will continue to evaluate the capital markets in 1995 as a source of financing its subsidiaries' investing activities.
Consumers has several available sources of credit including unsecured, committed lines of credit totaling $185 million and a $470 million working capital facility. Consumers has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory 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, 1994 and 1993, receivables sold totaled $275 million and $285 million, respectively.
Electric Utility Results of Operations
In Millions Pretax Operating Income ------------------------------ Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ 33 $ 34 Weather - 11 Resolution of MCV power cost issues - 126 Rate increase and other regulatory issues 38 5 O&M, general taxes and depreciation (22) (44) ----- ----- Total change $ 49 $132 ===== =====
Electric Sales: Total electric sales in 1994 were a record 34.5 billion kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent increase in system sales to Consumers' ultimate customers. Strong industrial sales accounted for 58 percent of the growth. In 1994, residential and commercial sales increased 1.6 percent and 3.0 percent, respectively, while industrial sales increased 6.8 percent. The significant increase in electric sales reflects the continued improvement in economic conditions in Michigan and broad-based growth in sales to industrial customers. Growth in industrial sales was the strongest in the automotive and chemical sectors. Total electric sales in 1993 were 32.8 billion kWh, a 3.7 percent increase from the 1992 levels. The 32.8 billion kWh includes a 3.8 percent increase in system sales.
Power Costs: Power costs for 1994 totaled $950 million, a $42 million increase from the corresponding 1993 period. This increase reflects increased kWh production at Consumers' generating plants and greater power purchases from outside sources to meet increased sales demand. Power costs for 1993 compared to 1992 reflect the impact of $126 million relating to the resolution of MCV power cost issues (see Note 3).
Operation and Maintenance: Increases in other operation and maintenance expense for 1994 and 1993 reflected increased expenditures to improve electric system reliability.
Depreciation: The increased depreciation for 1994 reflects additional capital investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' obligation to purchase contract capacity from the MCV Partnership was 1,132 MW in 1994 and increases to 1,240 MW in 1995 and thereafter. In 1993, the MPSC issued the Settlement Order that permits Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. 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 an after-tax loss of $343 million for the present value of estimated future underrecoveries of power purchases from the MCV Partnership. This loss included all fixed energy amounts at issue in the arbitration proceedings discussed below. Additional losses may occur if actual future experience materially differs from the 1992 estimates. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $61 million for 1994. Estimated future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below.
After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award at this time until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed. In a second arbitration proceeding, the MCV Partnership is seeking additional payments from Consumers which the MCV has estimated at $6.3 million annually for an alleged breach of the PPA.
In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew the lawsuit.
In July 1994 and February 1995, Consumers terminated power purchase agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood and chipped tire plant. Consumers plans to seek MPSC approval to substitute 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. For further information, see Note 3.
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consumers filed a request with the MPSC in November 1994, to increase its retail electric rates in a range from $104 million to $140 million annually (see Note 4). Additionally, in January 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.
Special Rates: In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility, and allow use of MCV contract capacity above the level currently authorized by the MPSC, to respond to customers' alternative energy options.
PSCR Matters: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. From mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. In November 1994, an ALJ issued a proposal for decision that recommended a $4 million disallowance of replacement power costs related to the 1993 outage. Consumers accrued a loss for this issue for 1994. Recovery of replacement power costs and the prudency of actions taken during the 1994 outage will be reviewed by the MPSC during the 1994 PSCR reconciliation proceeding.
Electric Conservation Efforts: In 1993, Consumers completed the customer participation portion of several DSM programs designed to encourage the efficient use of energy. During 1994, Consumers recognized $11 million in incentive revenue, related to Consumers' achievement of certain DSM program objectives approved by the MPSC in 1992. A final order, authorizing Consumers to collect the $11 million incentive, is expected from the MPSC by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to continue certain DSM programs. For further information, see Note 4.
Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental Response Act, under which Consumers expects that it will ultimately incur costs at a number of sites, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates or from others.
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 or results of operations.
The EPA has asked a number of utilities in the Great Lakes area to voluntarily retire certain equipment containing specific levels of polychlorinated biphenyls. While Consumers believes that it is largely in compliance with the EPA's request, it has agreed to a 10-year retirement period for certain equipment included in the EPA's request. Consumers does not anticipate that any significant additional costs will be incurred as a result of this agreement. For further information regarding electric environmental matters, see Note 12.
Electric Outlook
Competition: Consumers currently expects customer demand for electricity within its service territory will increase by approximately 1.6 percent per year over the next five years. Economic growth and an increasing customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is experiencing accelerating competitive pressures which may result in a negative impact on Consumers' sales growth. The primary sources of this 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. Several of Consumers' industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk" customers. These strategies include a request that the MPSC allow Consumers to offer special competitive service rates to current industrial customers which have demonstrated an ability to seek alternate electric supplies and to attract new customers which are considering locating or expanding facilities in Michigan. As part of its current electric rate case, Consumers has requested that the MPSC eliminate the rate subsidization of residential customers. If approved, commercial and industrial customers' electric costs would decrease by a total of approximately $80 million per year.
Consumers is committed to holding operation and maintenance costs level and continuing to improve customer service. Consumers is also working with large customers to identify ways to improve the efficiency with which energy is used.
In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In February 1995, an ALJ issued a proposal for decision that addressed the methodology for pricing transmission rates to be used for the experiment. An MPSC order is expected by mid-1995. In the short-term, Consumers does not expect this experiment to have a material impact on its financial position or results of operations.
Nuclear Matters: In late 1993, the NRC completed a review of Consumers' performance at Palisades that showed a decline in performance. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades during 1994 which found certain performance, operational and management deficiencies at the plant. Consumers subsequently filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is unlikely that the DOE will begin accepting any spent nuclear fuel by the originally scheduled date in 1998. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued a decision, effectively allowing Consumers to continue using dry cask storage at Palisades.
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. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed, prior to the year 2000, a temperature screening criterion established by NRC regulations. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 13.
The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the FASB has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed, annual provisions for decommissioning could increase, estimated costs for decommissioning could be recorded as a liability rather than as accumulated depreciation, and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense.
Stray Voltage: Consumers has recently experienced increases in the number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending. CMS Energy believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. For further information, see Note 12.
Gas Utility Results of Operations
In Millions Pretax Operating Income ----------------------------- Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ (3) $ 7 Weather - 10 Regulatory recovery of gas cost 10 12 O&M, general taxes and depreciation (19) 9 ----- ----- Total change $(12) $38 ===== =====
Gas Deliveries: Gas sales and gas transported in 1994 totaled 409 bcf, a .4 percent decrease from 1993. In 1993, gas sales and gas transported totaled 410.6 bcf, a 6.9 percent increase from 1992 deliveries.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates by $21 million. The requested increase in revenue reflects increased expenditures, including those associated with postretirement benefits, and proposes a 13 percent return on equity. A final order from the MPSC is expected in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent.
In June 1994, the FERC approved a stipulation and agreement in full settlement of a rate proceeding originally filed by Michigan Gas Storage in 1993, which provides Michigan Gas Storage with estimated annual revenues of $20 million. For further information regarding gas utility rates, see Note 4.
Gas Environmental Matters: Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time.
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 1994 costs. At December 31, 1994, Consumers has accrued a liability for $48 million. 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 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 recovered in rates, prudent costs must be approved in a rate case. The MPSC has approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated 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 12.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.3 percent per year (excluding MCV transportation 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 increasing efforts to promote natural gas to Consumers' current customers that are using various non-gas furnaces and appliances. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Management also believes there exists significant potential for developing industrial process fuel conversion projects.
New technologies being developed on a national level, such as the emerging use of natural gas vehicles and commercial gas cooling equipment, also provide 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 to natural gas.
In 1994, Consumers purchased approximately 83 percent of its required gas supply under long-term contracts, and the balance on the spot market. Trunkline supplied approximately 35 percent of the total requirement. In late 1994, Consumers' supply contract with Trunkline was replaced by several one- and two-year contracts with independent producers. Consumers estimates its purchases under long-term gas contracts will range from 70 - 80 percent in future years. Consumers also has transmission contracts totaling approximately 90 percent of its supply requirements. These contracts vary in length from one to ten years. Consumers' ability to purchase gas during the off-season and store it in its extensive underground storage facilities continues to help provide customers with low, competitive gas rates.
Oil and Gas Exploration and Production
Pretax Operating Income: 1994 pretax operating income increased $5 million from 1993, reflecting higher gas sales volumes, lower international write-offs, and the gain from assignment of a gas supply contract, partially offset by lower average market prices for oil and gas. 1993 pretax operating income decreased $4 million from 1992, primarily reflecting lower average market prices for oil and $10 million of international write-offs, partially offset by higher gas and oil sales volumes and higher average market prices for gas.
Capital Expenditures: In June 1994, CMS NOMECO acquired for $22.5 million a working interest in the Espinal block in Colombia, South America, which is operated by LASMO Oil (Colombia) Limited, from Sun Company, Inc. The other interest holder is Empresa Colombiana de Petroleos (Ecopetrol), the Colombian State Oil Company. The block which includes 250,000 acres is currently producing 8,500 barrels of oil per day. CMS NOMECO estimates the block to contain at least 75 million barrels of proven oil reserves of which CMS NOMECO's share of production is 14.7 percent.
In September 1994, a consortium in which CMS NOMECO is a 29 percent participant was awarded the right to enter into an agreement with Maraven, S.A., a unit of the Venezuelan state oil company, to develop the Colon block in the Maracaibo basin of southwest Venezuela. The agreement commits the consortium to spend at least $160 million over the next three years in a development program involving reworking, re-equipping and re- entering wells, and drilling new wells to optimize production from existing proved reserves. Total production from the block is expected to approximate 30,000 barrels per day by 1997. The consortium's operating fee and profit compensation is approximately $4.90 per barrel of production during the 20-year life of the concession.
The 1994 capital expenditures also reflect pipeline and road construction and development drilling in Ecuador. Production commenced in May 1994. By year end all three fields were producing at a pipeline-curtailed rate of 33,000 barrels per day compared to total productive capacity of 43,000 barrels per day. Further, the Ministry of Energy and Mines in Ecuador has recently informed the consortium members that the Ministry will seek to renegotiate the Risk Service Contract and other contracts governing the project. CMS NOMECO cannot predict the outcome of these negotiations. CMS NOMECO holds a 14 percent working interest.
In mid-1994, CMS NOMECO negotiated an agreement to acquire Walter. Because of the need to obtain governmental approvals, the transaction did not close until early 1995. CMS NOMECO's acquisition of Walter will add net production of 5,500 barrels per day in 1995 and proven reserves of approximately 20 million barrels of oil.
CMS Energy currently plans to invest $342 million over the next three years in its oil and gas exploration and production operations. These anticipated capital expenditures, which reflect the acquisition of Walter, will be concentrated in North and South America and Africa.
Independent Power Production
Pretax Operating Income: 1994 pretax operating income increased $15 million, primarily reflecting higher capacity sales from the MCV partnership, as well as additional equity earnings by the CMS Generation subsidiaries due to the addition of new electric generating capacity. Sales and revenues related to CMS Energy's ownership interest increased 24 percent and 15 percent, respectively, over the prior year. 1993 pretax operating income increased $21 million from 1992, primarily reflecting the addition of new electric generating capacity and improved equity earnings and operating efficiencies.
Capital Expenditures: In 1994, GPSLP, an unconsolidated affiliate of CMS Generation, obtained financing and began construction on the Genesee Power Station. CMS Generation has a 50 percent ownership interest in GPSLP, the 35 MW wastewood-fueled power plant near Flint, Michigan. Completion of the project is scheduled for Spring 1996 with an estimated cost of $94 million. CMS Generation's share of GPSLP equity committed upon completion of the project approximates $11 million.
In June 1994, CMS Generation acquired a 41 percent ownership interest in the Centrales Termicas Mendoza electric generating plant in western Argentina's Mendoza Province. CMS Generation is the lead developer and the plant operator. With major retrofitting and maintenance, this facility has the potential to produce 382 MW of generating capacity from oil and natural gas. CMS Generation's operational responsibility for the plant commenced on November 1, 1994.
In July 1994, CMS Generation acquired a 32.5 percent ownership interest in Toledo Power Company, which holds two operating power plants totaling 135 MW of generating capacity located on the island of Cebu in the Philippines.
In January 1995, CMS Generation completed its acquisition of Niagara Mohawk Power Corporation's independent power subsidiary, HYDRA-CO. CMS Generation purchased 100 percent of HYDRA-CO's stock for $207 million, including approximately $52 million of current assets. CMS Generation partially financed the acquisition with a $118 million bridge credit facility supplied by a consortium of four banks led by Union Bank of California. CMS Generation assumes ownership in 735 megawatts of gross capacity and 224 megawatts of net ownership. CMS Generation will manage and operate eight plants previously managed by HYDRA-CO and will also assume construction management responsibility for a 60-megawatt diesel- fueled plant which has begun in Jamaica. The plant is scheduled to go into service in the third quarter of 1996.
CMS Energy currently plans to invest $516 million relating to its independent power production operations over the next three years, primarily in domestic and international subsidiaries and partnerships. These anticipated capital expenditures include a $155 million requirement for the HYDRA-CO acquisition. CMS Generation will also pursue acquisitions of operating electric generating plants in Latin America, southern Asia and the Pacific Rim region.
Natural Gas Pipeline, Storage and Marketing
Pretax Operating Income: 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 1994, 66 bcf was marketed compared to 60 bcf in 1993.
Capital Expenditures: In January 1994, CMS Gas Transmission acquired a 50 percent ownership interest in Moss Bluff Gas Storage Systems, a high deliverability salt cavern storage facility on the Gulf Coast of Texas, for $18 million.
Effective January 1, 1995, CMS Gas Transmission increased its ownership of Antrim Limited Partnership to 100 percent by acquiring the remaining 40 percent interest. Under a new agreement with MichCon, CMS Gas Transmission will provide a gas treating service for up to 260 MMcf/d of Antrim gas. CMS Gas Transmission currently plans to expand this existing 120 MMcf/d treating complex to accommodate new Antrim production. This $22 million expansion will treat gas connected to a number of gathering lines including CMS Gas Transmission's South Chester gathering system and deliver gas to MichCon's Northern Michigan pipeline network.
CMS Energy currently plans to invest $149 million over the next three years relating to its non-utility gas operations, continuing to pursue development of natural gas storage, gas gathering and pipeline operations both domestically and internationally and work toward the development of a Midwest "market center" for natural gas through strategic alliances and asset acquisition and development.
Other
Other Income: Other income for 1994 decreased $34 million when compared to the corresponding 1993 period, reflecting the sale of the remaining MCV Bonds in December 1993 which eliminated the bond interest income. The 1992 loss included a $343 million charge related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. On April 15, 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA.
CMS Energy Corporation Notes to Consolidated Financial Statements
1: Corporate Structure
CMS Energy is the parent holding company of Consumers and Enterprises. Consumers, a combination electric and gas utility company serving the Lower Peninsula of Michigan, is the principal subsidiary of CMS Energy. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry. Enterprises is engaged in several non-utility energy-related businesses including: 1) oil and gas exploration and production, 2) development and operation of independent power production facilities, 3) gas marketing services to utility, commercial and industrial customers, and 4) 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. CMS Energy uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest and includes these results in operating revenue. For the years ended December 31, 1994, 1993 and 1992, equity earnings (losses) were $34 million, $17 million, and $(6) million, respectively.
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 1994 and 3.4 percent for 1993 and 1992. The composite rate for gas utility plant was 4.2 percent for 1994, 4.4 percent for 1993 and 4.3 percent for 1992.
CMS NOMECO follows the full-cost method of accounting and, accordingly, capitalizes its exploration and development costs, including the cost of non-productive drilling and surrendered acreage, on a country-by-country basis. The capitalized costs in each cost center are being amortized on an overall units-of-production method based on total estimated proven oil and gas reserves.
The composite rates for Consumers' common property, CMS NOMECO's other property, and other property of CMS Energy and its subsidiaries were 4.3 percent in 1994, 4.5 percent in 1993 and 4.7 percent in 1992.
New Accounting Standards: In December 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, effective for 1995 year- end financial statements. CMS Energy does not believe that it will be significantly affected by the statement, which requires disclosures about the nature of a company's operations and the use of estimates in financial statements. For other recent accounting standards regarding financial instruments, see Note 8.
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 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. The DOE is exploring options to offset the costs incurred by nuclear utilities to store spent nuclear fuel on site. For fuel burned after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers it through electric rates and remits it 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, 1994, Consumers has recorded a liability to the DOE of $95 million, including interest. Consumers has been recovering through electric rates the amount of this liability, excluding a portion of interest.
Nuclear Plant Decommissioning: Consumers collects estimated costs to decommission its two nuclear plants through a monthly surcharge to electric customers which currently totals $45 million annually. On March 1, 1995, Consumers filed updated decommissioning estimates with the MPSC which increased the estimated decommissioning costs for Big Rock to $290 million from $221 million and for Palisades to $502 million from $423 million (in 1994 dollars). The increase in the estimated decommissioning costs principally reflects the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. Consumers currently 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 significantly later than originally anticipated. Consumers has asked the NRC for an exemption from its requirement for assurance that the Big Rock decommissioning funds will at least equal the adjusted "minimum certification" amount of $361 million (in 1994 dollars) since the site specific cost study for Big Rock demonstrates that a lesser amount will cover the projected decommissioning costs for which the assurance is required. 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. At the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds are estimated to provide $1 billion for Big Rock and $2.1 billion for Palisades including trust earnings over this period. Accordingly, Consumers believes that the current decommissioning surcharge is sufficient. At December 31, 1994, Consumers had an investment in nuclear decommissioning trust funds of $213 million. For information regarding reactor embrittlement at Palisades, see Note 13.
Reclassifications: CMS Energy has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect the net income or net losses for the years presented.
Related-Party Transactions: In 1994, 1993 and 1992, Consumers purchased $48 million, $52 million and $36 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Affiliates of CMS Energy sold, stored and transported natural gas and provided other services to the MCV Partnership totaling approximately $22 million, $27 million and $21 million for 1994, 1993 and 1992, respectively. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 18. 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 also 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 these unrecovered costs or refunds the excess recoveries to customers following reconciliation hearings conducted before the MPSC.
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. Consumers' regulatory assets and liabilities are described in Note 18.
Other: For significant accounting policies regarding income taxes, see Note 5; for pensions and other postretirement benefits, see Note 10; and for cash equivalents, see Note 15.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. At December 31, 1994, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' obligation for purchase of contract capacity from the MCV Partnership under the PPA was 1,132 MW in 1994 and increases to a maximum amount of 1,240 MW in 1995 and thereafter. Prior to 1993, the MPSC allowed Consumers to recover costs of power purchased from the MCV Partnership at levels significantly less than Consumers paid. In March 1993, the MPSC approved, with modifications, a settlement proposal which allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity effective January 1993. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be competitively bid into Consumers' next solicitation for power or, if necessary, utilized for current power needs. In either instance, the MPSC would 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. At the request of the MPSC, the MCV Partnership confirmed that it did not object to the Settlement Order. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals.
The PPA provides that Consumers is to pay to the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity 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 economic energy deliveries above the availability limits to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized an after-tax loss of $343 million which was the present value of an undiscounted after-tax loss of $789 million, based on Consumers' 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. These after-tax cash underrecoveries, including fixed energy charges (in connection with a dispute with the MCV Partnership discussed below) which were being escrowed, were $61 million in 1994 and $59 million in 1993. 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 its future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below.
After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
At December 31, 1994 and 1993, the after-tax, present value of the Settlement Order liability totaled $272 million and $307 million, respectively. The reduction in the Settlement Order liability during 1994 reflects after-tax cash underrecoveries related to capacity totaling $57 million, partially offset by after-tax accretion expense of $22 million.
In connection with the MPSC's approval of the settlement proposal discussed above, Consumers and the MCV Partnership engaged in arbitration under the PPA regarding the payment of certain fixed energy charges. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed.
In May 1994, Consumers was notified by the MCV that it was initiating further arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, has been estimated by the MCV Partnership to total $6.3 million annually. An arbitrator has been selected and a ruling is expected in the third quarter of 1995. Consumers cannot predict the outcome of this arbitration.
In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of the arbitration between the MCV Partnership and Consumers discussed above. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew this lawsuit.
In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility. Additionally, in February 1995, Consumers agreed to pay $15 million to terminate a power purchase agreement with a 44 MW wood and chipped tire facility. Consumers plans to seek MPSC approval to substitute less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. This proposed substitution of capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. The capacity substitution represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for similar facilities. As a result, Consumers has recorded a regulatory asset of $45 million ($30 million in 1994), which it believes will ultimately be recoverable in rates.
MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. Consumers also agreed not to appeal any MCV-related issues raised in future orders for these plan cases and related reconciliations to the extent those issues are resolved by the Settlement Order. In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992 confirming Consumers' recovery for the purchase of 840 MW from the MCV in accordance with the MPSC plan case order and allowing recovery for the purchase of power above 840 MW based on replacement power costs. The MPSC subsequently confirmed the recovery of MCV-related costs consistent with the Settlement Order as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals.
4: Rate Matters
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits, and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers by allocating $40 million of the rate increase to residential customers.
In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes a proposed increase in Consumers' authorized rate of return on equity to 12.75 percent from 11.75 percent, recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. Consumers has requested that the MPSC eliminate the remainder of rate cross-subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 12). In January 1995, 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, which if approved would result in a net decrease in depreciation expense of $7 million (see Electric Rate Case discussion in the Management's Discussion and Analysis).
Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could collect $35 million pretax annually for the next 10 years for its abandoned nuclear project. Consumers is amortizing the abandoned assets against current income over the recovery period using an interest method. Consumers was not permitted to earn a return on the portion of the abandoned investment for which the MPSC was allowing recovery. The loss of a return on the amount being recovered is reflected in earnings as accretion income. An after-tax total of $27 million remains to be included in accretion income through April 2001. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. Consumers and ABATE have appealed this decision to the Michigan Supreme Court. Management cannot predict the outcome of this issue.
Electric DSM: As a result of settlement discussions regarding DSM and an MPSC order, Consumers agreed to spend $65 million over two years on DSM programs. Consumers completed the customer participation portion of these DSM programs in 1993. Based on the criteria set out in the DSM settlement agreement approved by the MPSC, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of $11 million of incentive revenue. Accordingly, during 1994, Consumers recognized $11 million in revenue, related to its DSM program. A final order from the MPSC is expected by mid-1995.
In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to recover DSM expenditures which exceeded $65 million and to continue certain programs ($30 million annually) in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from customers in accordance with an MPSC accounting order. The unamortized balance of deferred costs totaled $71 million at December 31, 1994 and 1993.
PSCR Issues: In November 1994, an ALJ issued a proposal for decision in the 1993 PSCR reconciliation proceeding that addressed issues related to an extended refueling and maintenance outage that began at Palisades in June 1993 and ended in November 1993. Consumers conceded that one day of the 1993 outage was unnecessary, while the ALJ found that 22 days of the outage were the result of imprudent actions and recommended a disallowance of $4 million of replacement power costs. While Consumers has taken exception to the ALJ's proposal, it has accrued a loss for this issue for 1994. In addition, from mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. The 1994 outage will be reviewed as part of the 1994 reconciliation proceeding.
The Energy Act imposes an obligation on the utility industry to decommission DOE uranium enrichment facilities. In 1994, the MPSC authorized Consumers to recover through electric rates its required decommissioning payments to the DOE. At December 31, 1994, Consumers' remaining liability and regulatory asset each totaled $25 million.
Gas Rates: In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits against 1994 earnings. The agreement was reached in response to a claim that gas utility business earnings for 1993 were excessive. This charge against earnings partially offsets savings related to reduced state property taxes. The agreement also provides for an additional $4 million of postretirement benefit costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers filed a gas rate case in December 1994. Consumers requested an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. Consumers expects an MPSC decision in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent.
GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced prospectively. As a result, Consumers was not allowed to recover $13 million of costs incurred prior to February 1993. Consumers previously had accrued a loss in excess of the disallowed amount. Future disallowances are not anticipated, unless appeals filed by the intrastate producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and certain other parties, which resolved numerous claims and proceedings concerning Trunkline liquified natural gas costs. The settlement represents significant gas cost savings for Consumers and its customers in future years. In 1992, Consumers recorded a liability and regulatory asset for the principal amount of payments due Trunkline. In 1993, the MPSC approved a separate settlement agreement providing full recovery of the liability over a five-year period. At December 31, 1994, the remaining liability and regulatory asset were $85 million.
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 the financial statements.
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 ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that can be carried forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- -----
Current federal income taxes $ 36 $ 19 $ 39 Deferred income taxes 66 67 (177) Deferred income taxes - tax rate change - (1) - Deferred ITC, net (10) (10) (8) ----- ----- -----
$ 92 $ 75 $(146) ===== ===== =====
Operating $ 104 $ 92 $ 22 Other (12) (17) (168) ----- ----- -----
$ 92 $ 75 $(146) ===== ===== =====
The principal components of CMS Energy's deferred tax assets (liabilities) recognized in the balance sheet are as follows:
In Millions December 31 1994 1993 - ----------- ------- ------- Property $ (601) $ (580) Unconsolidated investments (246) (194) Postretirement benefits (Note 10) (179) (180) Abandoned Midland project (Note 4) (51) (57) Employee benefit obligations (includes postretirement benefits of $176 and $182) (Note 10) 205 204 AMT carryforward 154 110 MCV power purchases - settlement (Note 3) 146 165 ITC carryforward (expires 2005) 37 48 Other (13) (8) ------- -------
$ (548) $ (492) ======= =======
Gross deferred tax liabilities $(1,661) $(1,571) Gross deferred tax assets 1,113 1,079 ------- -------
$ (548) $ (492) ======= =======
The actual income tax expense (benefit) 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 1994 1993 1992 - ----------------------- ------ ------ ------
Net income (loss) before preferred dividends $ 203 $ 166 $ (286) Income tax expense (benefit) 92 75 (146) ------ ------ ------
295 241 (432) Statutory federal income tax rate x 35% x 35% x 34% ------ ------ ------
Expected income tax expense (benefit) 103 84 (147) Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 6 9 ITC amortization and utilization (9) (11) (11) Nonconventional fuel tax credit (8) (6) (4) Other, net (5) (3) 2 ------ ------ ------
$ 92 $ 75 $ (146) ====== ====== ======
6: Short-Term Financings
In 1994, the FERC granted Consumers' request for authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At December 31, 1994, $170 million and $166 million were outstanding under these facilities at weighted average interest rates of 6.3 percent and 7.3 percent, respectively. Consumers has an established $500 million trade receivables purchase and sale program. At December 31, 1994 and 1993, receivables sold under the agreement totaled $275 million and $285 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.
7: Capitalization
CMS Energy
Capital Stock: On February 14, 1995, CMS Energy mailed a proxy statement to its shareholders seeking their approval to amend its Articles of Incorporation and authorize a new class of Common Stock of CMS Energy. This proposed new class of Common Stock, designated Class G Common Stock, would reflect the separate performance of the gas distribution, storage and transportation businesses currently conducted by Consumers and Michigan Gas Storage (such businesses, collectively, would be the "Consumers Gas Group"). The existing CMS Energy Common Stock would continue to be outstanding if and after any shares of Class G Common Stock were issued by CMS Energy and would reflect 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 any outstanding shares of the Class G Common Stock.
CMS Energy also filed a shelf-registration statement with the SEC on February 15, 1995 covering the issuance of up to $200 million of securities. Such securities could encompass Common Stock of CMS Energy (including Class G if approved), Preferred Stock of CMS Energy or a special purpose affiliate of CMS Energy, and/or unsecured debt of CMS Energy. CMS Energy will continually evaluate the capital markets and may offer such instruments from time to time, at terms to be determined at or prior to the time of the sale.
CMS Energy's Articles permit it to issue up to 250 million shares of common stock at $.01 par value and up to 5 million shares of preferred stock at $.01 par value. Under the Unsecured Credit Facility and the Indentures pursuant to which the GTNs are issued, which currently contain CMS Energy's most restrictive dividend covenants, CMS Energy is permitted to pay, as dividends on its common stock, an amount not to exceed the total of its net income, as defined in the Indentures, and any proceeds received from the issuance or sale of common stock as defined in the agreements and $120 million, provided there exists no event of default under the terms of the Unsecured Credit Facility or GTNs. The same formula applies to limits available to repurchase or reacquire CMS Energy stock for either the payment of dividends or repurchase of stock.
In October 1994, CMS Energy filed a shelf-registration statement for the offering and issuance of up to two million shares of common stock. As described in the SEC filing, the shares may be offered and issued in connection with acquisitions of energy-related business and assets. In October 1993, CMS Energy issued an additional 4.6 million shares of common stock at a price of $26-5/8. The net proceeds of $119 million were used to reduce existing debt and for general corporate purposes.
Long-Term Debt: In October 1992, CMS Energy received proceeds of $130 million and $219 million from the issuance of Series A and Series B Notes, respectively. Interest will accrue and increase the principal to the face value of the Notes through October 1, 1995. After such date, interest will be paid semi-annually commencing April 1, 1996, at a rate of 9.5 percent per annum for the Series A Notes and 9.875 percent per annum for the Series B Notes. As of January 31, 1995, $328 million of Notes was outstanding.
In January 1994, CMS Energy filed a shelf-registration statement with the SEC permitting the issuance and sale of up to $250 million of GTNs. The net proceeds are being used to reduce the amount of Notes outstanding and for general corporate purposes. The GTNs may be offered from time to time on terms to be determined at the time of sale. As of January 31, 1995, $99 million of GTNs was outstanding at a weighted average interest rate of 7.5 percent and the principal amount of Series B Notes outstanding was reduced by $114 million to a balance of $167 million.
In July 1994, CMS Energy refinanced its Secured Credit Facility with a new $400 million Unsecured Credit Facility and extended the termination date to June 30, 1997. As of December 31, 1994, $196 million was outstanding at a weighted average interest rate of 6.8 percent leaving $204 million available at December 31, 1994.
Consumers
Capital Stock: During 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds to Consumers were $193 million. The stock is redeemable at the option of Consumers, on or after April 1, 1999, at a redemption price of $25 per share plus accrued dividends.
At December 31, 1992, Consumers effected a quasi-reorganization in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. This action had no effect on CMS Energy's consolidated financial statements.
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, Articles and the need for regulatory approvals in compliance with appropriate state and federal law. In the first quarter of 1994, Consumers redeemed first mortgage bonds totaling $101 million. These redemptions completed Consumers' commitment to the MPSC, under a 1993 financing order to refinance certain long-term debt.
Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its then existing long-term, variable rate, credit agreement and to reduce short-term borrowings. At December 31, 1994, the new loan carried a weighted average interest rate of 6.5 percent. In 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for a fixed-rate interest of 5.2 percent on $250 million of its long-term bank debt. The swap agreement hedges the variable rate exposure associated with Consumers' long-term bank debt and had the effect of increasing the weighted average interest rate to 5.3 percent from 5.0 percent for the 12- month period ended December 31, 1994. The current swap agreement began to decrease in February 1995 and will terminate by May 1996. In February 1995, Consumers entered into another hedging agreement for $100 million to reduce its exposure to variable rate interest associated with its long- term bank debt.
Other: Consumers has a total of $131 million of long-term PCRBs outstanding (secured by irrevocable letters of credit and first mortgage bonds) with a weighted average interest rate of 4.8 percent as of December 31, 1994.
In 1994, Consumers received a $100 million equity investment from CMS Energy. The investment was consistent with CMS Energy's plan to improve Consumers' capital structure and was recognized and included in the capitalization structure employed by the MPSC as part of Consumers' most recent electric rate order.
CMS NOMECO
As of December 31, 1994, CMS NOMECO had total debt outstanding of $129 million. Senior serial notes amounting to $36 million with a weighted average interest rate of 9.4 percent are outstanding from a private placement. Available existing credit lines total $110 million. At December 31, 1994, $89 million was outstanding at a weighted average interest rate of 7.3 percent. CMS NOMECO also has $4 million outstanding under other credit agreements.
CMS Generation
In May 1994, MOAPA redeemed $22 million of Clark County, Nevada tax-exempt bonds. The bonds had been included in current maturities on the balance sheet and the funds held in a trust account had been included as other current assets. The bonds were issued in 1990 for the purpose of providing partial funding for the development of a proposed tires-to- energy solid waste disposal and resource recovery facility which was never constructed.
In January 1995, CMS Generation entered into a one-year $118 million bridge credit facility, for the acquisition of HYDRA-CO. CMS Energy is currently evaluating permanent financing options.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments in financial instruments, approximate fair value. The carrying amount of long-term debt was $2.7 billion and $2.4 billion and the fair value of long-term debt was $2.6 billion and $2.6 billion as of December 31, 1994 and 1993, respectively. 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. The fair value of interest rate swap agreements was $(5) million and $6 million and guarantees/letters of credit outstanding were $123 million and $96 million as of December 31, 1994 and 1993, respectively (see Note 7).
Effective January 1, 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.
9: 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. The plan reserves for award not more than 2 percent of CMS Energy's common stock outstanding on January 1 each year, less the number of shares of restricted common stock awarded and of common stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1994, awards of up to 402,316 shares of common stock may be issued.
Restricted shares of common stock are outstanding shares with full voting and dividend rights. Performance criteria were added in 1990 based on CMS Energy's total return to shareholders. 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, 1994, 314,856 shares of the 330,356 restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, remains in effect until all authorized options are granted or September 25, 1995. At December 31, 1994, options for 43,000 shares remained to be granted.
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 of Shares of Shares per Share --------- --------- --------------- Outstanding at January 1, 1992 275,063 1,291,091 $ 7.13 - $34.25 Granted 101,000 215,000 $17.13 - $18.00 Exercised or Issued (37,422) (21,000) $13.00 - $16.00 Canceled (15,375) (50,000) $20.50 - $33.88 ------- --------- ---------------
Outstanding at December 31, 1992 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 ======= ========= ===============
10: 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 18). CMS Energy's non-utility 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. The MPSC's generic order allows utilities three years to seek recovery of costs. In May 1994, the MPSC authorized recovery of the electric utility portion of these costs over 18 years. In December 1994, Consumers requested recovery of the gas utility portion of these costs (see Note 4). CMS Energy funds the benefits using external Voluntary Employee Beneficiary Associations. 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, 1994, are based on the assumption that costs would increase 10 percent in 1995, 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, 1994 by $85 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1994 by $10 million.
For the years ended December 31, 1994, 1993 and 1992, the weighted average discount rate was 8 percent, 7.25 percent and 8 percent, respectively, and the expected long-term rate of return on plan assets was 7 percent, 8.5 percent and 8.5 percent, respectively. Net periodic postretirement benefit cost for health care benefits and life insurance benefits was $54 million in 1994, $51 million in 1993 and $49 million in 1992. The 1994, 1993 and 1992 cost was comprised of $13 million, $13 million and $10 million for service plus $41 million, $38 million and $39 million for interest, respectively.
The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows:
In Millions 1994 1993 ------ ------ Actuarial present value of estimated benefits Retirees $ 338 $ 282 Eligible for retirement 44 54 Active (upon retirement) 170 190 ------ ------
Accumulated postretirement benefit obligation 552 526 Plan assets at fair value 36 4 ------ ------
Projected postretirement benefit obligation in excess of plan assets (516) (522) Unrecognized prior service cost (39) (39) Unrecognized net loss 35 41 ------ ------
Recorded liability $ (520) $ (520) ====== ======
CMS Energy's postretirement health care plan is partially funded; the accumulated postretirement benefit obligation for that plan is $536 million and $514 million at December 31, 1994 and 1993, respectively.
Supplemental Executive Retirement Plan: Certain management employees qualify under the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1994 and 1993, trust assets at cost (which approximates market) were $19 million and $18 million, respectively, and were classified as other non- current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan is fully funded, no contributions were made for plan years 1992 through 1994.
Years Ended December 31 1994 1993 1992 - ----------------------- ------ ------ -----
Discount rate 8.0% 7.25% 8.5% Rate of compensation increase 4.5% 4.5% 5.5% Expected long-term rate of return on assets 9.25% 8.75% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- -----
Service cost $ 24 $ 19 $ 19 Interest cost 51 50 48 Actual return on plan assets 21 (92) (36) Net amortization and deferral (85) 34 (20) ----- ----- -----
Net periodic pension cost $ 11 $ 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 1994 1993 1994 1993 ----- ----- ----- ----- Actuarial present value of estimated benefits Vested $ 421 $ 471 $ 17 $ 16 Non-vested 61 56 - - ----- ----- ----- -----
Accumulated benefit obligation 482 527 17 16 Provision for future pay increases 154 138 11 8 ----- ----- ----- -----
Projected benefit obligation 636 665 28 24 Plan assets (primarily stocks and bonds, including $79 in 1994 and $87 in 1993 in common stock of CMS Energy) at fair value 637 692 - - ----- ----- ----- -----
Projected benefit obligation less than (in excess of) plan assets 1 27 (28) (24) Unrecognized net (gain) loss from experience different than assumed (35) (56) 5 8 Unrecognized prior service cost 40 45 2 (1) Unrecognized net transition (asset) obligation (39) (44) 1 1 ----- ----- ----- -----
Recorded liability $ (33) $ (28) $ (20) $(16) ===== ===== ===== =====
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.
11: Leases
CMS Energy, Consumers, and Enterprises lease various assets, including vehicles, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1996. The maximum amount of nuclear fuel that can be leased increased during 1994 to $80 million. The lease provides for an additional one-year extension 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 $59 million as of December 31, 1994. 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, 1994, were:
In Millions Capital Operating Leases Leases ------- -------- 1995 $ 50 $ 10 1996 60 6 1997 17 5 1998 15 5 1999 12 4 2000 and thereafter 21 20 ----- -----
Total minimum lease payments 175 $ 50 Less imputed interest 24 ===== -----
Present value of net minimum lease payments 151 Less current portion 43 -----
Non-current portion $108 =====
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, 1994, 1993 and 1992, were $10 million, $10 million and $15 million, respectively.
Capital lease expenses for the years ended December 31, 1994, 1993 and 1992 were $43 million, $34 million and $47 million, respectively. Included in these amounts for the years ended 1994, 1993 and 1992, are nuclear fuel lease expenses of $21 million, $13 million and $17 million, respectively.
12: Commitments, Contingencies and Other
Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve certain recreational areas and convey certain undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to the MPSC permitting Consumers to recover all such settlement costs from electric customers, and approval by the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan. In one, the state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, reduced only upon installation of "adequate" fish barriers and other changed conditions. Each year, a barrier net is installed at Ludington by Consumers and Detroit Edison from April to October. In the other, the Attorney General sought to have Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, 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 will average less than 4 percent of the estimated total site remediation costs, and such liability will probably not exceed $6 million. At December 31, 1994, Consumers has accrued a liability for its estimated losses. Consumers and CMS Energy believe that it is unlikely that their liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on their financial positions or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility studies for several of these former manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved three of four plans for remedial investigation/feasibility studies submitted by Consumers.
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 1994 costs. At December 31, 1994, Consumers has accrued a liability of $48 million. 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 1994. Consumers and CMS Energy believe that remedial action costs are 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 two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. All of 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. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in the year 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. 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 controls to be installed at the other coal- fired units are not expected earlier than 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, DSM and new lease commitments, of $939 million for 1995, $647 million for 1996 and $627 million for 1997. Capital expenditures for 1995 include requirements of $197 million for acquisitions which commenced in 1994 but did not close until 1995.
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 1995 to 2004. Consumers contracts for approximately 60 - 70 percent of its annual coal requirements which in 1994 totaled $261 million (63 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 1995 to 2003. Consumers contracts for approximately 70 - 80 percent of its annual gas requirements which in 1994 totaled $662 million (83 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its gas needs.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA.
Other: As of December 31, 1994 CMS Energy and Enterprises have guaranteed up to $117 million in contingent obligations of unconsolidated affiliates of Enterprises' subsidiaries.
CMS NOMECO has hedging arrangements which are used to reduce the risk of price fluctuations for its spot sales of oil and gas. These arrangements limit potential gains/losses from any future decrease/increase in the spot prices.
CMS NOMECO periodically enters into oil and gas price hedging arrangements to mitigate its exposure to price fluctuations on the sale of crude oil and natural gas. As of December 31, 1993, CMS NOMECO was party to gas price collar contracts on 7.3 bcf of gas for the delivery months of January through December 1994 at prices ranging from $2.05 to $2.30 per MMBtu. Also, CMS NOMECO has contracts on 7.3 bcf of gas for the delivery months of January through December 1995 at prices ranging from $2.05 to $2.35 per MMBtu. These hedging arrangements are accounted for as hedges; accordingly, any gains or losses are deferred and recognized on the settlement dates. As of December 31, 1993 and December 31, 1994, the fair value of these hedge arrangements was 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, 1994 and December 31, 1993, the seller had arranged a letter of credit in CMS NOMECO's favor for $3 million and $10 million, respectively.
Consumers has experienced increases in the 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 January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending.
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.
The ultimate effect of the proceedings discussed in this note is not expected to have a material impact on CMS Energy's financial position or results of operations.
13: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied National Environmental Policy Act requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. As of February 28, 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades' 1995 refueling.
In the latter part of 1995, 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 testing has not disclosed any leakage, 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. 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 concluded that the pad location is acceptable to support the casks.
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 no other states' repositories are available to Michigan generators of such waste. Consumers stores low- level waste at its nuclear plant sites and plans to continue to do so following final shutdown of the plants, if necessary, until a permanent storage site is provided. Consumers currently estimates that a permanent low-level radioactive waste disposal site will be available by the year 2027.
Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $33 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote.
In November 1993, Palisades returned to service following a planned refueling and maintenance outage that had been extended due to several unanticipated repairs (see Note 4). The results of an NRC review of Consumers' performance at Palisades published shortly after the planned outage showed a decline in performance ratings for the plant. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the deficiencies. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned levels of expenditures.
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. If the results of the calculation indicate that an NRC temperature screening criterion will be exceeded, Consumers must determine what, if any, plant modifications are necessary to avoid exceeding the screening criterion and prevent potential reactor vessel failure as a result of postulated pressurized thermal shock events. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed the screening criterion prior to the year 2000. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. It is currently estimated that expenditures for corrective action related to this issue could total $20 million to $30 million. Consumers cannot predict the outcome of these efforts.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities:
In Millions December 31 1994 1993 - ----------- ----- ----- Net investment Ludington - 51% $119 $114 Campbell Unit 3 - 93.3% 337 349 Transmission lines - various 31 32
Accumulated depreciation Ludington $ 76 $ 74 Campbell Unit 3 224 210 Transmission lines 11 11
15: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were:
In Millions 1994 1993 1992 ----- ----- -----
Cash transactions Interest paid (net of amounts capitalized) $162 $193 $203 Income taxes paid (net of refunds) 39 32 19
Non-cash transactions Nuclear fuel placed under capital lease $ 21 $ 28 $ 30 Other assets placed under capital leases 15 30 39 Capital leases refinanced - 42 - Assumption of debt - - 15
Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below:
In Millions 1994 1993 1992 ----- ----- -----
Sale of receivables, net $ (10) $ 60 $ 25 Accounts receivable (15) 22 6 Accrued revenue 20 (48) 88 Inventories (4) (32) 23 Accounts payable 26 (31) 20 Accrued refunds (3) (49) (143) Other current assets and liabilities, net 4 (4) 46 Non-current deferred amounts, net (6) (6) (40) ----- ----- -----
$ 12 $(88) $ 25 ===== ===== =====
16: 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 pipeline, storage and marketing.
The Consolidated Statements of Income show operating revenue and pretax operating income by business segments. Other segment information follows:
In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ------- ------- -------
Depreciation, depletion and amortization Electric utility $ 257 $ 241 $ 230 Gas utility 76 73 76 Oil and gas exploration and production 41 45 38 Independent power production 2 2 2 Natural gas pipeline, storage and marketing 2 1 1 Other 1 2 - ------- ------- -------
$ 379 $ 364 $ 347 ======= ======= =======
Identifiable assets Electric utility (a) (b) $ 4,364 $ 4,100 $ 3,845 Gas utility (b) 1,673 1,628 1,574 Oil and gas exploration and production 469 398 364 Independent power production 536 488 333 Natural gas pipeline, storage and marketing 109 75 60 Other 233 275 672 ------- ------- -------
$ 7,384 $ 6,964 $ 6,848 ======= ======= =======
Capital expenditures (d)(e) Electric utility (c) $ 358 $ 403 $ 390 Gas utility (c) 134 158 116 Oil and gas exploration and production 115 83 68 Independent power production 30 110 12 Natural gas pipeline, storage and marketing 31 14 6 Other 5 - 2 ------- ------- -------
$ 673 $ 768 $ 594 ======= ======= =======
(a) Includes abandoned Midland investment of $147 million, $162 million and $175 million for 1994, 1993 and 1992, respectively.
(b) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses.
(c) 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.
(d) Includes equity investments in unconsolidated partnerships of $53 million for 1994, $108 million for 1993 and $12 million for 1992.
(e) Certain prior year amounts have been adjusted for comparative purposes.
17: 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 1994 1993 - ----------- ------- -------
Postretirement benefits (Note 10) $ 503 $ 510 Income taxes (Note 5) 189 189 Abandoned Midland project (Note 4) 147 162 Trunkline settlement (Note 4) 85 117 DSM - deferred costs (Note 4) 71 71 Manufactured gas plant sites (Note 12) 47 - Power purchase contract (Note 3) 30 - Uranium enrichment facility (Note 4) 25 33 Other 31 39 ------- -------
Total regulatory assets $ 1,128 $ 1,121 ======= =======
Income taxes (Note 5) $ (205) $ (195) DSM - deferred revenue (21) (17) ------- -------
Total regulatory liabilities $ (226) $ (212) ======= =======
At December 31, 1994, $864 million of Consumers' regulatory assets are being recovered through rates being charged to customers over periods of up to 18 years. Consumers anticipates MPSC approval for recovery of the remaining amounts.
Consumers is experiencing increased competition, particularly in its electric utility business. Municipalization and self-generation, among other forms of competition, could restrict Consumers' ability to establish rates sufficient to recover specific costs associated with its regulatory assets.
18: Summarized Financial Information of Significant Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1994 obligation to purchase electric capacity from the MCV Partnership was approximately 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows:
Statements of Income In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- -----
Operating revenue (a) $ 579 $ 548 $ 488 Operating expenses 378 362 315 ----- ----- -----
Operating income 201 186 173 Other expense, net 183 189 190 ----- ----- -----
Net income (loss) $ 18 $ (3) $ (17) ===== ===== =====
Balance Sheets In Millions December 31 1994 1993 - ----------- ------ ------ Assets Current assets (a) $ 206 $ 181 Property, plant and equipment, net 2,012 2,073 Other assets 154 146 ------ ------
$2,372 $2,400 ====== ======
Liabilities and Partners' Equity Current liabilities $ 218 $ 198 Long-term debt and other non-current liabilities (b) 2,081 2,147 Partners' equity (c) 73 55 ------ ------
$2,372 $2,400 ====== ======
(a) Revenue from Consumers totaled $534 million, $505 million and $444 million for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993 and 1992, $48 million, $44 million and $38 million, respectively, were receivable from Consumers.
(b) FMLP is a 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 (see Note 3). At December 31, 1994 and 1993, lease obligations of $1.7 billion were owed to the owner trust of which FMLP is the sole beneficiary. CMS Holdings' share of the interest and principal portion for the 1994 lease payments was $62 million and $20 million, respectively, and for the 1993 lease payments was $63 million and $16 million, respectively. The lease payments service $1.2 billion in non-recourse debt outstanding as of December 31, 1994 and 1993 of the owner-trust whose beneficiary is FMLP. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1994 and 1993, the owner-trust whose beneficiary is FMLP made debt payments of $175 million and $172 million, respectively. The 1993 amounts included $10 million of principal and $25 million of interest on the MCV Bonds held by Consumers through December 1993.
(c) 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.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants ----------------------------------------
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt and preferred stock of CMS ENERGY CORPORATION (a Michigan corporation) and subsidiaries as of December 31, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995).
Consumers Power Company
1994 Financial Statements
Consumers Power Company Management's Discussion and Analysis
Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry.
On January 1, 1995, Consumers was internally reorganized into separate electric utility and gas utility strategic business units. The restructuring, while not affecting Consumers' consolidated financial statements or corporate legal form, is designed to sharpen management focus, improve efficiency and accountability in both business segments and better position Consumers for growth in the gas market and to meet increased competition in the electric power market. Management believes that the strategic business unit structure will allow each unit to focus more on its own profitability and growth potential, and will, in the long term, allow Consumers to be more competitive.
Consolidated Earnings
Consolidated net income after dividends on preferred stock totaled $202 million in 1994, compared to net income of $187 million in 1993 and a net loss of $255 million in 1992. The improved net income in 1994 reflects a significant increase in electric sales, the impact from a May 1994 electric rate increase, the recognition of incentive revenue related to DSM programs, and the favorable resolution of a previously recorded gas cost contingency. The increased 1993 net income reflects the Settlement Order related to power purchases from the MCV Partnership. Earnings in 1993 also reflect increased electric sales and gas deliveries.
Cash Position, Financing and Investing
Consumers' operating cash requirements are met by its operating and financing activities. In 1994, 1993 and 1992, cash from operations was derived mainly from the sale and transportation of natural gas and the generation, sale and transmission of electricity. Cash from operations for 1994 reflects record-setting electric sales and increased electric rates which were approved by the MPSC in mid-1994. Cash from operations for 1993 primarily reflected increased electric sales and gas deliveries from 1992 levels and reduced after-tax cash shortfalls resulting from Consumers' purchases of power from the MCV Partnership. During 1992, Consumers generated cash primarily from its consolidated operating activities.
Consumers' primary use of cash continues to reflect extensive construction expenditures and improvements in the reliability of its electric and gas transmission and distribution systems. Consumers has also used its cash to retire portions of long-term debt when appropriate and to pay common and preferred dividends.
Financing Activities: Consumers declared $176 million in common stock dividends during 1994, of which $16 million were attributable to 1993 earnings. Consumers also issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds of $193 million from the sale were used for general corporate purposes, including debt retirement and improvements to Consumers' distribution systems. Additionally, Consumers received a $100 million equity investment from CMS Energy in 1994.
In early 1994, Consumers continued its effort to reduce its future interest charges by retiring $101 million of high-cost first mortgage bonds. In November 1994, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its long-term, variable rate credit agreement (see Note 7) and to reduce short-term borrowings. During 1993, Consumers retired $51 million of high-cost outstanding debt and refinanced $573 million of other debt at lower interest rates.
Investing Activities: Capital expenditures (excluding assets placed under capital leases of $36 million) and deferred DSM costs totaled $456 million in 1994 as compared to $503 million in 1993 and $437 million in 1992. These amounts primarily represent capital investments in Consumers' electric and gas utility business units.
Financing and Investing Outlook: Consumers estimates that capital expenditures, including DSM and new lease commitments, related to its electric and gas utility operations will total approximately $1.2 billion over the next three years.
In Millions Years Ended December 31 1995 1996 1997 - ----------------------- ---- ---- ---- Consumers Construction (including DSM) $403 $347 $319 Nuclear fuel lease 32 4 38 Capital leases other than nuclear fuel 12 15 17 Michigan Gas Storage 5 8 6 ---- ---- ---- $452 $374 $380 ==== ==== ====
Consumers is required to redeem or retire approximately $190 million of long-term debt during 1995 through 1997. Cash generated by operations is expected to satisfy a substantial portion of these capital expenditures and debt retirements.
Consumers has several available sources of credit including unsecured, committed lines of credit totaling $185 million and a $470 million working capital facility. Consumers has FERC authorization to issue or guarantee up to $900 million in short-term debt through December 31, 1996. Consumers uses short-term borrowings to finance working capital, seasonal fuel inventory 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, 1994 and 1993, receivables sold totaled $275 million and $285 million, respectively.
At December 31, 1994, Consumers' capital structure consisted of approximately 34 percent common equity, 8 percent preferred stock, and 58 percent long- and short-term debt (including capital leases and notes payable). Consumers' goal is to achieve and maintain a capital structure consisting of approximately 36 percent common equity, 10 percent preferred stock and 54 percent debt. Management expects to achieve this structure through accumulated earnings, controlled capital expenditures, the issuance of new preferred stock and equity investments from CMS Energy.
Electric Utility Results of Operations
Electric Pretax Operating Income: The $49 million improvement in 1994 electric pretax operating income compared to 1993 reflects increased electric system sales of $33 million, partially offset by higher electric operating costs and depreciation. Other factors contributing to the 1994 increased electric pretax operating income were the impact of the May 1994 electric rate increase, and the recognition of $11 million in revenue, related to DSM, based on having achieved all objectives agreed upon with the MPSC. The 1993 increase of $132 million from the 1992 level reflects an increase of $126 million relating to the resolution of the recoverability of MCV power purchase costs under the PPA and increased electric system sales of $45 million, partially offset by higher electric operating costs and depreciation.
In Millions Impact on Pretax Operating Income ---------------------------------- Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ 33 $ 34 Weather - 11 Resolution of MCV power cost issues - 126 Rate increase and other regulatory issues 38 5 O&M, general taxes and depreciation (22) (44) ----- ----- Total change $ 49 $132 ===== =====
Electric Sales: Total electric sales in 1994 were a record 34.5 billion kWh, a 5.2 percent increase from 1993 levels which includes a 4.2 percent increase in system sales to Consumers' ultimate customers. Strong industrial sales accounted for 58 percent of the growth. In 1994, residential and commercial sales increased 1.6 percent and 3.0 percent, respectively, while industrial sales increased 6.8 percent. The significant increase in electric sales reflects the continued improvement in economic conditions in Michigan and broad-based growth in sales to industrial customers. Growth in industrial sales was the strongest in the automotive and chemical sectors. Total electric sales in 1993 were 32.8 billion kWh, a 3.7 percent increase from the 1992 levels. The 32.8 billion kWh includes a 3.8 percent increase in system sales.
Power Costs: Power costs for 1994 totaled $950 million, a $42 million increase from the corresponding 1993 period. This increase reflects increased kWh production at Consumers' generating plants and greater power purchases from outside sources to meet increased sales demand. Power costs for 1993 totaled $908 million, a $31 million increase as compared to 1992.
Operation and Maintenance: Increases in other operation and maintenance expense for 1994 and 1993 reflected increased expenditures to improve electric system reliability.
Depreciation: The increased depreciation for 1994 reflects additional capital investments in property and equipment.
Electric Utility Issues
Power Purchases from the MCV Partnership: Consumers' obligation to purchase contract capacity from the MCV Partnership was 1,132 MW in 1994 and increases to 1,240 MW in 1995 and thereafter. In 1993, the MPSC issued the Settlement Order that permits Consumers to recover substantially all payments for 915 MW of contract capacity purchased from the MCV Partnership. 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 an after-tax loss of $343 million for the present value of estimated future underrecoveries of power purchases from the MCV Partnership. This loss included all fixed energy amounts at issue in the arbitration proceedings discussed below. Additional losses may occur if actual future experience materially differs from the 1992 estimates. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals. As anticipated in 1992, Consumers continues to experience cash underrecoveries associated with the Settlement Order. These after-tax cash underrecoveries totaled $61 million for 1994. Estimated future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below.
After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
Consumers and the MCV Partnership engaged in arbitration to determine whether Consumers was entitled to reduce the fixed energy charges payable to the MCV Partnership. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award at this time until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed. In a second arbitration proceeding, the MCV Partnership is seeking additional payments from Consumers which the MCV has estimated at $6.3 million annually for an alleged breach of the PPA.
In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew the lawsuit.
In July 1994 and February 1995, Consumers terminated power purchase agreements with a 65 MW coal-fired cogeneration facility and a 44 MW wood and chipped tire plant. Consumers plans to seek MPSC approval to substitute 109 MW of less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. For further information, see Note 3.
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers. Consumers filed a request with the MPSC in November 1994, to increase its retail electric rates in a range from $104 million to $140 million annually (see Note 4). Additionally, in January 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.
Special Rates: In January 1995, the MPSC dismissed a filing made by Consumers, seeking approval of a plan to offer competitive, special rates to certain large qualifying customers. Consumers had proposed to offer the new rates to customers using high amounts of electricity that have expressed an intention to or are capable of terminating purchases of electricity from Consumers and have the ability to acquire energy from alternative sources. Consumers subsequently filed a new, simplified proposal with the MPSC which would allow Consumers a certain level of rate-pricing flexibility, and allow use of MCV contract capacity above the level currently authorized by the MPSC, to respond to customers' alternative energy options.
PSCR Matters: Consumers experienced an extended refueling and maintenance outage at Palisades during 1993. From mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. In November 1994, an ALJ issued a proposal for decision that recommended a $4 million disallowance of replacement power costs related to the 1993 outage. Consumers accrued a loss for this issue for 1994. Recovery of replacement power costs and the prudency of actions taken during the 1994 outage will be reviewed by the MPSC during the 1994 PSCR reconciliation proceeding.
Electric Conservation Efforts: In 1993, Consumers completed the customer participation portion of several DSM programs designed to encourage the efficient use of energy. During 1994, Consumers recognized $11 million in incentive revenue, related to Consumers' achievement of certain DSM program objectives approved by the MPSC in 1992. A final order, authorizing Consumers to collect the $11 million incentive, is expected from the MPSC by mid-1995. In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to continue certain DSM programs. For further information, see Note 4.
Electric Capital Expenditures: Consumers estimates capital expenditures, including deferred DSM costs and new lease commitments, related to its electric utility operations of $325 million for 1995, $255 million for 1996 and $269 million for 1997. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses.
Electric Environmental Matters: The 1990 amendment of the federal Clean Air Act significantly increased the environmental constraints that utilities will operate under in the future. While the Clean Air Act's provisions require Consumers to make certain capital expenditures in order to comply with the amendments for nitrogen oxide reductions, Consumers' generating units are presently operating at or near the sulfur dioxide emission limits which will be effective in the year 2000. Therefore, management believes that Consumers' annual operating costs will not be materially affected.
In 1990, the State of Michigan passed amendments to the Environmental Response Act, under which Consumers expects that it will ultimately incur costs at a number of sites, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. Consumers believes costs incurred for both investigation and required remedial actions will be recovered in rates or from others.
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 or results of operations.
The EPA has asked a number of utilities in the Great Lakes area to voluntarily retire certain equipment containing specific levels of polychlorinated biphenyls. While Consumers believes that it is largely in compliance with the EPA's request, it has agreed to a 10-year retirement period for certain equipment included in the EPA's request. Consumers does not anticipate that any significant additional costs will be incurred as a result of this agreement. For further information regarding electric environmental matters, see Note 12.
Electric Outlook
Competition: Consumers currently expects customer demand for electricity within its service territory will increase by approximately 1.6 percent per year over the next five years. Economic growth and an increasing customer base are expected to lead to consistently higher annual sales.
However, Consumers (along with the electric utility industry) is experiencing accelerating competitive pressures which may result in a negative impact on Consumers' sales growth. The primary sources of this 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. Several of Consumers' industrial customers are studying these options.
Consumers is pursuing several strategies to retain its current "at-risk" customers. These strategies include a request that the MPSC allow Consumers to offer special competitive service rates to current industrial customers which have demonstrated an ability to seek alternate electric supplies and to attract new customers which are considering locating or expanding facilities in Michigan. As part of its current electric rate case, Consumers has requested that the MPSC eliminate the rate subsidization of residential customers. If approved, commercial and industrial customers' electric costs would decrease by a total of approximately $80 million per year.
Consumers is committed to holding operation and maintenance costs level and continuing to improve customer service. Consumers is also working with large customers to identify ways to improve the efficiency with which energy is used.
In April 1994, the MPSC approved a framework for a five-year experimental retail wheeling program for Consumers and Detroit Edison. Under the experiment, up to 60 MW of Consumers' additional load requirements could be met by retail wheeling. The program becomes effective upon Consumers' next solicitation for capacity. In February 1995, an ALJ issued a proposal for decision that addressed the methodology for pricing transmission rates to be used for the experiment. An MPSC order is expected by mid-1995. In the short-term, Consumers does not expect this experiment to have a material impact on its financial position or results of operations.
Nuclear Matters: In late 1993, the NRC completed a review of Consumers' performance at Palisades that showed a decline in performance. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades during 1994 which found certain performance, operational and management deficiencies at the plant. Consumers subsequently filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned level of expenditures.
Consumers' on-site storage pool at Palisades is at capacity, and it is unlikely that the DOE will begin accepting any spent nuclear fuel by the originally scheduled date in 1998. Consumers is using NRC-approved dry casks, which are steel and concrete vaults, for temporary on-site storage. Several appeals relating to NRC approval of the casks and Consumers' use of the casks had been pending. In January 1995, the U.S. Sixth Circuit Court of Appeals issued a decision, effectively allowing Consumers to continue using dry cask storage at Palisades.
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. Preliminary analysis of more recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed, prior to the year 2000, a temperature screening criterion established by NRC regulations. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. Consumers cannot predict the outcome of these efforts. For further information regarding Palisades, see Note 13.
The staff of the SEC has questioned certain accounting practices of the electric utility industry, including Consumers, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements. In response to these questions, the FASB has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed, annual provisions for decommissioning could increase, estimated costs for decommissioning could be recorded as a liability rather than as accumulated depreciation, and trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense.
Stray Voltage: Consumers has recently experienced increases in the number of lawsuits relating to the effect of so-called stray voltage on certain livestock. At January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending. Consumers believes that the resolution of these lawsuits will not have a material impact on its financial position or results of operations. For further information, see Note 12.
Gas Utility Results of Operations
Gas Pretax Operating Income: For 1994, gas pretax operating income decreased $11 million compared to 1993, reflecting slightly lower gas sales and higher depreciation and gas operating costs, which include $10 million of postretirement benefit costs related to the gas settlement with the MPSC (see Note 4), partially offset by the favorable resolution of a previously recorded gas cost contingency. During 1993, gas pretax operating income increased $37 million from the 1992 level, reflecting higher gas deliveries (both sales and transportation volumes) and more favorable regulatory recovery of gas costs related to transportation.
In Millions Impact on Pretax Operating Income --------------------------------- Change Compared to Prior Year 1994/1993 1993/1992 --------- --------- Sales $ (3) $ 7 Weather - 10 Regulatory recovery of gas cost 10 12 O&M, general taxes and depreciation (18) 8 ----- ----- Total change $(11) $37 ===== =====
Gas Deliveries: Gas sales and gas transported in 1994 totaled 409 bcf, a .4 percent decrease from 1993. In 1993, gas sales and gas transported totaled 410.6 bcf, a 6.9 percent increase from 1992 deliveries.
Gas Utility Issues
Gas Rates: In December 1994, Consumers filed a request with the MPSC to increase Consumers' annual gas rates by $21 million. The requested increase in revenue reflects increased expenditures, including those associated with postretirement benefits, and proposes a 13 percent return on equity. A final order from the MPSC is expected in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent.
In June 1994, the FERC approved a stipulation and agreement in full settlement of a rate proceeding originally filed by Michigan Gas Storage in 1993, which provides Michigan Gas Storage with estimated annual revenues of $20 million. For further information regarding gas utility rates, see Note 4.
Gas Capital Expenditures: Consumers estimates capital expenditures, including new lease commitments, related to its gas utility operations of $127 million for 1995, $119 million for 1996 and $111 million for 1997. These amounts include an attributed portion of Consumers' anticipated capital expenditures for plant and equipment common to both the electric and gas utility businesses.
Gas Environmental Matters: Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time.
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 1994 costs. At December 31, 1994, Consumers has accrued a liability for $48 million. 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 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 recovered in rates, prudent costs must be approved in a rate case. The MPSC has approved similar deferred accounting requests by two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated 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 12.
Gas Outlook
Consumers currently anticipates gas deliveries to grow approximately 2.3 percent per year (excluding MCV transportation 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 increasing efforts to promote natural gas to Consumers' current customers that are using various non-gas furnaces and appliances. Consumers plans additional capital expenditures to construct new gas mains that are expected to expand Consumers' system. Management also believes there exists significant potential for developing industrial process fuel conversion projects.
New technologies being developed on a national level, such as the emerging use of natural gas vehicles and commercial gas cooling equipment, also provide 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 to natural gas.
In 1994, Consumers purchased approximately 83 percent of its required gas supply under long-term contracts, and the balance on the spot market. Trunkline supplied approximately 35 percent of the total requirement. In late 1994, Consumers' supply contract with Trunkline was replaced by several one- and two-year contracts with independent producers. Consumers estimates its purchases under long-term gas contracts will range from 70 - 80 percent in future years. Consumers also has transmission contracts totaling approximately 90 percent of its supply requirements. These contracts vary in length from one to ten years. Consumers' ability to purchase gas during the off-season and store it in its extensive underground storage facilities continues to help provide customers with low, competitive gas rates.
Other
Other Income: Other income for 1994 decreased $38 million when compared to the corresponding 1993 period, reflecting the sale of the remaining MCV Bonds in December 1993 which eliminated the bond interest income. The 1992 loss included a $343 million after-tax charge related to the Settlement Order.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. On April 15, 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA.
Consumers Power Company Notes to Consolidated Financial Statements
1: Corporate Structure
Consumers is a combination electric and gas utility company serving the Lower Peninsula of Michigan, and is the principal subsidiary of CMS Energy, an energy holding company. Consumers' customer base includes a mix of residential, commercial and diversified industrial customers, the largest of which is the automotive industry.
2: Summary of Significant Accounting Policies and Other Matters
Basis of Presentation: The consolidated financial statements include Consumers and its wholly owned subsidiaries. Consumers uses the equity method of accounting for investments in its companies and partnerships where it has more than a 20 percent but less than a majority ownership interest.
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 1994 and 3.4 percent for 1993 and 1992. The composite rate for gas utility plant was 4.2 percent for 1994, 4.4 percent for 1993 and 4.3 percent for 1992. The composite rate for other plant and property was 4.7 percent for 1994 and 1993 and 5.8 percent for 1992.
New Accounting Standards: In December 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, effective for 1995 year- end financial statements. Consumers does not believe that it will be significantly affected by the statement, which requires disclosures about the nature of a company's operations and the use of estimates in financial statements. For other recent accounting standards regarding financial instruments, see Note 8.
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 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. The DOE is exploring options to offset the costs incurred by nuclear utilities to store spent nuclear fuel on site. For fuel burned after April 6, 1983, Consumers charges disposal costs to nuclear fuel expense, recovers it through electric rates and remits it 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, 1994, Consumers has recorded a liability to the DOE of $95 million, including interest. Consumers has been recovering through electric rates the amount of this liability, excluding a portion of interest.
Nuclear Plant Decommissioning: Consumers collects estimated costs to decommission its two nuclear plants through a monthly surcharge to electric customers which currently totals $45 million annually. On March 1, 1995, Consumers filed updated decommissioning estimates with the MPSC which increased the estimated decommissioning costs for Big Rock to $290 million from $221 million and for Palisades to $502 million from $423 million (in 1994 dollars). The increase in the estimated decommissioning costs principally reflects the unavailability of low- and high-level radioactive waste disposal facilities. Amounts collected from electric retail customers and deposited in trusts (including trust earnings) are credited to accumulated depreciation. To meet NRC decommissioning requirements, Consumers prepared site-specific decommissioning cost estimates for Big Rock and Palisades, assuming that each plant site will eventually be restored to conform with the adjacent landscape, and that all contaminated equipment will be disassembled and disposed of in a licensed burial facility. Consumers currently 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 significantly later than originally anticipated. Consumers has asked the NRC for an exemption from its requirement for assurance that the Big Rock decommissioning funds will at least equal the adjusted "minimum certification" amount of $361 million (in 1994 dollars) since the site specific cost study for Big Rock demonstrates that a lesser amount will cover the projected decommissioning costs for which the assurance is required. 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. At the time the plants are fully decommissioned (in the years 2030 for Big Rock and 2046 for Palisades), the trust funds are estimated to provide $1 billion for Big Rock and $2.1 billion for Palisades including trust earnings over this period. Accordingly, Consumers believes that the current decommissioning surcharge is sufficient. At December 31, 1994, Consumers had an investment in nuclear decommissioning trust funds of $213 million. For information regarding reactor embrittlement at Palisades, see Note 13.
Reclassifications: Consumers has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect the net income or net losses for the years presented.
Revenue and Fuel Costs: Consumers accrues revenue for electricity and gas used by its customers but not billed at the end of an accounting period. Consumers also 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 these unrecovered costs or refunds the excess recoveries to customers following reconciliation hearings conducted before the MPSC.
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. Consumers' regulatory assets and liabilities are described in Note 18.
Other: For significant accounting policies regarding income taxes, see Note 5; for pensions and other postretirement benefits, see Note 10; and for cash equivalents, see Note 15.
3: The Midland Cogeneration Venture
The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990 and to supply electricity and steam to The Dow Chemical Company. At December 31, 1994, Consumers, through its subsidiaries, held the following assets related to the MCV: 1) CMS Midland owned a 49 percent general partnership interest in the MCV Partnership; and 2) CMS Holdings held through the FMLP a 35 percent lessor interest in the MCV Facility.
Power Purchases from the MCV Partnership: Consumers' obligation for purchase of contract capacity from the MCV Partnership under the PPA was 1,132 MW in 1994 and increases to a maximum amount of 1,240 MW in 1995 and thereafter. Prior to 1993, the MPSC allowed Consumers to recover costs of power purchased from the MCV Partnership at levels significantly less than Consumers paid. In March 1993, the MPSC approved, with modifications, a settlement proposal which allowed Consumers to recover substantially all of the payments for its ongoing purchase of 915 MW of contract capacity effective January 1993. Capacity and energy purchases from the MCV Partnership above the 915 MW level can be competitively bid into Consumers' next solicitation for power or, if necessary, utilized for current power needs. In either instance, the MPSC would 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. At the request of the MPSC, the MCV Partnership confirmed that it did not object to the Settlement Order. ABATE and the Attorney General have appealed the Settlement Order to the Court of Appeals.
The PPA provides that Consumers is to pay to the MCV Partnership a minimum levelized average capacity charge of 3.77 cents per kWh, a fixed energy charge and a variable energy charge which is based primarily on Consumers' average cost of coal consumed. The Settlement Order permits Consumers to recover capacity charges averaging 3.62 cents per kWh for 915 MW of capacity 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 economic energy deliveries above the availability limits to 915 MW, Consumers is allowed to recover 1/2 cent per kWh capacity payment in addition to the variable energy charge.
In 1992, Consumers recognized an after-tax loss of $343 million which was the present value of an undiscounted after-tax loss of $789 million, based on Consumers' 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. These after-tax cash underrecoveries, including fixed energy charges (in connection with a dispute with the MCV Partnership discussed below) which were being escrowed, were $61 million in 1994 and $59 million in 1993. 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 its future after-tax cash underrecoveries and possible additional losses for the next five years if none of the additional capacity is sold are shown in the table below.
After-tax, In Millions 1995 1996 1997 1998 1999 ---- ---- ---- ---- ----
Expected cash underrecoveries $60 $56 $55 $ 8 $ 9
Possible additional under- recoveries and losses (a) $20 $20 $22 $72 $72
(a) If unable to sell any capacity above the MPSC's authorized level.
At December 31, 1994 and 1993, the after-tax, present value of the Settlement Order liability totaled $272 million and $307 million, respectively. The reduction in the Settlement Order liability during 1994 reflects after-tax cash underrecoveries related to capacity totaling $57 million, partially offset by after-tax accretion expense of $22 million.
In connection with the MPSC's approval of the settlement proposal discussed above, Consumers and the MCV Partnership engaged in arbitration under the PPA regarding the payment of certain fixed energy charges. In January 1995, the arbitrator ruled in favor of Consumers' interpretation of the PPA and found that Consumers was entitled to the immediate return of an estimated $22 million, representing the fixed energy amounts for which Consumers did not receive full cost recovery during the years prior to the Settlement Order (1990 - 1992). Consumers had escrowed approximately $16 million of this amount. The arbitrator postponed the return of payments for 1993 and 1994 because the Settlement Order is still subject to pending appeals. The amount under dispute in 1994 is approximately $9 million and increases each year thereafter, averaging approximately $17 million per year over the life of the contract. Consumers believes it is premature to recognize any current year earnings benefit from this award until the remaining amount of MCV capacity is sold and/or the market for the capacity is confirmed.
In May 1994, Consumers was notified by the MCV that it was initiating further arbitration proceedings under the PPA to determine whether the energy charge paid to the MCV is being properly calculated. Consumers believes that its calculation of the energy charge is correct. The amount in dispute, which relates to the period beginning in 1990 and continuing through the term of the PPA, has been estimated by the MCV Partnership to total $6.3 million annually. An arbitrator has been selected and a ruling is expected in the third quarter of 1995. Consumers cannot predict the outcome of this arbitration.
In 1994, the lessors of the MCV Facility filed a lawsuit against CMS Energy, Consumers and CMS Holdings, alleging breach of contract, breach of fiduciary duty and negligent or fraudulent misrepresentation relating to the MCV Partnership's failure to object to the Settlement Order in light of Consumers' interpretation of the Settlement Order, which is the subject of the arbitration between the MCV Partnership and Consumers discussed above. The action alleged damages in excess of $1 billion and sought injunctive relief relative to Consumers' payments of the fixed energy charges. In February 1995, after the arbitrator's decision, the lessors voluntarily withdrew this lawsuit.
In July 1994, Consumers paid $30 million to terminate a power purchase agreement with a 65 MW coal-fired cogeneration facility. Additionally, in February 1995, Consumers agreed to pay $15 million to terminate a power purchase agreement with a 44 MW wood and chipped tire facility. Consumers plans to seek MPSC approval to substitute less expensive contract capacity from the MCV Facility which Consumers is currently not authorized to recover from retail customers. This proposed substitution of capacity would start in late 1996, the year the coal-fired cogeneration facility was scheduled to begin operations. The capacity substitution represents significant savings to Consumers' customers, compared to the cost approved by the MPSC for similar facilities. As a result, Consumers has recorded a regulatory asset of $45 million ($30 million in 1994), which it believes will ultimately be recoverable in rates.
MCV-related PSCR Matters: Consistent with the terms of the 1993 Settlement Order, Consumers withdrew its appeals of various MPSC orders issued in connection with several PSCR cases. Consumers also agreed not to appeal any MCV-related issues raised in future orders for these plan cases and related reconciliations to the extent those issues are resolved by the Settlement Order. In March 1994, the MPSC issued an order in the PSCR reconciliation case for 1992 confirming Consumers' recovery for the purchase of 840 MW from the MCV in accordance with the MPSC plan case order and allowing recovery for the purchase of power above 840 MW based on replacement power costs. The MPSC subsequently confirmed the recovery of MCV-related costs consistent with the Settlement Order as part of the 1993 and 1994 plan case orders. ABATE or the Attorney General has appealed these plan case orders to the Court of Appeals.
4: Rate Matters
Electric Rate Case: In May 1994, the MPSC granted Consumers a $58 million annual increase in its retail electric rates. The order provides Consumers with higher revenues associated with increased expenditures primarily related to capital additions, operation and maintenance, postretirement benefits, and the continuation of certain DSM programs. The MPSC order generally supported Consumers' rate design proposal and reduced the level of subsidization of residential customers by commercial and industrial customers by allocating $40 million of the rate increase to residential customers.
In November 1994, Consumers filed a request with the MPSC which could increase its retail electric rates in a range from $104 million to $140 million, depending upon the ratemaking treatment afforded sales losses to competition and the treatment of the MCV contract capacity above 915 MW. The request includes a proposed increase in Consumers' authorized rate of return on equity to 12.75 percent from 11.75 percent, recognition of increased expenditures related to continuing construction activities and capital additions aimed at maintaining and improving system reliability and increases in financing costs. Consumers has requested that the MPSC eliminate the remainder of rate cross-subsidization of residential rates in a two-step adjustment, eliminate all DSM expenditures after April 1995 and allow recovery of all jurisdictional costs associated with the proposed settlement of the proceedings concerning the operation of Ludington (see Note 12). In January 1995, 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, which if approved would result in a net decrease in depreciation expense of $7 million (see Electric Rate Case discussion in the Management's Discussion and Analysis).
Abandoned Midland Project: In 1991, the MPSC ordered that Consumers could collect $35 million pretax annually for the next 10 years for its abandoned nuclear project. Consumers is amortizing the abandoned assets against current income over the recovery period using an interest method. Consumers was not permitted to earn a return on the portion of the abandoned investment for which the MPSC was allowing recovery. The loss of a return on the amount being recovered is reflected in earnings as accretion income. An after-tax total of $27 million remains to be included in accretion income through April 2001. In December 1994, the Court of Appeals upheld the MPSC orders allowing recovery of the abandoned investment. Consumers and ABATE have appealed this decision to the Michigan Supreme Court. Management cannot predict the outcome of this issue.
Electric DSM: As a result of settlement discussions regarding DSM and an MPSC order, Consumers agreed to spend $65 million over two years on DSM programs. Consumers completed the customer participation portion of these DSM programs in 1993. Based on the criteria set out in the DSM settlement agreement approved by the MPSC, Consumers has achieved all the agreed-upon objectives. Consumers believes that the MPSC will ultimately allow collection of $11 million of incentive revenue. Accordingly, during 1994, Consumers recognized $11 million in revenue, related to its DSM program. A final order from the MPSC is expected by mid-1995.
In 1994, as part of Consumers' electric rate case, the MPSC authorized Consumers to recover DSM expenditures which exceeded $65 million and to continue certain programs ($30 million annually) in 1994 through 1996. Consumers is deferring program costs and amortizing the costs over the period these costs are being recovered from customers in accordance with an MPSC accounting order. The unamortized balance of deferred costs totaled $71 million at December 31, 1994 and 1993.
PSCR Issues: In November 1994, an ALJ issued a proposal for decision in the 1993 PSCR reconciliation proceeding that addressed issues related to an extended refueling and maintenance outage that began at Palisades in June 1993 and ended in November 1993. Consumers conceded that one day of the 1993 outage was unnecessary, while the ALJ found that 22 days of the outage were the result of imprudent actions and recommended a disallowance of $4 million of replacement power costs. While Consumers has taken exception to the ALJ's proposal, it has accrued a loss for this issue for 1994. In addition, from mid-February through mid-June 1994, Palisades took an unscheduled outage to repair valve leakage and conduct other needed inspections and repairs. The 1994 outage will be reviewed as part of the 1994 reconciliation proceeding.
The Energy Act imposes an obligation on the utility industry to decommission DOE uranium enrichment facilities. In 1994, the MPSC authorized Consumers to recover through electric rates its required decommissioning payments to the DOE. At December 31, 1994, Consumers' remaining liability and regulatory asset each totaled $25 million.
Gas Rates: In July 1994, the MPSC approved an agreement previously reached between the MPSC staff and Consumers, to charge $10 million of costs for postretirement benefits against 1994 earnings. The agreement was reached in response to a claim that gas utility business earnings for 1993 were excessive. This charge against earnings partially offsets savings related to reduced state property taxes. The agreement also provides for an additional $4 million of postretirement benefit costs to be charged against 1995 earnings instead of being deferred. As part of the agreement, Consumers filed a gas rate case in December 1994. Consumers requested an increase in its gas rates of $21 million annually. The request, among other things, incorporates cost increases, including costs for postretirement benefits and costs related to Consumers' former manufactured gas plant sites. Consumers requested that the MPSC authorize a 13 percent rate of return on equity, instead of the currently authorized rate of 13.25 percent. Consumers expects an MPSC decision in late 1995. Consumers' most recent rate filing for its electric utility business resulted in an approved rate of return on equity of 11.75 percent.
GCR Issues: In 1993, the MPSC provided that the price payable to certain intrastate gas producers by Consumers be reduced prospectively. As a result, Consumers was not allowed to recover $13 million of costs incurred prior to February 1993. Consumers previously had accrued a loss in excess of the disallowed amount. Future disallowances are not anticipated, unless appeals filed by the intrastate producers are successful.
In 1992, the FERC approved a settlement involving Consumers, Trunkline and certain other parties, which resolved numerous claims and proceedings concerning Trunkline liquified natural gas costs. The settlement represents significant gas cost savings for Consumers and its customers in future years. In 1992, Consumers recorded a liability and regulatory asset for the principal amount of payments due Trunkline. In 1993, the MPSC approved a separate settlement agreement providing full recovery of the liability over a five-year period. At December 31, 1994, the remaining liability and regulatory asset were $85 million.
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 the financial statements.
5: Income Taxes
Consumers and its subsidiaries file a consolidated federal income tax return with CMS Energy. Income taxes are generally allocated based on each company's separate taxable income. Consumers' accrued federal income tax benefits from CMS Energy were $33 million and $49 million as of December 31, 1994 and 1993, respectively. Consumers practices full deferred tax accounting for temporary differences as authorized by a generic MPSC order.
Consumers uses ITC to reduce current income taxes payable and defers and amortizes ITC over the life of the related property. Any AMT paid generally becomes a tax credit that can be carried forward indefinitely to reduce regular tax liabilities in future periods when regular taxes paid exceed the tax calculated for AMT.
The significant components of income tax expense (benefit) consisted of:
In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- -----
Current federal income taxes $ 51 $ 41 $ 52 Deferred income taxes 67 61 (172) Deferred income taxes - tax rate change - (2) - Deferred ITC, net (11) (9) (7) ----- ----- -----
$ 107 $ 91 $(127) ===== ===== =====
Operating $ 120 $ 116 $ 51 Other (13) (25) (178) ----- ----- -----
$ 107 $ 91 $(127) ===== ===== =====
The principal components of Consumers' deferred tax assets (liabilities) recognized in the balance sheet are as follows:
In Millions December 31 1994 1993 - ----------- ------- ------- Property $ (535) $ (518) Unconsolidated investments (236) (184) Postretirement benefits (Note 10) (177) (178) Abandoned Midland project (Note 4) (51) (57) Employee benefit obligations (includes postretirement benefits of $172 and $178) (Note 10) 200 200 MCV power purchases - settlement (Note 3) 146 165 AMT carryforward 89 64 ITC carryforward (expires 2005) 37 48 Other (6) (8) ------- -------
$ (533) $ (468) ======= =======
Gross deferred tax liabilities $(1,388) $(1,319) Gross deferred tax assets 855 851 ------- -------
$ (533) $ (468) ======= =======
The actual income tax expense (benefit) 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 1994 1993 1992 - ----------------------- ------ ------ ------
Net income (loss) $ 226 $ 198 $ (244) Income tax expense (benefit) 107 91 (127) ------ ------ ------
333 289 (371) Statutory federal income tax rate x 35% x 35% x 34% ------ ------ ------
Expected income tax expense (benefit) 117 101 (126) Increase (decrease) in taxes from: Capitalized overheads previously flowed through 5 5 5 Differences in book and tax depreciation not previously deferred 6 6 9 ITC amortization and utilization (9) (10) (10) Affiliated companies' dividends (6) (6) (5) Other, net (6) (5) - ------ ------ ------
$ 107 $ 91 $ (127) ====== ====== ======
6: Short-Term Financings
In 1994, the FERC granted Consumers' request for authorization to issue or guarantee up to $900 million of short-term debt through December 31, 1996. Consumers has an unsecured $470 million facility and unsecured, committed lines of credit aggregating $185 million that are used to finance seasonal working capital requirements. At December 31, 1994, $170 million and $166 million were outstanding under these facilities at weighted average interest rates of 6.3 percent and 7.3 percent, respectively. Consumers has an established $500 million trade receivables purchase and sale program. At December 31, 1994 and 1993, receivables sold under the agreement totaled $275 million and $285 million, respectively. Accounts receivable and accrued revenue in the Consolidated Balance Sheets have been reduced to reflect receivables sold.
7: Capitalization
Capital Stock: During 1994, Consumers issued and sold 8 million shares of Class A Preferred Stock (cumulative, without par value) with an annual dividend of $2.08. Net proceeds to Consumers were $193 million. The stock is redeemable at the option of Consumers, on or after April 1, 1999, at a redemption price of $25 per share plus accrued dividends.
At December 31, 1992, Consumers effected a quasi-reorganization in which Consumers' accumulated deficit of $574 million was eliminated against other paid-in capital. This action was approved by Consumers' Board of Directors and did not require shareholder approval.
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, Articles and the need for regulatory approvals in compliance with appropriate state and federal law. In the first quarter of 1994, Consumers redeemed first mortgage bonds totaling $101 million. These redemptions completed Consumers' commitment to the MPSC, under a 1993 financing order to refinance certain long-term debt.
Long-Term Bank Debt: In 1994, subsequent to MPSC authorization, Consumers entered into a new $400 million unsecured, variable rate, five-year term loan and subsequently used the proceeds to refinance its then existing long-term, variable rate, credit agreement and to reduce short-term borrowings. At December 31, 1994, the new loan carried a weighted average interest rate of 6.5 percent. In 1993, Consumers entered into an interest rate swap agreement, exchanging variable-rate interest for a fixed-rate interest of 5.2 percent on $250 million of its long-term bank debt. The swap agreement hedges the variable rate exposure associated with Consumers' long-term bank debt and had the effect of increasing the weighted average interest rate to 5.3 percent from 5.0 percent for the 12- month period ended December 31, 1994. The current swap agreement began to decrease in February 1995 and will terminate by May 1996. In February 1995, Consumers entered into another hedging agreement for $100 million to reduce its exposure to variable rate interest associated with its long- term bank debt.
Other: Consumers has a total of $131 million of long-term PCRBs outstanding (secured by irrevocable letters of credit and first mortgage bonds) with a weighted average interest rate of 4.8 percent as of December 31, 1994.
In 1994, Consumers received a $100 million equity investment from CMS Energy. The investment was consistent with CMS Energy's plan to improve Consumers' capital structure and was recognized and included in the capitalization structure employed by the MPSC as part of Consumers' most recent electric rate order.
8: Financial Instruments
The carrying amounts of cash, short-term investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments, except as shown below, approximate fair value.
The carrying amount of long-term debt was $2.0 billion and $1.8 billion, and the fair value, as calculated by debt-pricing specialists, was $1.9 billion and $2.0 billion at December 31, 1994 and 1993, respectively. 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 Consumers' off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. At December 31, 1994, the fair value of Consumers' interest rate swap agreement was $4 million, representing the amount that Consumers would receive to terminate the agreement. At December 31, 1993, Consumers would have paid $5 million to terminate the agreement. This beneficial change resulted from an increase in market interest rates. Guarantees and letters of credit were $7 million at December 31, 1994 and 1993. For held-to-maturity securities, see Note 17.
Effective January 1, 1994, Consumers adopted SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which resulted in an increase in assets of $30 million with a corresponding increase in stockholders' equity of $20 million, net of tax. Consumers classifies unrealized losses on nuclear decommissioning investments in accumulated depreciation.
9: Executive Incentive Compensation
Consumers participates in CMS Energy's Performance Incentive Stock Plan. Under the plan, restricted shares of common stock of CMS Energy, stock options and stock appreciation rights may be granted to key employees based on their contributions to the successful management of CMS Energy and its subsidiaries. The plan reserves for award not more than 2 percent of CMS Energy's common stock outstanding on January 1 each year, less the number of shares of restricted common stock awarded and of common stock subject to options granted under the plan during the immediately preceding four calendar years. Any forfeitures are subject to award under the plan. At December 31, 1994, awards of up to 402,316 shares of common stock may be issued.
Restricted shares of common stock are outstanding shares with full voting and dividend rights. Performance criteria were added in 1990 based on CMS Energy's total return to shareholders. 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, 1994, 314,856 shares of the 330,356 restricted shares outstanding are subject to performance objectives.
Consumers' Executive Stock Option and Stock Appreciation Rights Plan, an earlier plan approved by shareholders, remains in effect until all authorized options are granted or September 25, 1995. At December 31, 1994, options for 43,000 shares remained to be granted.
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 and includes shares for employees of CMS Energy and non-utility affiliates.
Restricted Stock Options ---------- --------------- Number Number Price of Shares of Shares per Share --------- --------- --------------- Outstanding at January 1, 1992 275,063 1,291,091 $ 7.13 - $34.25 Granted 101,000 215,000 $17.13 - $18.00 Exercised or Issued (37,422) (21,000) $13.00 - $16.00 Canceled (15,375) (50,000) $20.50 - $33.88 ------- --------- ---------------
Outstanding at December 31, 1992 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 ======= ========= ===============
10: Retirement Benefits
Postretirement Benefit Plans Other Than Pensions: Consumers adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions, effective as of the beginning of 1992 and recorded a liability of $466 million for the accumulated transition obligation and a corresponding regulatory asset for anticipated recovery in utility rates (see Note 18). Both the MPSC and FERC have generally allowed recovery of SFAS 106 costs. The MPSC's generic order allows utilities three years to seek recovery of costs. In May 1994, the MPSC authorized recovery of the electric utility portion of these costs over 18 years. In December 1994, Consumers requested recovery of the gas utility portion of these costs (see Note 4). Consumers funds the benefits using external Voluntary Employee Beneficiary Associations. 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, 1994, are based on the assumption that costs would increase 10 percent in 1995, 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, 1994 by $84 million and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1994 by $10 million.
For the years ended December 31, 1994, 1993 and 1992, the weighted average discount rate was 8 percent, 7.25 percent and 8 percent, respectively, and the expected long-term rate of return on plan assets was 7 percent, 8.5 percent and 8.5 percent, respectively. Net periodic postretirement benefit cost for health care benefits and life insurance benefits was $53 million in 1994, $51 million in 1993 and $49 million in 1992. The 1994, 1993 and 1992 cost was comprised of $13 million, $13 million and $10 million for service plus $40 million, $38 million and $39 million for interest, respectively.
The funded status of the postretirement benefit plans is reconciled with the liability recorded at December 31 as follows:
In Millions 1994 1993 ------ ------ Actuarial present value of estimated benefits Retirees $ 336 $ 281 Eligible for retirement 43 54 Active (upon retirement) 166 187 ------ ------
Accumulated postretirement benefit obligation 545 522 Plan assets at fair value 35 4 ------ ------
Projected postretirement benefit obligation in excess of plan assets (510) (518) Unrecognized net loss from experience different than assumed 2 8 ------ ------
Recorded liability $ (508) $ (510) ====== ======
Consumers' postretirement health care plan is partially funded; the accumulated postretirement benefit obligation for that plan is $530 million and $510 million at December 31, 1994 and 1993, respectively.
Supplemental Executive Retirement Plan: Certain management employees qualify under the SERP. SERP benefits, which are based on an employee's years of service and earnings as defined in the SERP, are paid from a trust established and funded in 1988. Because the SERP is not a qualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in consolidated assets. At December 31, 1994 and 1993, trust assets at cost (which approximates market) were $14 million and $16 million, respectively, and were classified as other non- current assets.
Defined Benefit Pension Plan: A trusteed, non-contributory, defined benefit Pension Plan covers substantially all employees. The benefits are based on an employee's years of accredited service and earnings, as defined in the plan, during an employee's five highest years of earnings. Because the plan is fully funded, no contributions were made for plan years 1992 through 1994. Amounts presented below for the Pension Plan include minor amounts for employees of CMS Energy and non-utility affiliates which are not distinguishable from the plan's total assets.
Years Ended December 31 1994 1993 1992 - ----------------------- ------ ------ -----
Discount rate 8.0% 7.25% 8.5% Rate of compensation increase 4.5% 4.5% 5.5% Expected long-term rate of return on assets 9.25% 8.75% 8.75%
Net Pension Plan and SERP costs consisted of:
In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- -----
Service cost $ 23 $ 19 $ 19 Interest cost 50 49 47 Actual return on plan assets 21 (92) (36) Net amortization and deferral (85) 34 (20) ----- ----- -----
Net periodic pension cost $ 9 $ 10 $ 10 ===== ===== =====
The funded status of the Pension Plan and SERP reconciled to the pension liability recorded at December 31 was:
In Millions Pension Plan SERP 1994 1993 1994 1993 ----- ----- ----- ----- Actuarial present value of estimated benefits Vested $ 421 $ 471 $ 13 $ 12 Non-vested 61 56 - - ----- ----- ----- -----
Accumulated benefit obligation 482 527 13 12 Provision for future pay increases 154 138 6 5 ----- ----- ----- -----
Projected benefit obligation 636 665 19 17 Plan assets (primarily stocks and bonds, including $79 in 1994 and $87 in 1993 in common stock of CMS Energy) at fair value 637 692 - - ----- ----- ----- -----
Projected benefit obligation less than (in excess of) plan assets 1 27 (19) (17) Unrecognized net (gain) loss from experience different than assumed (35) (56) 3 5 Unrecognized prior service cost 40 45 1 - Unrecognized net transition (asset) obligation (39) (44) 1 1 ----- ----- ----- -----
Recorded liability $ (33) $ (28) $ (14) $(11) ===== ===== ===== =====
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.
11: Leases
Consumers leases various assets, including vehicles, aircraft, construction equipment, computer equipment, nuclear fuel and buildings. Consumers' nuclear fuel capital leasing arrangement is scheduled to expire in November 1996. The maximum amount of nuclear fuel that can be leased increased during 1994 to $80 million. The lease provides for an additional one-year extension 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 $59 million as of December 31, 1994. Consumers is responsible for payment of taxes, maintenance, operating costs, and insurance.
Minimum rental commitments under Consumers' non-cancelable leases at December 31, 1994, were:
In Millions Capital Operating Leases Leases ------- --------
1995 $ 43 $ 6 1996 60 3 1997 17 3 1998 15 2 1999 12 2 2000 and thereafter 21 20 ----- -----
Total minimum lease payments 168 $ 36 Less imputed interest 24 ===== -----
Present value of net minimum lease payments 144 Less current portion 36 -----
Non-current portion $108 =====
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, 1994, 1993 and 1992, were $8 million, $8 million and $12 million, respectively.
Capital lease expenses for the years ended December 31, 1994, 1993 and 1992 were $40 million, $32 million and $44 million, respectively. Included in these amounts for the years ended 1994, 1993 and 1992, are nuclear fuel lease expenses of $21 million, $13 million and $17 million, respectively.
12: Commitments and Contingencies
Ludington Pumped Storage Plant: In 1994, Consumers, Detroit Edison, the Attorney General, the DNR and certain other parties, signed an agreement in principle designed to resolve all legal issues associated with fish mortality at Ludington. The proposed settlement, which allows for continued operation of the plant through the end of its FERC license, will require Consumers and Detroit Edison to continue using a seasonal barrier net as well as monitoring new technology which may further reduce fish loss at the plant. The proposed settlement also requires Consumers to make annual payments to the Great Lakes Fishery Trust, develop and improve certain recreational areas and convey certain undeveloped land to the State of Michigan and the Great Lakes Fishery Trust. Upon approval of the settlement agreement, Consumers will transfer land (with an original cost of $9 million and a fair market value in excess of $20 million), make an initial payment of approximately $3 million and incur approximately $1 million of expenditures related to recreational improvements. Future annual payments of approximately $1 million are also anticipated over the next 24 years and are intended to enhance the fishery resources of the Great Lakes. The agreement is subject to the MPSC permitting Consumers to recover all such settlement costs from electric customers, and approval by the FERC.
The proposed settlement would resolve two lawsuits filed by the Attorney General in 1986 and 1987 on behalf of the State of Michigan. In one, the state sought $148 million (including $16 million of interest) for past injuries and $89,000 per day for future injuries, reduced only upon installation of "adequate" fish barriers and other changed conditions. Each year, a barrier net is installed at Ludington by Consumers and Detroit Edison from April to October. In the other, the Attorney General sought to have Ludington's bottomlands lease declared void.
Environmental Matters: Consumers is a so-called "Potentially Responsible Party" at several sites being administered under Superfund. Although Superfund liability is joint and several, 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 will average less than 4 percent of the estimated total site remediation costs, and such liability will probably not exceed $6 million. At December 31, 1994, Consumers has accrued a liability for its estimated losses. Consumers believes that it is unlikely that its liability at any of the known Superfund sites, individually or in total, will have a material adverse effect on its financial position or results of operations.
Under Michigan's Environmental Response Act, Consumers expects that it will ultimately incur investigation and remedial action costs at a number of sites, including some of the 23 sites that formerly housed manufactured gas plant facilities, even those in which it has a partial or no current ownership interest. Parties other than Consumers with current or former ownership interests may also be considered liable for site investigations and remedial actions. There is limited knowledge of manufactured gas plant contamination at these sites at this time.
Consumers has prepared plans for remedial investigation/feasibility studies for several of these former manufactured gas plant sites to define the nature and extent of contamination at these sites and to determine which of several possible remedial action alternatives, including no action, may be required under the Environmental Response Act. The DNR has approved three of four plans for remedial investigation/feasibility studies submitted by Consumers.
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 1994 costs. At December 31, 1994, Consumers has accrued a liability of $48 million. 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 1994. Consumers believes that remedial action costs are 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 two other Michigan utilities relative to investigation and remedial action costs. Accordingly, Consumers has recorded a regulatory asset for the accrued liability that was established for these estimated remedial action costs. Consumers has initiated discussions with certain insurance companies regarding coverage for some or all of the costs which may be incurred for these sites.
The federal Clean Air Act contains provisions that limit emissions of sulfur dioxide and nitrogen oxides and require enhanced emissions monitoring. All of 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. Beginning in 1995, certain coal-fueled generating units will receive emissions allowances (all of Consumers' coal units will receive allowances beginning in the year 2000). Based on projected emissions from these units, Consumers expects to have excess allowances which may be sold or saved for future use. 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 controls to be installed at the other coal- fired units are not expected earlier than 1996. Management believes that Consumers annual operating costs will not be materially affected.
Capital Expenditures: Consumers estimates capital expenditures, including DSM and new lease commitments, of $452 million for 1995, $374 million for 1996 and $380 million for 1997.
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 1995 to 2004. Consumers contracts for approximately 60 - 70 percent of its annual coal requirements which in 1994 totaled $261 million (63 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 1995 to 2003. Consumers contracts for approximately 70 - 80 percent of its annual gas requirements which in 1994 totaled $662 million (83 percent was under long-term contracts). Consumers supplements its long-term contracts with spot-market purchases to fulfill its gas needs.
Public Utility Holding Company Act Exemption: CMS Energy is exempt from registration under PUHCA. However, the Attorney General and the MMCG have asked the SEC to revoke CMS Energy's exemption from registration under PUHCA. In 1992, the MPSC filed a statement with the SEC recommending that CMS Energy's current exemption be revoked and a new exemption be issued conditioned upon certain reporting and operating requirements. If CMS Energy were to lose its current exemption, it would become more heavily regulated by the SEC; Consumers could ultimately be forced to divest either its electric or gas utility business; and CMS Energy would be restricted from conducting businesses that are not functionally related to the conduct of its utility business as determined by the SEC. CMS Energy is opposing this request and believes it will maintain its current exemption from registration under PUHCA.
Other: Consumers has experienced increases in the 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 January 31, 1995, Consumers had 81 separate stray voltage lawsuits pending.
In addition to the matters disclosed in these notes, Consumers and certain of its subsidiaries are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies, arising from the ordinary course of business involving personal injury and property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing and other matters.
The ultimate effect of the proceedings discussed in this note is not expected to have a material impact on Consumers' financial position or results of operations.
13: Nuclear Matters
In 1993, the NRC approved the design of the spent fuel dry storage casks now being used by Consumers at Palisades. Subsequently, the Attorney General and certain other parties attempted to block Consumers' use of the storage casks, alleging that the NRC had failed to comply adequately with the procedural requirements of the Atomic Energy Act and the National Environmental Policy Act. In January 1995, the U.S. Sixth Circuit Court of Appeals rejected these allegations and upheld the NRC's rulemaking action. The court found that the NRC's environmental assessment satisfied National Environmental Policy Act requirements, and that a site-specific environmental analysis concerning the use and operation of the storage casks at Palisades was not required. As of February 28, 1995, Consumers had loaded nine dry storage casks with spent nuclear fuel and expects to load four additional casks prior to Palisades' 1995 refueling.
In the latter part of 1995, 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 testing has not disclosed any leakage, 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. 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 concluded that the pad location is acceptable to support the casks.
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 no other states' repositories are available to Michigan generators of such waste. Consumers stores low- level waste at its nuclear plant sites and plans to continue to do so following final shutdown of the plants, if necessary, until a permanent storage site is provided. Consumers currently estimates that a permanent low-level radioactive waste disposal site will be available by the year 2027.
Consumers maintains insurance coverage against property damage, debris removal, personal injury liability and other risks that are present at its nuclear generating facilities. If certain loss events occur at its own or other nuclear plants similarly insured, Consumers could be required to pay maximum assessments of: $33 million in any one year to NML and NEIL; $79 million per event under the nuclear liability secondary financial protection program, limited to $10 million per event in any one year; and $6 million in the event of nuclear workers claiming bodily injury from radiation exposure. Consumers considers the possibility of these assessments to be remote.
In November 1993, Palisades returned to service following a planned refueling and maintenance outage that had been extended due to several unanticipated repairs (see Note 4). The results of an NRC review of Consumers' performance at Palisades published shortly after the planned outage showed a decline in performance ratings for the plant. To provide NRC senior management with a more in-depth assessment of plant performance, the NRC conducted a diagnostic evaluation inspection at Palisades. The inspection, completed in June 1994, found certain performance, operational and management deficiencies at Palisades. The NRC acknowledged that the new Palisades senior management team, in place since early 1994, had recognized and begun to address the deficiencies. In August 1994, Consumers filed its response to the NRC's diagnostic evaluation report and included both short- and long-term enhancements planned to improve Palisades' performance. Acceptable performance at Palisades will require continuing performance improvements and additional expenditures at the plant, which have been included in Consumers' total planned levels of expenditures.
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. If the results of the calculation indicate that an NRC temperature screening criterion will be exceeded, Consumers must determine what, if any, plant modifications are necessary to avoid exceeding the screening criterion and prevent potential reactor vessel failure as a result of postulated pressurized thermal shock events. Analysis of recent data from testing of similar materials indicates that the Palisades reactor vessel could exceed the screening criterion prior to the year 2000. Consumers is continuing to analyze alternative means to permit continued operation of Palisades to the end of its license life in the year 2007. It is currently estimated that expenditures for corrective action related to this issue could total $20 million to $30 million. Consumers cannot predict the outcome of these efforts.
14: Jointly Owned Utility Facilities
Consumers is responsible for providing its share of financing for the jointly owned facilities. The following table indicates the extent of Consumers' investment in jointly owned utility facilities:
In Millions December 31 1994 1993 - ----------- ----- ----- Net investment Ludington - 51% $119 $114 Campbell Unit 3 - 93.3% 337 349 Transmission lines - various 31 32
Accumulated depreciation Ludington $ 76 $ 74 Campbell Unit 3 224 210 Transmission lines 11 11
15: Supplemental Cash Flow Information
For purposes of the Statement of Cash Flows, all highly liquid investments with an original maturity of three months or less are considered cash equivalents. Other cash flow activities and non-cash investing and financing activities for the years ended December 31 were:
In Millions 1994 1993 1992 ----- ----- -----
Cash transactions Interest paid (net of amounts capitalized) $147 $177 $176 Income taxes paid (net of refunds) 34 90 6
Non-cash transactions Nuclear fuel placed under capital lease $ 21 $ 28 $ 30 Other assets placed under capital leases 15 30 39 Capital leases refinanced - 42 - Assumption of debt - - 15
Changes in other assets and liabilities as shown on the Consolidated Statements of Cash Flows at December 31 are described below:
In Millions 1994 1993 1992 ----- ----- -----
Sale of receivables, net $ (10) $ 60 $ 25 Accounts receivable (4) 19 30 Accrued revenue 24 (48) 91 Inventories (5) (32) 24 Accounts payable 19 (25) 21 Accrued refunds (3) (48) (143) Other current assets and liabilities, net 12 (45) 38 Non-current deferred amounts, net (9) (7) (49) ----- ----- -----
$ 24 $(126) $ 37 ===== ===== =====
16: Reportable Segments
The Consolidated Statements of Income show operating revenue and pretax operating income by segments. These amounts include earnings (losses) from investments accounted for by the equity method of $16 million, $6 million and $(10) million for 1994, 1993 and 1992, respectively. Other segment information follows:
In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ------- ------- -------
Depreciation, depletion and amortization Electric $ 257 $ 241 $ 230 Gas 76 73 76 Other 2 2 1 ------- ------- -------
$ 335 $ 316 $ 307 ======= ======= =======
Identifiable assets Electric (a) (b) $ 4,364 $ 4,100 $ 3,845 Gas (b) 1,673 1,628 1,574 Other (c) 772 823 1,177 ------- ------- -------
$ 6,809 $ 6,551 $ 6,596 ======= ======= =======
Capital expenditures (d) Electric $ 358 $ 403 $ 390 Gas 134 158 116 ------- ------- -------
$ 492 $ 561 $ 506 ======= ======= =======
(a) Includes abandoned Midland investment of $147 million, $162 million and $175 million for 1994, 1993 and 1992, respectively.
(b) Amounts include an attributed portion of Consumers' other common assets to both the electric and gas utility businesses.
(c) Reclassified 1992 to include independent power production, which is no longer significant enough for Consumers to report separately. Also, other was reduced in 1993 by the sale of the remaining $309 million of MCV Bonds.
(d) Includes capital leases for nuclear fuel and other assets and electric DSM costs (see Statement of Cash Flows). Amounts also include an attributed portion of Consumers' capital expenditures for plant and equipment common to both the electric and gas utility businesses.
17: Related-Party Transactions
Consumers has an investment of $250 million in 10 shares of Enterprises' preferred stock. Beginning in 1997, a five-year redemption program of $50 million per year will commence. In addition, Consumers has an investment in approximately 3 million shares of CMS Energy common stock with a fair value totaling $67 million (see Note 8) at December 31, 1994. As a result of these two investments, Consumers received dividends on affiliates' common and preferred stock totaling $17 million in 1994 and $16 million in 1993 and 1992. MGL, a wholly owned subsidiary of Consumers, was dissolved in December 1994. As a result, MGL's $10 million promissory note to its wholly owned subsidiary, CMS Midland, was replaced with a short-term note from Consumers, in satisfaction of a covenant related to CMS Midland's general partnership interest in the MCV Partnership.
Consumers purchases a portion of its gas from an affiliate, CMS NOMECO. The amounts of purchases for the years ended 1994, 1993 and 1992 were $1 million, $3 million and $3 million, respectively. In 1994, 1993 and 1992, Consumers purchased $48 million, $52 million and $36 million, respectively, of electric generating capacity and energy from affiliates of Enterprises. Consumers and its subsidiaries sold, stored and transported natural gas and provided other services to the MCV Partnership totaling approximately $13 million for 1994 and $14 million for 1993 and 1992. For additional discussion of related-party transactions with the MCV Partnership and the FMLP, see Notes 3 and 19. Other related-party transactions are immaterial.
18: Effects of the Ratemaking Process
The following regulatory assets (liabilities) which include both current and non-current amounts, are reflected in the Consolidated Balance Sheets. These assets represent probable future revenue to Consumers associated with certain incurred costs as these costs are recovered through the ratemaking process.
In Millions December 31 1994 1993 - ----------- ------- -------
Postretirement benefits (Note 10) $ 503 $ 510 Income taxes (Note 5) 189 189 Abandoned Midland project (Note 4) 147 162 Trunkline settlement (Note 4) 85 117 DSM - deferred costs (Note 4) 71 71 Manufactured gas plant sites (Note 12) 47 - Power purchase contract (Note 3) 30 - Uranium enrichment facility (Note 4) 25 33 Other 31 39 ------- -------
Total regulatory assets $ 1,128 $ 1,121 ======= =======
Income taxes (Note 5) $ (205) $ (195) DSM - deferred revenue (21) (17) ------- -------
Total regulatory liabilities $ (226) $ (212) ======= =======
At December 31, 1994, $864 million of Consumers' regulatory assets are being recovered through rates being charged to customers over periods of up to 18 years. Consumers anticipates MPSC approval for recovery of the remaining amounts.
Consumers is experiencing increased competition, particularly in its electric utility business. Municipalization and self-generation, among other forms of competition, could restrict Consumers' ability to establish rates sufficient to recover specific costs associated with its regulatory assets.
19: Summarized Financial Information of Significant Related Energy Supplier
Under the PPA with the MCV Partnership discussed in Note 3, Consumers' 1994 obligation to purchase electric capacity from the MCV Partnership was approximately 15 percent of Consumers' owned and contracted capacity. Summarized financial information of the MCV Partnership follows:
Statements of Income In Millions Years Ended December 31 1994 1993 1992 - ----------------------- ----- ----- -----
Operating revenue (a) $ 579 $ 548 $ 488 Operating expenses 378 362 315 ----- ----- -----
Operating income 201 186 173 Other expense, net 183 189 190 ----- ----- -----
Net income (loss) $ 18 $ (3) $ (17) ===== ===== =====
Balance Sheets In Millions December 31 1994 1993 - ----------- ------ ------ Assets Current assets (a) $ 206 $ 181 Property, plant and equipment, net 2,012 2,073 Other assets 154 146 ------ ------
$2,372 $2,400 ====== ======
Liabilities and Partners' Equity Current liabilities $ 218 $ 198 Long-term debt and other non-current liabilities (b) 2,081 2,147 Partners' equity (c) 73 55 ------ ------
$2,372 $2,400 ====== ======
(a) Revenue from Consumers totaled $534 million, $505 million and $444 million for 1994, 1993 and 1992, respectively. At December 31, 1994, 1993 and 1992, $48 million, $44 million and $38 million, respectively, were receivable from Consumers.
(b) FMLP is a 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 (see Note 3). At December 31, 1994 and 1993, lease obligations of $1.7 billion were owed to the owner trust of which FMLP is the sole beneficiary. CMS Holdings' share of the interest and principal portion for the 1994 lease payments was $62 million and $20 million, respectively, and for the 1993 lease payments was $63 million and $16 million, respectively. The lease payments service $1.2 billion in non-recourse debt outstanding as of December 31, 1994 and 1993 of the owner-trust whose beneficiary is FMLP. FMLP's debt is secured by the MCV Partnership's lease obligations, assets, and operating revenues. For 1994 and 1993, the owner-trust whose beneficiary is FMLP made debt payments of $175 million and $172 million, respectively. The 1993 amounts included $10 million of principal and $25 million of interest on the MCV Bonds held by Consumers through December 1993.
(c) 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.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants ----------------------------------------
To Consumers Power Company:
We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt and preferred stock of CONSUMERS POWER COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 Consumers Power Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for certain investments in debt and equity securities.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CMS Energy
None for CMS Energy.
Consumers
None for Consumers. PART III (ITEMS 10., 11., 12. and 13.) CMS Energy
CMS Energy's definitive Proxy Statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. BUSINESS for information pursuant to Item 10.
Item 10.
Consumers
Consumers' definitive Proxy Statement, except for the organization and compensation committee report contained therein, is incorporated by reference herein. See also Item 1. BUSINESS for information pursuant to Item 10.
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are listed in Item 8 in the Index to Financial Statements, and are incorporated by reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are listed after the Exhibits in the Index to Financial Statement Schedules, and are incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Reports dated October 5, 1994, November 21, 1994, January 10, 1995 and February 2, 1995 covering matters reported pursuant to Item 5. Other Events.
Consumers
Current reports dated October 5, 1994, November 21, 1994, January 10, 1995 and February 2, 1995 covering matters reported pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also Exhibit volume).
The following exhibits are applicable to CMS Energy and Consumers except where otherwise indicated "CMS ONLY":
CMS Energy and Consumers Exhibit Numbers - ---------------
(1)-(2) - Not applicable.
(3)(a) (CMS ONLY) - Articles of Incorporation of CMS Energy Corporation, as Amended. (Designated in CMS Energy Corporation's Form S-8 dated June 30, 1989, File No. 1-9513, as Exhibit (4).)
(3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation.
(3)(c) - Restated Articles of Incorporation of Consumers Power Company.
(3)(d) - Copy of By-Laws of Consumers Power Company.
(4)(a) - Composite Working Copy of Indenture dated as of September 1, 1945, between Consumers Power Company and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. (Designated in Consumers Power Company's Registration No. 2-65973 as Exhibit (b)(1)-4.)
Indentures Supplemental thereto:
Consumers Power Company Sup Ind/Dated as of File Reference Exhibit ------------------- ---------------- -------
65th 02/15/88 Form 8-K dated Feb 18, 1988 File No 1-5611 (4) 66th 04/15/88 Form 10-Q for quarter ended March 31, 1988 File No 1-5611 (4)(d) 67th 11/15/89 Reg No 33-31866 (4)(d) 68th 06/15/93 Reg No 33-41126 (4)(c) 69th 09/15/93 Form 8-K dated September 21, 1993 File No 1-5611 (4)
(4)(b) (CMS ONLY) - Indenture between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form S-3 Registration Statement filed May 1, 1992, File No. 33-47629, as Exhibit (4)(a).)
First Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).)
Second Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).)
(4)(c) (CMS ONLY) - Indenture between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee, dated as of January 15, 1994. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4a).)
First Supplemental Indenture dated as of January 20, 1994 between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4b).)
(5)-(9) - Not applicable.
(10)(a) (CMS ONLY) - Credit Agreement dated as of July 29, 1994, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent and the Operational Agent, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1994, File No. 1-9513, as Exhibit (4).)
(10)(b) - Employment Agreement dated as of August 1, 1990 among Consumers Power Company, CMS Energy Corporation and William T. McCormick, Jr. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(c).)
(10)(c) - Employment contract effective as of March 1, 1987 among CMS Energy Corporation, Consumers Power Company and S. Kinnie Smith, Jr. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1987, File No. 1-5611, as Exhibit (10)(g).)
(10)(d) - Employment Agreement effective as of June 15, 1988 among Consumers Power Company, CMS Energy Corporation and Victor J. Fryling. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1988, File No. 1-5611, as Exhibit (10)(i).)
(10)(e) - Employment Agreement dated May 26, 1989 between Consumers Power Company and Michael G. Morris. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(f).)
(10)(f) - Employment Agreement dated May 26, 1989 between Consumers Power Company and David A. Mikelonis. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1- 5611, as Exhibit 10(h).)
(10)(g) - Employment Agreement dated May 26, 1989 among Consumers Power Company, CMS Energy Corporation and John W. Clark. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(f).)
(10)(h) - Employment Agreement dated March 25, 1992 between Consumers Power Company, CMS Energy Corporation and Alan M. Wright. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(j).)
(10)(i) - Employment Agreement dated March 25, 1992 between Consumers Power Company and Paul A. Elbert. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(k).)
(10)(j) - Consumers Power Company's Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(g).)
(10)(k) - CMS Energy Corporation's Performance Incentive Stock Plan effective as of December 1, 1989. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(h).)
(10)(l) - CMS Deferred Salary Savings Plan effective January 1, 1994. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1993, File No. 1-9513, as Exhibit (10)(m).)
(10)(m) - Consumers Power Company's Executive Incentive Compensation Plan effective February 1993, as amended March 1994. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(n).)
(10)(n) - Consumers Power Company's Supplemental Executive Retirement Plan effective November 1, 1990. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(o).)
(10)(o) - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.1.)
Indenture Supplemental thereto:
Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.2.)
(10)(p) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, Midland Cogeneration Venture Limited Partnership and United States Trust Company of New York, Trustee. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513, as Exhibit (28)(b).)
Indenture Supplemental thereto:
Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.4.)
(10)(q) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland Holdings Corporation as Indemnitor and CMS Energy Corporation as Guarantor. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(v).)
(10)(r) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to The Connecticut National Bank and Others. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(y) and Form 10-Q for the quarter ended September 30, 1991, File No. 1-9513, as Exhibit (19)(d).)**
(10)(s) - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy Corporation to Midland Cogeneration Venture Limited Partnership. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(z).)**
(10)(t) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(aa).)**
(10)(u) - Amended and Restated Participation Agreement dated as of June 1, 1990 among Midland Cogeneration Venture Limited Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.13.)
Amendment No. 1 dated as of July 1, 1991. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(w).)
(10)(v) - Power Purchase Agreement dated as of July 17, 1986 between Midland Cogeneration Venture Limited Partnership and Consumers Power Company. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.4.)
Amendments thereto:
Amendment No. 1 dated September 10, 1987. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.5.)
Amendment No. 2 dated March 18, 1988. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.6.)
Amendment No. 3 dated August 28, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.7.)
Amendment No. 4A dated May 25, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.8.)
(10)(w) - Request for Approval of Settlement Proposal to Resolve MCV Cost Recovery Issues and Court Remand, filed with the Michigan Public Service Commission on July 7, 1992, MPSC Case No. U-10127. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1991 as amended by Form 8 dated July 15, 1992 as Exhibit (28).)
(10)(x) - Settlement Proposal Filed on July 7, 1992 as Revised on September 8, 1992 by Filing with the Michigan Public Service Commission. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 8-K dated September 8, 1992 as Exhibit (28).)
(10)(y) - Michigan Public Service Commission Order Dated March 31, 1993, Approving with Modifications the Settlement Proposal Filed on July 7, 1992, as Revised on September 8, 1992. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1992 as Exhibit (10)(cc).)
(10)(z) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy Corporation, Midland Group, Ltd., Consumers Power Company, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(y).)
(10)(aa) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy Corporation, Consumers Power Company and The Dow Chemical Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(z).)
(10)(bb) - Parent Guaranty dated as of June 14, 1990 from CMS Energy Corporation to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(aa).)**
(11)-(12) - Not applicable.
(13) - Not Applicable.
(14)-(20) - Not applicable.
(21)(a) (CMS ONLY) - Subsidiaries of CMS Energy Corporation.
(21)(b) - Subsidiaries of Consumers Power Company.
(22) - Not applicable.
(23) - Consents of experts and counsel.
(24)(a) - Power of Attorney for CMS Energy Corporation.
(24)(b) - Power of Attorney for Consumers Power Company.
(25)-(26) - Not applicable.
(27)(a) - Financial Data Schedule UT for CMS Energy Corporation.
(27)(b) - Financial Data Schedule UT for Consumers Power Company.
(28) - Not applicable
* Five copies of this exhibit have been signed by, or on behalf of, each of five Owner Participants. With regard to each of the agreements, each copy is substantially identical in all material respects except as to the parties thereto. Therefore, pursuant to Instruction 2, Item 601(a) of Regulation S-K, CMS Energy Corporation and Consumers Power Company are filing a copy of only one such document.
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith.
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts and Reserves 1994, 1993 and 1992: CMS Energy Corporation . . . . . . . . . . . . . 144 Consumers Power Company. . . . . . . . . . . . . 145
Report of Independent Public Accountants CMS Energy Corporation . . . . . . . . . . . . . 146 Consumers Power Company. . . . . . . . . . . . . 147
Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the information is not applicable.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants ----------------------------------------
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CMS Energy Corporation's 1994 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 31, 1995.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants ----------------------------------------
To Consumers Power Company:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consumers Power Company's 1994 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1995.
CMS ENERGY CORPORATION
By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 15th day of March 1995.
Signature Title - ----------------------------------- ----------------------------------
(i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director - ----------------------------------- William T. McCormick, Jr.
(ii) Principal financial officer: Senior Vice President, Chief Financial Officer A M Wright and Treasurer - ----------------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Vice President, Controller P. D. Hopper and Chief Accounting Officer - ----------------------------------- Preston D. Hopper
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director - ----------------------------------- James J. Duderstadt
Signature Title - ----------------------------------- ----------------------------------
K R Flaherty* Director - ----------------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director - ----------------------------------- Victor J. Fryling
Earl D. Holton* Director - ----------------------------------- Earl D. Holton
Lois A. Lund* Director - ----------------------------------- Lois A. Lund
Frank H. Merlotti* Director - ----------------------------------- Frank H. Merlotti
W. U. Parfet* Director - ----------------------------------- William U. Parfet
Percy A. Pierre* Director - ----------------------------------- Percy A. Pierre
S. Kinnie Smith, Jr.* Director - ----------------------------------- S. Kinnie Smith, Jr.
Robert D. Tuttle* Director - ----------------------------------- Robert D. Tuttle
Kenneth Whipple* Director - ----------------------------------- Kenneth Whipple
John B. Yasinsky* Director - ----------------------------------- John B. Yasinsky
* By Thomas A. McNish ---------------------------------- Thomas A. McNish, Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Power Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1995.
CONSUMERS POWER COMPANY
By William T. McCormick, Jr. ----------------------------- William T. McCormick, Jr. Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Power Company and in the capacities and on the 15th day of March 1995.
Signature Title - ----------------------------------- ----------------------------------
(i) Principal executive officer:
President and Michael G. Morris Chief Executive Officer - ----------------------------------- Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and A M Wright Chief Financial Officer - ----------------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Vice President and Dennis DaPra Controller - ----------------------------------- Dennis DaPra
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director - ----------------------------------- James J. Duderstadt
Signature Title - ----------------------------------- ----------------------------------
K R Flaherty* Director - ----------------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director - ----------------------------------- Victor J. Fryling
Earl D. Holton* Director - ----------------------------------- Earl D. Holton
Lois A. Lund* Director - ----------------------------------- Lois A. Lund
William T. McCormick, Jr.* Director - ----------------------------------- William T. McCormick, Jr.
Frank H. Merlotti* Director - ----------------------------------- Frank H. Merlotti
W. U. Parfet* Director - ----------------------------------- William U. Parfet
Percy A. Pierre* Director - ----------------------------------- Percy A. Pierre
S. Kinnie Smith, Jr.* Director - ----------------------------------- S. Kinnie Smith, Jr.
Robert D. Tuttle* Director - ----------------------------------- Robert D. Tuttle
Kenneth Whipple* Director - ----------------------------------- Kenneth Whipple
John B. Yasinsky* Director - ----------------------------------- John B. Yasinsky
*By Thomas A. McNish ---------------------------------- Thomas A. McNish, Attorney-in-Fact
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants for CMS Energy and Consumers are listed in Item 8 in the Index to Financial Statements, and are incorporated by reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public Accountants for CMS Energy and Consumers are listed after the Exhibits in the Index to Financial Statement Schedules, and are incorporated by reference herein.
(a)(3) Exhibits for CMS Energy and Consumers are listed after Item (c) below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy and Consumers.
CMS Energy
Current Reports dated October 5, 1994, November 21, 1994, January 10, 1995 and February 2, 1995 covering matters reported pursuant to Item 5. Other Events.
Consumers
Current reports dated October 5, 1994, November 21, 1994, January 10, 1995 and February 2, 1995 covering matters reported pursuant to Item 5. Other Events.
(c) Exhibits, including those incorporated by reference (see also Exhibit volume).
The following exhibits are applicable to CMS Energy and Consumers except where otherwise indicated "CMS ONLY":
CMS Energy and Consumers Exhibit Numbers - ---------------
(1)-(2) - Not applicable.
(3)(a) (CMS ONLY) - Articles of Incorporation of CMS Energy Corporation, as Amended. (Designated in CMS Energy Corporation's Form S-8 dated June 30, 1989, File No. 1-9513, as Exhibit (4).)
(3)(b) (CMS ONLY) - Copy of the By-Laws of CMS Energy Corporation.
(3)(c) - Restated Articles of Incorporation of Consumers Power Company.
(3)(d) - Copy of By-Laws of Consumers Power Company.
(4)(a) - Composite Working Copy of Indenture dated as of September 1, 1945, between Consumers Power Company and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee, including therein indentures supplemental thereto through the Forty-third Supplemental Indenture dated as of May 1, 1979. (Designated in Consumers Power Company's Registration No. 2-65973 as Exhibit (b)(1)-4.)
Indentures Supplemental thereto:
Consumers Power Company Sup Ind/Dated as of File Reference Exhibit ------------------- ---------------- -------
65th 02/15/88 Form 8-K dated Feb 18, 1988 File No 1-5611 (4) 66th 04/15/88 Form 10-Q for quarter ended March 31, 1988 File No 1-5611 (4)(d) 67th 11/15/89 Reg No 33-31866 (4)(d) 68th 06/15/93 Reg No 33-41126 (4)(c) 69th 09/15/93 Form 8-K dated September 21, 1993 File No 1-5611 (4)
(4)(b) (CMS ONLY) - Indenture between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form S-3 Registration Statement filed May 1, 1992, File No. 33-47629, as Exhibit (4)(a).)
First Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).)
Second Supplemental Indenture dated as of October 1, 1992 between CMS Energy Corporation and NBD Bank, National Association, as Trustee. (Designated in CMS Energy's Form 8-K dated October 1, 1992, File No. 1-9513, as Exhibit (4).)
(4)(c) (CMS ONLY) - Indenture between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee, dated as of January 15, 1994. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4a).)
First Supplemental Indenture dated as of January 20, 1994 between CMS Energy Corporation and Chase Manhattan Bank (National Association), as Trustee. (Designated in CMS Energy's Form 8-K dated March 29, 1994, File No. 1-9513, as Exhibit (4b).)
(5)-(9) - Not applicable.
(10)(a) (CMS ONLY) - Credit Agreement dated as of July 29, 1994, among CMS Energy Corporation, the Banks, the Co-Agents, the Documentation Agent and the Operational Agent, all as defined therein, and the Exhibits thereto. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1994, File No. 1-9513, as Exhibit (4).)
(10)(b) - Employment Agreement dated as of August 1, 1990 among Consumers Power Company, CMS Energy Corporation and William T. McCormick, Jr. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(c).)
(10)(c) - Employment contract effective as of March 1, 1987 among CMS Energy Corporation, Consumers Power Company and S. Kinnie Smith, Jr. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1987, File No. 1-5611, as Exhibit (10)(g).)
(10)(d) - Employment Agreement effective as of June 15, 1988 among Consumers Power Company, CMS Energy Corporation and Victor J. Fryling. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1988, File No. 1-5611, as Exhibit (10)(i).)
(10)(e) - Employment Agreement dated May 26, 1989 between Consumers Power Company and Michael G. Morris. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(f).)
(10)(f) - Employment Agreement dated May 26, 1989 between Consumers Power Company and David A. Mikelonis. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1- 5611, as Exhibit 10(h).)
(10)(g) - Employment Agreement dated May 26, 1989 among Consumers Power Company, CMS Energy Corporation and John W. Clark. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(f).)
(10)(h) - Employment Agreement dated March 25, 1992 between Consumers Power Company, CMS Energy Corporation and Alan M. Wright. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(j).)
(10)(i) - Employment Agreement dated March 25, 1992 between Consumers Power Company and Paul A. Elbert. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1992, File No. 1-5611, as Exhibit 10(k).)
(10)(j) - Consumers Power Company's Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1990, File No. 1-5611, as Exhibit (10)(g).)
(10)(k) - CMS Energy Corporation's Performance Incentive Stock Plan effective as of December 1, 1989. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(h).)
(10)(l) - CMS Deferred Salary Savings Plan effective January 1, 1994. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1993, File No. 1-9513, as Exhibit (10)(m).)
(10)(m) - Consumers Power Company's Executive Incentive Compensation Plan effective February 1993, as amended March 1994. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(n).)
(10)(n) - Consumers Power Company's Supplemental Executive Retirement Plan effective November 1, 1990. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1993, File No. 1-5611, as Exhibit (10)(o).)
(10)(o) - Senior Trust Indenture, Leasehold Mortgage and Security Agreement dated as of June 1, 1990 between The Connecticut National Bank and United States Trust Company of New York. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.1.)
Indenture Supplemental thereto:
Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.2.)
(10)(p) - Collateral Trust Indenture dated as of June 1, 1990 among Midland Funding Corporation I, Midland Cogeneration Venture Limited Partnership and United States Trust Company of New York, Trustee. (Designated in CMS Energy Corporation's Form 10-Q for the quarter ended June 30, 1990, File No. 1-9513, as Exhibit (28)(b).)
Indenture Supplemental thereto:
Supplement No. 1 dated as of June 1, 1990. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.4.)
(10)(q) - Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 among Investor Partners, CMS Midland Holdings Corporation as Indemnitor and CMS Energy Corporation as Guarantor. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(v).)
(10)(r) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to The Connecticut National Bank and Others. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(y) and Form 10-Q for the quarter ended September 30, 1991, File No. 1-9513, as Exhibit (19)(d).)**
(10)(s) - Indemnity Agreement dated as of June 1, 1990 made by CMS Energy Corporation to Midland Cogeneration Venture Limited Partnership. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(z).)**
(10)(t) - Environmental Agreement dated as of June 1, 1990 made by CMS Energy Corporation to United States Trust Company of New York, Meridian Trust Company, each Subordinated Collateral Trust Trustee and Holders from time to time of Senior Bonds and Subordinated Bonds and Participants from time to time in Senior Bonds and Subordinated Bonds. (Designated in CMS Energy Corporation's Form 10-K for the year ended December 31, 1990, File No. 1-9513, as Exhibit (10)(aa).)**
(10)(u) - Amended and Restated Participation Agreement dated as of June 1, 1990 among Midland Cogeneration Venture Limited Partnership, Owner Participant, The Connecticut National Bank, United States Trust Company, Meridian Trust Company, Midland Funding Corporation I, Midland Funding Corporation II, MEC Development Corporation and Institutional Senior Bond Purchasers. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 4.13.)
Amendment No. 1 dated as of July 1, 1991. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(w).)
(10)(v) - Power Purchase Agreement dated as of July 17, 1986 between Midland Cogeneration Venture Limited Partnership and Consumers Power Company. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.4.)
Amendments thereto:
Amendment No. 1 dated September 10, 1987. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.5.)
Amendment No. 2 dated March 18, 1988. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.6.)
Amendment No. 3 dated August 28, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.7.)
Amendment No. 4A dated May 25, 1989. (Designated in Midland Cogeneration Venture Limited Partnership's Form S-1 filed November 23, 1990, File No. 33-37977, as Exhibit 10.8.)
(10)(w) - Request for Approval of Settlement Proposal to Resolve MCV Cost Recovery Issues and Court Remand, filed with the Michigan Public Service Commission on July 7, 1992, MPSC Case No. U-10127. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1991 as amended by Form 8 dated July 15, 1992 as Exhibit (28).)
(10)(x) - Settlement Proposal Filed on July 7, 1992 as Revised on September 8, 1992 by Filing with the Michigan Public Service Commission. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 8-K dated September 8, 1992 as Exhibit (28).)
(10)(y) - Michigan Public Service Commission Order Dated March 31, 1993, Approving with Modifications the Settlement Proposal Filed on July 7, 1992, as Revised on September 8, 1992. (Designated in CMS Energy Corporation's and Consumers Power Company's Forms 10-K for the year ended December 31, 1992 as Exhibit (10)(cc).)
(10)(z) - Unwind Agreement dated as of December 10, 1991 by and among CMS Energy Corporation, Midland Group, Ltd., Consumers Power Company, CMS Midland, Inc., MEC Development Corp. and CMS Midland Holdings Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(y).)
(10)(aa) - Stipulated AGE Release Amount Payment Agreement dated as of June 1, 1990, among CMS Energy Corporation, Consumers Power Company and The Dow Chemical Company. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(z).)
(10)(bb) - Parent Guaranty dated as of June 14, 1990 from CMS Energy Corporation to MCV, each of the Owner Trustees, the Indenture Trustees, the Owner Participants and the Initial Purchasers of Senior Bonds in the MCV Sale Leaseback transaction, and MEC Development. (Designated in Consumers Power Company's Form 10-K for the year ended December 31, 1991, File No. 1-5611, as Exhibit (10)(aa).)**
(11)-(12) - Not applicable.
(13) - Not Applicable.
(14)-(20) - Not applicable.
(21)(a) (CMS ONLY) - Subsidiaries of CMS Energy Corporation.
(21)(b) - Subsidiaries of Consumers Power Company.
(22) - Not applicable.
(23) - Consents of experts and counsel.
(24)(a) - Power of Attorney for CMS Energy Corporation.
(24)(b) - Power of Attorney for Consumers Power Company.
(25)-(26) - Not applicable.
(27)(a) - Financial Data Schedule UT for CMS Energy Corporation.
(27)(b) - Financial Data Schedule UT for Consumers Power Company.
(28) - Not applicable
* Five copies of this exhibit have been signed by, or on behalf of, each of five Owner Participants. With regard to each of the agreements, each copy is substantially identical in all material respects except as to the parties thereto. Therefore, pursuant to Instruction 2, Item 601(a) of Regulation S-K, CMS Energy Corporation and Consumers Power Company are filing a copy of only one such document.
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities and Exchange Commission pursuant to various acts administered by the Commission, and which were designated as noted above, are hereby incorporated herein by reference and made a part hereof with the same effect as if filed herewith.
Index to Financial Statement Schedules
Page
Schedule II Valuation and Qualifying Accounts and Reserves 1994, 1993 and 1992: CMS Energy Corporation . . . . . . . . . . . . . 144 Consumers Power Company. . . . . . . . . . . . . 145
Report of Independent Public Accountants CMS Energy Corporation . . . . . . . . . . . . . 146 Consumers Power Company. . . . . . . . . . . . . 147
Schedules other than those listed above are omitted because they are either not required, not applicable or the required information is shown in the financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the information is not applicable.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants ----------------------------------------
To CMS Energy Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CMS Energy Corporation's 1994 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). Our audit was made for the purpose of forming an opinion on those basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 31, 1995.
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants ----------------------------------------
To Consumers Power Company:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Consumers Power Company's 1994 Annual Report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1995 (except with respect to certain matters discussed in Notes 2, 3, 7 and 13 to the consolidated financial statements as to which the date is March 1, 1995). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a) is the responsibility of the company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan, January 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1995.
CMS ENERGY CORPORATION
By William T. McCormick, Jr. --------------------------- William T. McCormick, Jr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of CMS Energy Corporation and in the capacities and on the 15th day of March 1995.
Signature Title - ----------------------------------- ----------------------------------
(i) Principal executive officer: Chairman of the Board, Chief Executive Officer William T. McCormick, Jr. and Director - ----------------------------------- William T. McCormick, Jr.
(ii) Principal financial officer: Senior Vice President, Chief Financial Officer A M Wright and Treasurer - ----------------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Vice President, Controller P. D. Hopper and Chief Accounting Officer - ----------------------------------- Preston D. Hopper
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director - ----------------------------------- James J. Duderstadt
Signature Title - ----------------------------------- ----------------------------------
K R Flaherty* Director - ----------------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director - ----------------------------------- Victor J. Fryling
Earl D. Holton* Director - ----------------------------------- Earl D. Holton
Lois A. Lund* Director - ----------------------------------- Lois A. Lund
Frank H. Merlotti* Director - ----------------------------------- Frank H. Merlotti
W. U. Parfet* Director - ----------------------------------- William U. Parfet
Percy A. Pierre* Director - ----------------------------------- Percy A. Pierre
S. Kinnie Smith, Jr.* Director - ----------------------------------- S. Kinnie Smith, Jr.
Robert D. Tuttle* Director - ----------------------------------- Robert D. Tuttle
Kenneth Whipple* Director - ----------------------------------- Kenneth Whipple
John B. Yasinsky* Director - ----------------------------------- John B. Yasinsky
* By Thomas A. McNish ---------------------------------- Thomas A. McNish, Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Consumers Power Company has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March 1995.
CONSUMERS POWER COMPANY
By William T. McCormick, Jr. ----------------------------- William T. McCormick, Jr. Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of Consumers Power Company and in the capacities and on the 15th day of March 1995.
Signature Title - ----------------------------------- ----------------------------------
(i) Principal executive officer:
President and Michael G. Morris Chief Executive Officer - ----------------------------------- Michael G. Morris
(ii) Principal financial officer:
Senior Vice President and A M Wright Chief Financial Officer - ----------------------------------- Alan M. Wright
(iii) Controller or principal accounting officer:
Vice President and Dennis DaPra Controller - ----------------------------------- Dennis DaPra
(iv) A majority of the Directors including those named above:
James J. Duderstadt* Director - ----------------------------------- James J. Duderstadt
Signature Title - ----------------------------------- ----------------------------------
K R Flaherty* Director - ----------------------------------- Kathleen R. Flaherty
Victor J. Fryling* Director - ----------------------------------- Victor J. Fryling
Earl D. Holton* Director - ----------------------------------- Earl D. Holton
Lois A. Lund* Director - ----------------------------------- Lois A. Lund
William T. McCormick, Jr.* Director - ----------------------------------- William T. McCormick, Jr.
Frank H. Merlotti* Director - ----------------------------------- Frank H. Merlotti
W. U. Parfet* Director - ----------------------------------- William U. Parfet
Percy A. Pierre* Director - ----------------------------------- Percy A. Pierre
S. Kinnie Smith, Jr.* Director - ----------------------------------- S. Kinnie Smith, Jr.
Robert D. Tuttle* Director - ----------------------------------- Robert D. Tuttle
Kenneth Whipple* Director - ----------------------------------- Kenneth Whipple
John B. Yasinsky* Director - ----------------------------------- John B. Yasinsky
*By Thomas A. McNish ---------------------------------- Thomas A. McNish, Attorney-in-Fact